Recently, Canada Revenue Agency ("CRA") released guidance on registered charities issuing receipts for cause-related marketing arrangements. "Cause-related marketing" is a mutually-beneficial arrangement where a registered charity works together with a for-profit partner to raise funds. Under the arrangement, the for-profit partner agrees to donate a percentage of its sales or services to the charity in return for being able to promote the relationship.
An example of a cause-related marketing arrangement would be where a shoe company agrees to donate 10% of its sales from a particular shoe to a charity with an environmental platform. The shoe company and the charity then promote the arrangement online and in stores that sell the particular shoe. Over the course of the year, the company generates $100,000 in sale proceeds for that shoe and its reputation improves. At the end of the year, the charity receives $10,000 from the arrangement.
When a registered charity wants to enter into a cause-related marketing arrangement, one of the questions it needs to consider is whether it will be able to issue an official donation receipt to the for-profit partner in respect of the donation of part of the sale proceeds received. A donation receipt can only be issued for the eligible amount of a gift. Generally, the eligible amount of a gift will be the fair market value ("FMV") of the gift. However, when a donor has received an advantage in return for a donation, the charity must apply CRA's split receipting rules to calculate the eligible amount of the gift.
The split receipting rules require the charity to calculate the eligible amount of the gift by subtracting the FMV of the advantage that the donor received from the FMV of the gift.
FMV of Gift – FMV of Advantage = Eligible Amount of Gift
Importantly, if the advantage received by the donor is minimal (de minimis), then the charity may issue a receipt for the full value of the gift. The de minimis rule applies where the value of the advantage received by the donor in making the gift is not more than $75 or 10% of the amount gifted to the charity, whichever is less. If the advantage received by the donor is over 80% of the amount gifted to the charity, CRA's position is that the donor had no real intention to make a gift. Where there is no intention to make a gift by the donor, the charity cannot issue a donation receipt.
Sometimes it can be relatively easy to determine the amount of the advantage. For example, if a donor gives a $100 to a charity and receives a ticket to attend an art exhibit valued at $40, the eligible amount of the gift for receipting purposes is $60.
In the case of cause-related marketing, CRA takes the view that it is unlikely that a charity would be able to issue a donation receipt to the for-profit partner in respect of its donation of funds generated as a result of the cause-related marketing campaign. In order to be able to determine the eligible amount of the gift, the charity must be able to calculate the advantage that the for-profit partner received as a result of the arrangement. In our first example above, the charity would likely be unable to calculate the value of advantages received by the shoe company through the arrangement (i.e., a bolstered reputation or the value of sales directly attributable to the cause-related marketing campaign). While the shoe company would not receive a donation receipt, it may be able to reduce its taxes by claiming the donation as an advertising expense.
It is the charity's responsibility to determine when it can issue a donation receipt and the eligible amount of the gift. Failure to issue proper receipts could result in penalties, loss of receipting privileges or, in extreme cases, revocation of charitable registration.
If you have questions about how to issue receipts, Miller Thomson's Social Impact Group can provide advice.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
