Chapter 10

Taxation Issues

Tax-Deductible Donations

Charities are often puzzled about what is and what isn't tax-deductible. This is can be made worse by listening to the advice of a lawyer or accountant who may be extraordinarily well informed about other areas, but is not up to date on the peculiarities of charity tax law. Here is a quick summary.

The comments that follow must be taken with the understanding that the author is frequently in touch with Revenue Canada on charity regulations, but is not a lawyer, accountant or tax specialist. For expert sources of advice, see the section on More Information, at the end of this chapter.

Registered charities can give donors a receipt that can be used for a tax credit. All gifts of money are receiptable. So are most gifts of goods. Most services are not. Most purchases (such as a book, poster or tuition fees) a donor makes from a charity are not.

Memberships are deductible unless they offer a material benefit, such as free goods or services or admission that is not available to the public. Minor rewards for being a member, such as a low-cost newsletter, or invitations to special events are acceptable, and if that's all the donor gets, the full membership fee is considered a tax-deductible donation.

Gifts of goods in kind

Charities can give a tax receipt for gifts of goods.

Donations of goods are eligible for charitable tax receipts, just like cash. Services are not.

Gifts of goods of no real market value, such as used clothes, are not eligible for receipts.

Gifts of valuable goods can be receipted at fair market value. No exchange of cheques is necessary.

Base the tax receipt on current retail value, regardless of the price originally paid. A donor who bought supplies at wholesale prices can receive a tax receipt for them at full retail value. If the goods are worth more than when purchased, the donor may claim the current value. However, capital gains taxes may apply, and the donor would legally have to declare the difference between the wholesale and retail value as income.

If the goods are worth less than when purchased, the donor is only eligible for a tax receipt at the current market value.

Gifts of goods cannot be double-deducted. If a donor has already deducted the cost of the goods for business purposes, a second deduction cannot be claimed for donating them to charity.

However, it is not the charity's responsibility to determine if the donor has already claimed the goods — “but use your common sense” says Revenue Canada. The charity may issue a tax receipt in good faith. It is the donor's responsibility to follow tax laws.

Art, antiques and unusual goods

These may be hard to evaluate for fair market value. Ask one or more licensed appraisers to determine the real current value. Certified cultural property has its value established by a cultural review board, not the recipient. This is a specialized area, and you should contact Revenue Canada.

Services are not tax-deductible

Services are never eligible for a tax-credit receipt, according to Revenue Canada.

Charities can, of course, pay the person. Then the person can give the money back to the charity and receive a receipt for tax purposes. This is perfectly legal.

While it is legal, it is seldom worth the trouble. The problem is that the person paid must declare the money as part of income, and this may increase her or his taxes. Few people find it worth the trouble to do this.

If you repay the expenses a volunteer incurs doing charitable work, these payments are not considered taxable income. The volunteer could then donate this money to the charity, and receive a tax receipt for it.

When is it a good or a service?

Determining what are services and what are goods can be confusing.

Computer programming, for example, is a service, according to Revenue Canada, and therefore not eligible for a tax receipt. However, a gift of a computer program that is sold as a commercial product comes under the heading of goods, and is eligible. For clarification, call Revenue Canada.

Donors may not need tax receipts.

Businesses do not necessarily require an official charitable tax-credit receipt.

No law requires that charities issue receipts for donations — they are allowed to but not obliged to do so.

The business may, however, want a letter for their records acknowledging that the charity received the donation, even though this is not suitable for claiming a charitable tax credit.

Why wouldn't they need an official charitable tax receipt?

• Businesses may deduct their support in one of two ways, either as a promotional expense or as a charitable donation.
• Business may also be donating goods that have already been depreciated or written off for maximum tax deductions. They can't deduct them twice.
• Donors of all types may have used up their maximum allowable charitable tax credits (which is 20% of income).
• Or they may be among those who believe that donations should be made because of their beliefs, not for tax incentives.

Whatever the reason, if no tax receipt is issued, Revenue Canada's 80/20 disbursement quota (see below) does not apply to the charity. In provinces which regulate charities, local rules must be followed, and Revenue Canada rules limiting advocacy work by charities still count.

Donors can contribute in any way they wish if no tax receipt is issued.

Registered charities can issue tax receipts.

The rules here do not apply to groups that cannot issue tax receipts.

In addition to registered charities, registered amateur athletic groups, certain arts groups, municipalities and a handful of other organizations approved by Revenue Canada can issue official tax receipts.

In-Kind Donations and Revenue Canada's 80/20 Rule

Not issuing a tax receipt gives the charity more freedom.

Revenue Canada requires a charity to spend 80% of the cash value of receipted donations on program (not administration or fundraising) in the following year.

This rule does not apply to donations for which no tax receipt is issued, although the charity must meet the criteria overall.

That means if a charity issues a tax receipt for $1,000, it must spend at least $800 on the charity's programs in the next year. This is true whether it issues the receipt for a gift of $1,000 in cash or in kind.

Don't assume, though, that a computer, for example, must always be an administrative expense. If the charity's mandate is training people how to use computers, and the computer is used exclusively for training, then it is a program expense. If the charity educates people, and the computer is used only to prepare educational materials, it is a program expense. If the charity uses it to do the bookkeeping, this is administration. If it is used for a little of each, it may be allocated proportionately.

True cost-accounting (discussed earlier in this book) calls for an appropriate share of all administration and fundraising expenses to be allocated to programs, not left separated by themselves. This is an excellent way to explain to the donors that no charity can operate without overhead — it is essential, not a frill.

However, Revenue Canada requires that charities keep administration separate from programs, to prove that at least 80% of receipted income was spent on programs. So for this purpose, refer back to the line budget.

Is it necessary to be registered?

Without a charitable registration number it is a little harder to raise money. These are issued by Revenue Canada.

Foundations only give money to registered charities (with a few rare exceptions, usually focused on scholarships to attend universities which in turn are registered charities).

Businesses like to see that you are registered, because it reassures them that you are a legitimate organization. Businesses do not require a tax receipt to write off their contribution to you, however. They can deduct it as a promotional expense.

Not everyone makes use of tax receipts. Less than one out of three Canadians claimed charitable tax credits on their income tax returns in 1992. They may be lazy, sloppy, or outright opposed to tax benefits because they believe gifts should be made without material reward.

One direct mail campaign offers donors the choice of giving their funds to the advocacy side of the organization (which is not tax deductible) or to the educational side (which is). Over three quarters of the donors choose to give their money to the non-tax-deductible section. It is reasonable to assume that many of the rest would have given even if the tax receipt had not been available, but since it was, they opted for it.

If your group is not a registered charity, and a donor wants a tax receipt, you can funnel gifts through another organization which is registered. The donation must show up in their books, of course, as income, and as a project expenditure to your group. Of course the `front group' is legally responsible should there be any problem (such as your group using the money for non-charitable activities like personal gain).

More Information on Tax Deductions

Revenue Canada offers a special charity `Hot Line' service to provide official answers on questions like these. Consult them by calling toll-free to 1-800-267-2384. This free information line allows the caller to remain anonymous, unless the questions you ask are very specific.

Revenue Canada has also published a series of official Interpretation Bulletins explaining the regulations. They are free from any Tax Office.

An excellent book called Canadian Taxation of Charities and Donations, by Arthur BC Drache, QC, is updated regularly with supplements. See the resource list at the end for the publisher's address.

Thanks to Judy Torrance of the Revenue Canada Charities Office
who reviewed and corrected this section in November 1993.

This summary provides a general overview for information only. The author is not a lawyer or an accountant, and is not a representative of the government. Please consult Revenue Canada for complete and up-to-date regulations.

For more information

Free government publications:

• Gifts in Kind (#P113)
• Gifts in Kind to Charity (#IT-297)
• Deductible Gifts and Official Donation Receipts (#IT-110)

Chapter 11

Should You Use
Fundraising Consultants?

An organization struggling to find adequate funds, and already overburdened with other work, is likely to consider hiring a consultant to help with the fundraising. This can solve problems — or make them worse.

Good fundraising consultants will help the organization develop greater strengths to continue fundraising after the consultant is gone.

Bad consultants will make you dependent on them for future fundraising, advocating only the techniques you can't do on your own.

Good consultants will tell you honestly how much work is expected of you, and what the potential problems will be.

Bad consultants will promise that you will have little work and no risks. They can only do this by charging exorbitant fees.

When to Hire a Consultant

• When you don't know what to do
• When you do know what to do but the board or staff won't listen to you
• When you know what you want the consultant to do
• Before the situation becomes desperate
• Before the plans and printed material are finalized

How Do You Pick a Consultant?

Before you begin shopping around, prepare your criteria so that you can evaluate and compare. Answer as many of these questions as you can, and add others:

• What do you see as your main problems/strengths?
• What would you like the consultant to do?

  1) Show you how to raise money?
     a) how much?
     b) When is it needed?
     c) For what purpose?
  2) Train volunteers and staff?
     a) in what areas?
     b) how many people?
     c) when needed?
  3) Handle a publicity campaign?
  4) Review printed materials?
  5) Develop a fundraising strategy?
  6) Other____________

• How much can you spend?

  1) on consultant's fees?
  2) on campaign expenses?

Find out who's available by checking with:

• the Canadian Centre for Philanthropy
• the Canadian Society of Fundraising Executives
• the National Society of Fundraising Executives
• other nonprofits, the United Way, a Volunteer Centre
• Yellow Pages
• ads in fundraising magazines (several are listed in the Resource section)
• contacts and friends

Phone and discuss your general criteria with the consultant:

• Ask if they've worked for any similar organizations. Which ones?
• Ask if they've worked on any similar problems.
• Ask for written material they may have on themselves.
• Narrow down the list.
• Prepare a brief orientation kit to explain what you want. Send it to a short list of consultants. It should contain:
  • mission statement
  • annual report
  • any brochures on your work
  • list of board members and what they do for you, and for a living
  • scope of the work you want the consultant to do
• Prepare interview questions that will help you compare the consultants' understanding of how to deal with your most difficult problems:
  • Does the consultant understand your special situation?
  • Who will do the work, a senior consultant or a less experienced junior?
  • How much does the consultant charge?
  • On what basis do they charge (% / hourly / fixed fee)?

Should you ask consultants for detailed proposals?

By all means, do ask for comments on your particular situation. Don't expect a lengthy proposal detailing how the consultant would solve your problem. This can involve a great deal of work. Don't try to use the selection process and the proposal as a way to get free advice on how to solve your problems without hiring the consultant.

Check the consultant's references

Contact people who might know about the consultant, and ask about his/her faults as well as abilities. Discuss anything that might make your situation special. Contact people such as:

• previous clients
• your contacts
• Better Business Bureau

You need a contract

Ask the consultant to develop a contract outlining your joint expectations. Be sure this protects you, not just the consultant. Have a lawyer look it over. Here are specific suggestions from Stan Melasky, a Toronto fundraiser:

Your contract should include at least:

• explanation of who does what, each party's duties and responsibilities.
• the prices for each service to be performed by the firm.
• a statement of how either party can terminate the contract.

The organization should have the following controls:

• approval of how your group's name will be used
• timetables to be adhered to
• prior review and approval of all materials, etc.
• assurance all programs meet legal requirements of the country, province, etc.
• ownership of newly acquired donors (the consultant should not keep the names and addresses, and should not use your list for another client without your permission).
• provisions to resolve client-firm disputes, if any, perhaps through a pre-selected independent arbitrator.
• prior knowledge and approval of costs (above a set limit) before work is ordered.
• definition of all expenses that will be reimbursed.

Should you pay a percentage commission?

The Canadian Society of Fundraising Executives (Cfre), the professional organization for both staff and consultants, has a Code of Ethics which prohibits commissions for fundraising. It suggests that you should instead pay on an hourly basis, or a fixed fee for a specific piece of work. Several similar organizations in the US have taken the same stand.

This is done to protect nonprofits from the handful of shady itinerant `bucket shop' operators who prey on desperate groups unfamiliar with good practice.

These organizations may offer to produce and promote a complete show for you. They usually hire low-paid telephone solicitors to sell tickets to your donors, to their own list of people who have bought tickets in the past, and to the public. Often donors are asked to become sponsors so that disabled children can be brought to see the show. Using the same techniques, ads in a program are sold to local businesses. They may offer to do a direct mail campaign, too.

Companies of this sort promise to pay all the expenses and take all the risks. In return, the company receives a percentage of the income as its commission. Administrative expenses are often added, in addition to commissions.

A commission may seem attractive, at first, because it reduces the risk to the group. If the consultant doesn't raise money, the consultant doesn't get paid.

Perhaps the most important factor against commissions is that many donors become irate at the idea that a consultant will get a percentage of what they might give. They may refuse to give at all.

Commissions also reward any techniques that get donations during the term of the contract. These may not improve the nonprofit's long-term strengths. In a commission structure, there is no payment made to cultivate the donors who may not be able to give much now, but could contribute generously in the future. There is no incentive to train the group's own personnel in effective fundraising techniques.

Consultants in this situation may only pick organizations that they can exploit for the maximum dollar return. Those that may be more controversial, or have ethical standards that would limit certain techniques of fundraising are avoided.

What a consultant can and can't do

A consultant cannot make policy decisions, or determine strategy. The board must do that, taking the consultant's recommendations into account. Ultimately, the board is responsible for the campaign, and must be able to reject the consultant's advice. The board must have a sense of ownership for any campaign to work.

Most face-to-face fundraising with individuals and groups expected to give large amounts should be done by volunteers, not a consultant. (It should not be done by a staff person either, although a consultant or staff person can accompany a volunteer as a back up resource.) Ideally, a consultant should be invisible to all donors except the board, serving as a guide, trainer or creative source only.

Consultants and paid help cannot substitute for legions of volunteers on labour-intensive work.

A consultant can recommend strategies and structures to allow work to be done efficiently.

A consultant cannot reveal your secrets to others, or tell you the inner workings of other groups' plans. A consultant can share the lessons gained from intimate knowledge of many different campaigns.

More Information on Consultants

The following short articles (and others) are available in the library of the Canadian Centre for Philanthropy.

• Engaging a Fundraising Consultant
  Gordon L Goldie, Consultant
• How and Why to Hire a Consultant
  Barbara H Davis
• The Role of Professional Fundraising Consultants
  Henry LabatteYMCA of Metropolitan Toronto
• How to Select a Planning Consultant
  Ontario Ministry of Citizenship and Culture
• Job Descriptions for Fundraising Positions
  A collection from various charities
• Description of a Fundraiser
  Grant MacEwan Community College
• Hiring the Development Officer: Planning is the Key
  Robert J Berendt and J Richard Taft