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Donations in kind and appropriate due diligence

charity-donationCharities need to be vigilant when accepting donations in kind. These include any non-monetary items, such as art, rare books, equipment and materials, personal objects of value, real property and computer-related assets. Receiving such donations is quite acceptable, but only after proper due diligence and professional advice is sought and followed. Donations in kind must be properly valuated by independent third party valuators specialized in such work. For art and other related assets, there are additional steps that must be followed in regard to seeking approval of the government agency responsible for monitoring such acquisitions, the Canadian Cultural Property Export Review Board. At least two separate valuations should be obtained. These independent valuations should be the basis for determining the amount on the charity receipt issued to the donor.

Some assets are easier to valuate than others. For example, the donation of real property can be assessed by real property valuators based on market value as determined by recent sales of comparable properties. Other assets can be more difficult to valuate. Valuating the donation of software, for example, can be particularly complicated. Unless there are comparable sales data that indicate clearly how much the market has paid for the software, it can be very difficult to determine an appropriate value for the donation. This is why it is essential that the valuators be experts in the area and completely independent from the charity. The valuators/consultants should be impartial, and should have had no involvement in the management or leadership of the charity.

In selecting a valuator, the charity’s managers and/or lay leadership need to be careful to choose professionals who have well-established credentials in the profession of valuation and, where needed, particular expertise in the specific type of asset being donated. The valuation must be well-written, with supporting documentation. The charity should ensure that the valuator has professional liability insurance to cover any errors or omissions made in the valuation, on the basis of which the receipt might be challenged by the CRA.

For donations of unusual assets (e.g. computer software) that are not of direct interest or use to the charity, it is strongly recommended that the directors of the charity be advised of the donation and that their agreement to receiving the donation be recorded by resolution of the board (and retained in the corporate records of the charity). This important step ensures transparency of decision-making and that the directors, who have the fiduciary responsibility for the work and actions of the charity, are fully informed, understand the implications and any possible problems that could arise with the donation and agree to the charity accepting the gift in kind.

Donations in kind, as a general rule, can be used by the charity for its own operations or, as in many cases, the charity may sell the asset and use the proceeds for its operations or set them aside for future use.

The CRA reviews charitable donations received by charities. Unusual donations and donations involving large amounts can draw the attention of the audit division, and it is therefore advisable to be prudent and assure that the reports filed are complete, accurate and supported by the required documentation. A case currently under appeal to the Supreme Court of Canada by our firm (Guindon) points out the challenges and potential risks inherent in dealing with unusual donations of gifts in kind. In that case, the donation consisted of timeshare weeks which (as it turned out) had not been legally created. There are several complex legal issues involved in the case and its final determination by the SCC will hopefully clarify the provisions of the Income Tax Act that are the subject of this case and the standards that need to be met in accepting donations in kind.

By Mark S. Anshan

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Drache Aptowitzer LLP

Tax and Charity Lawyers at Drache Aptowitzer LLP
Drache Aptowitzer LLPis one of Canada’s foremost experts in the law related to charities and non-profit organizations. Their team of bloggers is led by Adam Aptowitzer LLB. He is a lawyer practicing in the areas of charity and tax law. He is a member of both the bars of Alberta and Ontario. He has been speaking and writing on the topic of charity law for several years and been published in numerous publications including the Canadian Taxpayer, the Canadian Fundraiser and the Not-for-Profit News and has been cited as an expert in many publications including the National Post.Read more here
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