If you have clients that are charitable organizations, they should be made aware of new rules regarding charitable donations. These charities, in turn, will want to let potential donors know about the new rules in case these people are counting on getting charitable donation receipts for the full amount of their donations.

The new rules come into play if a charity gives a donor a gift of appreciation in return for his or her donation. The value of the gift of appreciation must be subtracted from the amount of the donation; the balance is then indicated on the charitable donation receipt.

Called “split-receipting” rules, they have been in use by the Canada Revenue Agency since they were announced in December 2002 — even though they have not yet been passed into law. Proposed tax amendments are usually not made law for several years, but are viewed as if they are law from the date of their announcement.

Both the British Columbia Supreme Court and the B.C. Court of Appeal followed this practice and applied the rule as law in a recent case — perhaps without realizing the full impact the decision would have on charities and donors.

The court case, known as Richert v. Stewards’ Charitable Foundation, began when retired B.C. businessman Harry Richert was invited to one of the foundation’s fundraising luncheons at the Vancouver Club.

The invitation indicated a lunch would be served, during which two medical anthropologists would speak about the AIDS epidemic in Africa. Attendees would be given a coffee-table book about Africa.

Richert sent the foundation a cheque for $1,000, and passed the luncheon invitation on to his accountant.

Clearly unaware of the new rules, Richert was incensed when he got a charitable donation receipt that showed the costs of both the $45 luncheon and the $100 book had been deducted from the amount of his donation.

He was so displeased that he filed a lawsuit against the charity, forcing it to defend itself for following the CRA rules — all the way to the B.C. Supreme Court.

The Trial Court did not find fault with the charity. “It [made the deduction] to comply with [what was then the] Canada Customs and Revenue Agency’s guidelines for what it calls ‘split-receipting’,” noted B.C. Supreme Court Judge T.M. McEwan in his February 2005 decision. “This bulletin interprets anticipated provisions of the Income Tax Act expected to have retrospective effect, if and when they are passed into law.”

The new rules try to resolve the differences in English common law and Quebec civil law regarding the legal interpretation of a gift.

Under common law, a gift cannot be considered a gift if something is given in return. However, the split-receipting rules provide a different legal interpretation of a gift for tax purposes that is more in line with Quebec law. That’s why the value of a gift of appreciation to a donor has to be deducted.

Unfortunately, because the spilt-receipting rules have not yet been made law, most of the argument at the B.C. Supreme Court level was focused on the common-law characterization of the transaction between Richert and the foundation instead of the Income Tax Act.

The court sidestepped the issue that the split-receipting rules are not yet law. Instead, Judge McEwan wrote: “No serious issue has been raised as to the reasonableness of that course of action as an approach to compliance with the Income Tax Act.”

The B.C. Supreme Court upheld the split-receipting rules but did not address the Income Tax Act itself, says Heather Evans, partner and tax lawyer in the Toronto office of Deloitte & Touche LLP.

The Appeal Court did not feel compelled to undo the trial decision, says Terry Carter, a partner with Carter & Associates in Orangeville, Ont., and a lawyer who advises many charities. The Appeal Court didn’t seem to find Richert’s case particularly sympathetic, Carter notes. Richert’s donation was small; furthermore, the lunch was consumed and the lecture was attended — neither benefit could be returned.

As a result of this decision, you should advise clients to provide information regarding the CRA split-receipting rules to potential donors. If the Stewards’ Charitable Foundation had added another line on its invitation, informing attendees that the costs of the lunch and book would be deducted from their $1,000, Richert would have made an informed donation.

@page_break@An alternative for clients that are charities would be to give donors the option of getting a receipt for the full amount of their donations by forgoing gifts of appreciation. IE



Visit www.cra-arc.gc.ca/E/pub/tp/itnews-26/itnews-26-e.html for more on split-receipt donations.