What are restricted gifts?
Donors to a not-for-profit organization (NPO) may designate or “restrict” the use of their donations to a particular purpose, program, or project. This is better known as restricted gifts. An example of a restricted gift is a specific scholarship for a university. Upon accepting such gifts, charities are obligated to meet the terms associated with the gift.
What happens when the condition of the gift can no longer be fulfilled?
It is possible for the purpose of a charity to change, or for a program to no longer exist. The Canada Revenue Agency (CRA) looked into whether or not a gift could be returned to a donor and its potential consequences. Using the above example, if a scholarship was offered to people in a specific program at a college or university, and that program was no longer offered, CRA noted the following:
“1. In most cases, returning a gift to a donor is prohibited. This is because at law a gift transfers ownership of the gifted property from the donor to the charity. However, as mentioned above, where a restricted gift is made, the charity is obliged to apply the gift pursuant to the terms upon which the gift was made. CRA acknowledged that the circumstances under which a gift can be returned are primarily a matter of provincial trust law rather than tax law.
2. The tax consequences applicable to the donor where a gift is returned are set out in the Income Tax Act (Canada). Generally speaking, the taxpayer is deemed not to have disposed of the property nor to have made a gift. As a result, the taxpayer’s income tax return for the year(s) in which the taxpayer claimed the donation tax credit/deduction may be reassessed as it relates to the transfer.
3. Before returning a gift, charities need to consider whether the return of the gift could be regarded as making a gift to a non-qualified donee or providing an undue benefit, both of which could result in sanctions, including revocation of registered status. Charities are recommended to consult CRA Guidance CG-016 – Consequences of returning donated property. The requirements pursuant to this guidance are discussed below.” (Miller Thomson, 2017)
Do I need to do anything after I return a gift?
If a charity returns a gift with a value of over $50, an information return must be submitted to the CRA, specifically addressed to the Audit Section of the Compliance Division. This needs to be done within 90 days after returning the gift and it must be in the form of a letter. See below for guidance on what needs to be enclosed in the letter:
- A description of the gift being returned
- The market value of the returned gift at the time it is returned
- The date on which the gift is returned
- The name and address of the person being returned to, including their first name, initial, and last name
- The information contained in the original donation receipt, or a copy of the original receipt, if the gift is being returned by the qualified donee that originally issued the receipt