Charities need to be vigilant when accepting donations in kind: 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 valued by independent third-party appraisers specializing in such work. For art and other related assets, additional steps must be followed to seek 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 to serve as the basis the amount on the charitable tax receipt issued to the donor.
Some assets are easier to value than others. For example, a donation of real property can be assessed by comparing it to recent sales of similar properties. Other assets can be more difficult to appraise – a donation of software, for example, can be particularly complicated. Unless there are comparable sales figures that prove how much the market has paid for the software, it can be very difficult to determine an appropriate value for the donation. It is essential that the appraisers be impartial and have no current or past involvement in the charity’s management or leadership.
Choose your valuator carefully
In selecting a valuator, the charity’s leaders must carefully choose professionals who have well-established credentials in the profession of appraisal 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 that might cause the receipt to be challenged by the Canada Revenue Agency.
Document Board’s acceptance of unusual gifts
For donations of unusual assets that are not of direct interest or use to the charity (e.g. computer software), staff should advise the charity’s Board of Directors of the donation. The Board’s agreement should be recorded by resolution and retained in the charity’s corporate records. This important step ensures transparency of decision-making and proves 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.
The charity may use donations in kind for its own operations, sell the asset and use the proceeds for its operations, or set the sale proceeds aside for future use.
Documentation in case of CRA audit
The CRA reviews charitable donations received by charities. Unusual donations and donations involving large amounts can draw the attention of its audit division. Therefore, it is advisable to be prudent and assure that the reports filed are complete, accurate and supported by the required documentation.
A case (Guindon) currently under appeal to the Supreme Court of Canada by our firm 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. Several complex legal issues are involved in the case, and its final determination by the Supreme Court of Canada will hopefully clarify both 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.
Mark S. Anshan provides legal, business, strategic and organizational advice to nonprofits and charities at Drache Aptowitzer LLP. He was instrumental in the conception and launch of URJ Camp George, the first summer camp in Canada for children from Reform Synagogues, and served as Director and Treasurer for the Micah Homes Non-Profit Housing Corporation during its planning and construction of Plaut Manor, a housing project for disadvantaged single-parent families.
Contact him by email or at 416.900.5572 ext. 15.