Charities are like any other actors in society, opportunities arise and they should be considered. Some will be discarded and others will be pursued. For charities though, the evaluation of opportunities must be made with the additional consideration of the constraints placed upon charities from normal economic operation. One interesting opportunity which lucky charities face now and again are large, and often unexpected, gifts in kind.
Sometimes donors feel they are helping the charity by donating property which can be used to create a revenue stream for the charity thus allowing it to effectively leverage the donation. However, given that charities are restricted from engaging in business even accepting such a donation could be fraught with difficulty.
Often the easiest way to deal with a donation of this type is to consider selling it to some other entity. The advantage of such an approach is that the organization does not have to engage in running a business it may know nothing about, and which it is restricted by law from doing. The other advantage of simply monetizing the donation is avoiding the disbursement quota rules apply to any asset not used in the organization’s charitable activities. This requirement then would force the charity to spend 3.5 percent of the value of the asset every year, regardless of whether or not the property was, in fact, producing an income. If the property cannot be effectively monetized quickly (or at all) the charity could be left trying to fund a disbursement quota obligation out of its general revenues.
Another difficulty in trying to sell the property may lie in the difference between the sale price and the valuation price used on the receipt. While the receipt must reflect the fair market value – defined as the price a third party would pay for the item – this is generally a theoretical calculation, whereas the price that the property can actually fetch at market may be considerably different. If that is the case, the CRA may question the appropriateness of the amount included on the receipt in the first place. Of course, if the valuation(s) obtained on the property was reasonably defensible, this concern may be ameliorated.
A recent document released by the Canada Revenue Agency (CRA) (Document # 2011-0431051R3) discusses another common method by which a charity may operate a business through a corporation. In this type of scenario, the donated property would be organized within a corporation and the charity would hold all the shares of that corporation. In the scenario the charity was not involved in the running of the business itself. Yet even there the charity must pay attention to its disbursement quota obligations and its other obligations (such as to use charitable assets in prudent investments).
Of course, the charity could consider running the business itself but, as we have written before, such a scenario would either have to be run by people who are not employees of the charity or it would have to be both related to and ancillary to the charity’s objects. Of course, this is not impossible, but it does mean starting a business that would have to be shoehorned into the restrictions placed upon it by the law and the CRA. Starting a business can be difficult enough without accepting those types of restrictions.
Fundamentally, this means that charities must think about the long term consequences that come with accepting a donation meant to increase their overall cash flow. Like most enterprises charities have a great deal of experience in one area and expanding into another can sink the whole ship. Even a quick foray into a different area with the intention of selling the property can result in problems given the special restrictions that are placed upon charities. It is for these reasons that charities must think carefully before accepting big gift in kind.
Drache Aptowitzer LLP
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