Cryptocurrency has been in the news now for many years. While cryptocurrencies such as Bitcoin, Ethereum etc. have received a lot of attention, in my anecdotal experience, very little money has been provided to Canadian charities through cryptocurrency.
We have discussed cryptocurrency before in our blog CRA asking about cryptocurrencies on charity audits (August 28, 2020). Also CRA has announced that they will be looking closely at charities and cryptocurrency. In February 2021 they said “Directorate developments include: … projects, such as the review of … cryptocurrency usage within the charitable sector“.
At the moment there is no particular tax advantage of donating cryptocurrency to a Canadian charity. Unlike appreciated marketable securities, which receive special treatment, there is no special treatment for cryptocurrency. Although this note will focus on donations of cryptocurrency there are also concerns with charities receiving cryptocurrency for purposes other than donations such as to pay for services.
Many charities don’t understand the complexity of cryptocurrency donations and unless they’re going to have policies and procedures and an understanding of how to deal with cryptocurrency appropriately they should not be accepting cryptocurrency donations. (I am sure that I will get at least one or two emails telling me that cryptocurrency is actually quite simple from people who have been studying cryptocurrency for the last 5 years and spending 14 hours a day reading about it!)
There are many people who are generous and own cryptocurrency. We don’t want to discourage them from donating to charity. They can cash in a cryptocurrency and send a cheque or wire transfer of cash to the charity. Or they can easily donate through CanadaHelps either cash or appreciated marketable securities. This will eliminate many of the complexities. Most people who live on the grid and own cryptocurrency are quite adept at selling it to pay for wares and services.
One of the biggest misunderstandings relating to cryptocurrency is that some people think that it is a currency. When it is being donated to a charity it’s actually considered by CRA to be a gift-in-kind and therefore all the rules that apply to gifts-in-kind including the deemed fair market value rules, apply to cryptocurrency. Charities will need to be aware of the cost of acquisition if the cryptocurrency was acquired in the last 3 years before the donation because of the deemed fair market value rules. As well, in some cases, it may be fairly straightforward to work out the current value of cryptocurrency when received by a charity for some other cryptocurrency that are thinly traded it may not be so easy. Keep in mind that if you get the deemed fair market value rules wrong – say because the donor does not tell you the cost of acquisition, then CRA can invalidate the receipt completely.
At the moment I’m involved with a number of CRA charity audits which all started out with CRA asking certain charities seemingly straightforward questions about cryptocurrency that evolved into full-scale audits.
I wish I can tell you that the charities received millions of dollars in donations through cryptocurrency but in some cases, we’re talking hundreds of dollars or thousands of dollars of cryptocurrency donations. In fact, sometimes the amounts are so low that they don’t even meet the threshold for some cryptocurrency systems to allow you to cash out the cryptocurrency! From a risk perspective, charities should ask if it is worth the extra risk for such as small amount of funds.
So sure if you have a donor who wants to give you $1 million and insists that it be in cryptocurrency you should definitely look into it. But for most charities, they would be better off having a simple policy that they do not accept cryptocurrency. In five or 10 years the systems relating to cryptocurrency may be simpler, the CRA rules may be more widely understood and the amounts of money available for donations may be far greater. However, in the current environment, regrettably, for almost all charities it does not make sense to accept cryptocurrency directly when the owner of the cryptocurrency can turn the cryptocurrency into cash and provide the cash proceeds.
If you do decide that you wish to accept cryptocurrency you should have an extensive policy covering a number of different issues relating to cryptocurrency.
For those who are interested in some of the nuances of cryptocurrency you might find these questions that we’ve seen from CRA to be helpful in understanding some of the information they may ask:
Important Note: Please do not provide us with the private key to the Organization’s digital wallet(s) anywhere in the response to this questionnaire or in any documents submitted to the CRA.
- When did the charity start accepting cryptocurrency?
- What is the charity accepting cryptocurrency for?
- Why did the charity decide to accept cryptocurrency?
- How is the charity accepting, accounting and/or managing cryptocurrency?
- Is the charity working with other organizations that are also receiving, or involved with cryptocurrency? If yes, please provide the name, address, and business number for each organization.
- Has the charity received any gifts in the form of cryptocurrencies?
- Which cryptocurrency address was gifted?
- Which type of cryptocurrency was gifted? How much of it was gifted, and when did the charity receive the amount?
- What is the name and address of the person/organization who gifted this amount? What is their association to the charity?
- How frequently does the charity engage in cryptocurrency transactions?
- How does the charity store the cryptocurrency received?
- If a wallet is used to store cryptocurrency, what type of wallet is it (i.e., custodial online wallet, private online/offline etc.)? Does the charity have multiple wallets for the purpose of holding and/or receiving cryptocurrency? Are the wallets shared? Please provide the name of the person in charge of managing the wallets and who has private keys to the wallets to manage the cryptocurrency.
- If the charity uses a cold wallet, What kind of cold wallet does the charity own (i.e., Paper wallet or hardware wallet)? If it is a hardware wallet, what is the make and model of the device?
- If the charity uses a hardware wallet, who was the person to set up this device at the beginning? Who created the PIN to unlock the device? Who are the people that know the PIN?
- If the charity uses a hardware wallet, who was the person to write down the 24 words backup on a sheet of paper? Where is that paper stored and who has access to it?
- If the charity uses a hardware wallet, there should be a corresponding app that is used with the hardware wallet. What is the name of that app? Who has the log in password to that app? What are the functions of that app?
- Who is responsible to check the different cryptocurrency balances? How often are the balances checked? Where do you go to check the balances (i.e., through a phone app or desktop app)? How do you know when you receive a crypto donation?
- Please provide a list of the cryptocurrency addresses that the charity owns. Is a separate address kept for each type of cryptocurrency?
- Please provide the total amount of cryptocurrency (by type) that the charity received for each fiscal year under review.
- How does the charity value the gift amount on the official donation receipt for the cryptocurrency donated?
- Who is the person responsible at the charity for issuing official donation receipts for cryptocurrency received by the charity?
- Please describe the charity’s internal controls regarding the handling of cryptocurrency, bookkeeping of cryptocurrency transactions and the issuance of official donation receipts.
- Does the charity maintain any records, spreadsheets, and documentation related to cryptocurrencies that helps to track cryptocurrency transactions? Can the Organization provide us with these documents?
- Which cryptocurrency exchange platform does the charity use to determine the fair market value of the cryptocurrency received? Also, please provide us with all the cryptocurrency exchange platforms that the charity has worked with in the past.
- What did the charity do with the cryptocurrency received (i.e., hold to invest, used to pay for purchases, convert into CAD dollars)? Does the charity immediately turn it into FIAT currency, or is the cryptocurrency invested/held?
- How does the charity use cryptocurrency to further its charitable purposes?
- Who in the charity is responsible for coordinating and approving cryptocurrency transactions? Did the charity seek assistance from external third parties to begin accepting cryptocurrency? If yes, please provide details.
- If assets were purchased with cryptocurrency received by the charity, please identify the type of assets purchased and who/where these assets were purchased from (i.e., name of store). Please provide transaction receipts.
- Does the charity accept cryptocurrency as fee for service? If yes, did the charity issue an official donation receipt for this transaction?
- How are cryptocurrency transactions recorded in the charity’s books and records?
- Please provide the bank account details (Bank and Account Number) that are linked to the charity’s cryptocurrency after it is converted to Canadian dollars.
- Please provide a list of third‐party cryptocurrency payment providers that the charity used.
- Please provide a copy of the statements issued by the payment provider.
- Please provide a listing of all official donation receipts issued by the charity for cryptocurrency donations.
There are a number of areas of concern when it comes to cryptocurrency. First, as we noted above the issue of how to issue official donation receipts correctly.
Second, as one famous business person who invests in cryptocurrency once joked there probably are reasons to use cryptocurrencies that are legal he just cannot think of them offhand! There is no question that much cryptocurrency work is perfectly legal and appropriate, however, as you can imagine there are some bad actors who take advantage of some of the benefits of cryptocurrency such as secrecy. I used the term ‘bad actors’ which probably isn’t the right term to use because I can assure you that many of these people think of themselves as extraordinarily generous and caring individuals. I think many charities would say to themselves why would a drug dealer or a retired warlord donate to a charity. Well, these individuals see themselves as being good people who support good work and in some cases may even want some recognition, respect and appreciation.
Another area of concern with respect to cryptocurrency is not just whether the donors or providers of cryptocurrency are good people (Know Your Donor or KYD) but also whether the charity can fully ascertain the information that you need not only to issue receipts but also to complete your T3010 Registered Charity Information Return. For example, was that $11,000 donation from in Canada or outside of Canada? Will you be able to fill in Schedule 4 which requires information on all donations over $10,000 from outside of Canada? Will you be able to complete lines on the T3010 which deals with receipted funds from outside of Canada and non-receipted funds from outside of Canada?
Some charities and some donors want charities to accept cryptocurrency because it sends a signal that cryptocurrency is legitimate and appropriate. Well, that may seem like a worthy reason, but for both the donor and the charity it may be better to have the funds move as cash and not cryptocurrency. If one wants to make a big deal about how the savvy investor made their fortune off cryptocurrency, you are welcome to do so.
For the charity their risk of audit increases significantly. Audits can result in compliance agreements, penalties, suspension of receipting abilities and revocation. Rarely will CRA look at just one issue, they will look at all the top compliance issues. Keep in mind as part of that audit CRA may ask for the names of every donor who gave by cryptocurrency. There is a possibility of cross-referral and that donor could end up with a personal audit by CRA. Worst of all in the case of major donations is not necessarily a donor being audited by CRA but if the deemed fair market value rules are not complied with, even though valuable property was provided to the charity, the CRA can deem the receipt to be nil. In such a case it is possible that the donor would sue the charity. So with the regulatory complexity that charities can face dealing with cryptocurrency and the risk for both the charity and donor, both charity and donor are better off with the donor selling the cryptocurrency and providing the cash to the charity. Donors can go onto CanadaHelps and donate cash or appreciated marketable securities very easily to almost any charity in Canada.
If this complexity continues it will ultimately result in a small number of “umbrella” charities accepting cryptocurrency and passing cash along to other charities.
If your charity decides that it wishes to it accept cryptocurrency then you really do need to do your homework, understand cryptocurrency, have policies and procedures in place to ensure that all avenues are covered and then, unfortunately, based on anecdotal evidence probably get ready for a CRA audit as well!
By Mark Blumberg, Blumbergs, Canadian Charity Law
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- CRA adds additional questions and schedule to T3010 annual return - June 29, 2023
- Globe and Mail article “CRA typo causes a multimillion-dollar mistake for the Hewitt Foundation” focuses on the importance of T3010 - June 26, 2023