Tax Forum
Charitable Receipts
A recent Tax Court of Canada decision clarifies some of the murkiness surrounding gifts of labour.
FROM:
JUL-AUG 2005 ISSUE | BY
DON GOODISON
I am frequently asked questions about charitable receipts for gifts of labour. For example, say Billy Bob Jones painted the church for free. It would have cost $10,000 to have it done by a professional painter. Can the church issue a receipt to Billy Bob for the fair market value of his labour? When I say no, the response is always "Why not?" I must confess that I used to be somewhat stuck for an answer. Thankfully, the Tax Court of Canada has provided me with the means to give a learned response, with its ruling in
Rodolfo Jose Slobodrian v. The Queen [2004-589(IT)I].
From 1999 to 2002, Slobodrian was engaged in advanced research and teaching for the Canadian Space Agency at Laval University. He was not paid for his services, he did not submit any invoices to his employer, and the employer did not issue him T4s. In filing his returns for those years, he claimed charitable donations in the amounts of $44,993 for 1999, $29,113 for 2000, $18,000 for 2001, and $37,600 for 2002. The Minister of National Revenue disallowed the claims, and so Slobodrian appealed to the Tax Court of Canada.
Evidence at trial showed that in 1999, Slobodrian was the principal investigator for a contract with the Canadian Space Agency, and conducted scientific research at the Department of Physics of Laval University. In addition, he taught at the university for three weeks. The contract extended into 2000, as did his teaching. In 2000, he also submitted new research proposals to the Natural Sciences and Engineering Research Council of Canada and the Canadian Space Agency.
In 2001, he accepted a five-month contract with the Canadian Space Agency to conduct scientific research. He produced three reports of his findings for the agency. He also counselled students in the Physics faculty, directed a student's master's thesis, and participated in phase A of the Interactions in Cosmic and Atmospheric Particle Systems project through the European Space Agency's International Space Station. These activities continued through 2002.
As stated, Slobodrian received no remuneration for these services but instead received a letter each year from the faculty director that established a monetary value for the activities. Slobodrian took the position that his scientific research and teaching at the university constituted donations, and not services. He asserted that he generated intellectual property. He also took the position that the
Income Tax Act doesn't explicitly restrict donations to property, and that nothing in the Act prevents the claiming of a "donation in kind."
The court rejected Slobodrian's argument, stating that in order for a gift to be deductible under the
Act, it must involve the transfer of property. The supply of services without compensation is not property, as opposed to the gratuitous assignment of a person's right to remuneration that has been earned. Since it was agreed that Slobodrian would not receive any remuneration for his services, he had nothing to assign.
The court also dismissed his claim that he had contributed intellectual property. Evidence revealed that agreements he had with the various agencies stated that any such property would rest with the federal government or Laval University. The court concluded that he was not the owner of the intellectual property and therefore couldn't have donated it.
The court then considered the "receipts" (the letters stating the value of his services) Slobodrian received from the University, and concluded that they did not meet the requirements of subsection 118.1(2) of the
Act, and Section 3501 of the
Regulations. Based on these reasons, the court dismissed Slobodrian's appeal.
I must confess that I have had a change of heart concerning donations in kind over the years. I initially considered the Tax Department's position to be uncharitable, feeling that it discouraged people from donating time and talent to worthy causes. However, when I consider it in its totality, I am now in favour of the position.
When the rules are followed, the person making the donation is paid by the charity, and then donates the amount back to the charity. This results in income to the person, which is subject to tax, and a corresponding charitable donation. If only a receipt was issued, there would be no income subject to tax. In effect, the taxpayers of Canada would be subsidizing the donation. The
Act could have to be amended requiring a corresponding inclusion into income, but that would require more enforcement than it would be worth.
While I can't profess to be overly familiar with this, I have been told that such donations can have a detrimental effect on a charity's cash flow as well. Charities are required to expend
80 per cent of their receipted donations on charitable works. Receipts issued for donations in kind would require that 80 per cent be expended as part of its disbursement quota. I may be missing something, but I really can't see the difference if a charity paid someone for services and then had it donated back. The charity would still have a receipt for which it didn't have cash.
One final note on the subject of charitable receipts: as of
January 1, 2005, registered charities must include the name and Web site address of the Canada Revenue Agency on official donation receipts; however, the Agency has said it will continue to honour receipts not containing the information for the rest of the year.
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Don Goodison, CFP, FCGA, is a partner of Kemp Harvey Goodison, Certified General Accountants, in Burnaby, B.C. E-mail
goodison@axionet.com.