Tax receipts for in-kind donations: What Canadian nonprofits need to know
One complex area of Canada Revenue Agency rules for nonprofits involves tax receipts for in-kind donations.
For most organizations, non-monetary gifts from supporters can be very valuable. But the regulations around receipts for these contributions is very different than a typical cash donation. This blog post looks at everything Canadian causes should know:
Tax receipts for in-kind donations: what gifts are eligible?
CRA rules differentiate between gifts of actual property and gifts of services. Property donations, like a piece of equipment, food, merchandise, or furniture, are eligible for tax receipts. The CRA views these gifts as direct substitutes for cash. Rather than an individual or business donating money, it may benefit all parties involved for property to be given. This could include rare items that can’t easily be bought or that save effort all around.
However, you can not receive a tax receipt for contributing a service to a nonprofit. For example, if a consultant advises a nonprofit client, they can’t receive an official tax receipt for that work.
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Determining fair market value
Nonprofits must determine a fair market value when issuing a receipt for an in-kind gift of property. There are a few approaches for doing this.
In some cases, fair market value will be clear. If a business contributes an item that is regularly sold, the standard price can be used. For example, if a computer retailer donates a new laptop that they advertise for $1,000, that would be the fair market value. Or, if a t-shirt printer gives 500 branded shirts which they sell in bulk at $4 per unit, your nonprofit can receipt the gift for $2,000.
In other cases, fair market value may not be as obvious, but can still be found. You can use a depreciated value of the original sales price if the item is used, or estimate a replacement value if it is not something that is typically purchased. The CRA recommends that third-party appraisals are used to determine fair market value if it is expected to be over $1,000.
Using a “cheque exchange” for services given
While you cannot issue a tax receipt for services, the CRA offers a mechanism that helps both the provider and nonprofit.
Take an example of a nonprofit who wants to use a decorator for help at a donor appreciation event. This would normally cost $500, but the decorator doesn’t want to take a payment from the nonprofit. Since this would be income to them, they would also have to pay income taxes on it. Still, the nonprofit wants to issue a receipt so that they have an agreed to schedule, record and paper trail. The two could decide to do a “cheque exchange” to reduce their costs and eliminate risks.
Here, the decorator performs their service for the nonprofit. The nonprofit pays $500, and the decorator provides them a receipt. In a separate transaction, the decorator would then make a $500 donation to the organization. This entitles them to an official tax receipt. Now, the nonprofit can recover their cost, and essentially receives the decorator’s service for free. For the decorator, their income tax bill will balance out, since the tax paid on the income is equally reduced by the tax credit for the cash donation. Now, the decorator has successfully provided their services without receiving a benefit, and both parties have proper documentation for audit and record-keeping purposes.
The key here is that two separate transactions clearly occur. The service provider receives payment for their work, and then makes a direct cash donation to the nonprofit.
Want to make Canadian tax receipting simpler going forward?
If you find Canadian tax receipting a burden for your nonprofit, Causeview can help. Click the "Request a Demo" button to schedule a time with us. We can show you how our donor management & gift processing platform makes tax receipting simple, no matter how complex the requirements get.