Young Associates’ Q & A section includes answers to a number of frequently (and less frequently, but still relevant) questions we’ve fielded from clients, colleagues and members of the arts, not-for-profit and charitable sectors. We also have a discussion board if you would like to start a conversation with Young Associates staff and members of your sector.
‘Holiday pay’ and ‘Time in lieu’ are actually very different. Holiday pay is pay for ‘standard’ holidays, either public or at least consistently recognized by the employer. Time in lieu is paid time off in exchange for overtime work.
Holiday pay is pay for days that an employee doesn’t have to work, because they are public holidays. In Ontario, these days are: New Year’s Day, Family Day, Good Friday, Victoria Day, Canada Day, Labour Day, Thanksgiving Day, Christmas Day, and Boxing Day. Public holidays vary in different jurisdictions. Also, some employers choose to provide holiday pay for days which are not official public holidays, but are frequently observed. For example, in Ontario, employers often acknowledge Civic Holiday the first Monday in August. Public holiday pay is based on the previous four weeks of work, and can be calculated here. The calculation i:s (regular wages from 4 weeks previous + vacation pay from 4 weeks previous) / 20. You add up the last month of earnings and divide by 20 because there are 20 working days in a normal month.
In the entertainment field — and others — it’s not uncommon for employers to ask their staff to work on a public holiday. Employees have the option to agree in writing to work the day and receive either public holiday pay plus premium pay for the hours worked on the holiday OR their regular rate plus holiday pay on a ‘substitute’ day off. In this case, the holiday rate would be calculated on the four weeks previous to the substitute holiday, not the original holiday. Some jobs do not entitle employees to take public holidays off. More details on public holiday pay in Ontario can be found here.
‘Time in lieu’ is paid time instead of overtime pay. The Employment Standards Act sets out rules on overtime pay; in most cases it is time-and-a-half (1 ½ times regular pay) for hours worked beyond 44 in a week. An employee and employer can agree in writing to time in lieu, also sometimes called ‘banked time’. In Ontario, if an employee has agreed to bank overtime hours, the employer must provide 1 ½ hours of paid time off for each hour of overtime worked. The time off must be taken within 3 months or, if an agreement is made in writing, within 12 months. If employment ends before the employee takes the paid time off, the employer must pay him or her overtime pay instead.
First, a reminder of how and when vacation time is earned: Employees earn their vacation time upon completion of a year of work (the Ontario Ministry of Labour calls it a “12-month vacation entitlement year”), and each subsequent 12-month period. If the employer deviates from the standard entitlement year, the employee is entitled to their minimum vacation time as well as a pro-rated amount of vacation time for the ‘stub period’ which precedes the start of the first alternative vacation entitlement year.
The Ontario Ministry of Labour dictates that vacation time earned (whether based on a completed entitlement year or stub period) must be taken within 10 months. The employer has the right to schedule the employee’s vacation time and/or ensure vacation is scheduled and taken.
Upon obtaining written agreement from their employer and the approval of the Director of Employment, an employee can give up some or all earned vacation time. The employer is still obliged to issue the employee vacation pay. You can give up vacation time, but you do not give up your right to the remuneration associated with that time.
You can learn more about vacation time from the Ontario Ministry of Labour website or by visiting the labour website applicable to your region.
When a staff member leaves, you must review their vacation pay entitlement. This is done by calculating vacation pay earned and subtracting vacation time used. If the employee has not used their vacation time, you must pay out the amount owing in cash.
Yes. CPP, EI, and taxes are deducted from vacation pay in the same manner as with regular pay.
There are 2 methods to calculate vacation pay: you can include vacation pay in each paycheque, or your can pay it out in a lump sum when employees take their holiday (or when their contract ends). For our examples, let’s assume an employee receiving the Employment Standards Act minimum of 2 paid weeks per year worked, or 4% of earnings.
Method 1 - Pay with each cheque:
Vacation pay can be rolled into regular pay, so the employee receives it as they earn it. This means that the employee has to do their own saving-up for time off. This method is often used for part-timers, temporary and hourly-paid staff.
Example: An employee earns $1,000.00 per pay cheque. The employee has vacation paid on each cheque, therefore s/he receives $1,000.00 in pay + 4% ($40.00) for a total of $1,040.00 of gross pay each pay period
Method 2A – Pay with holiday – Salary:
Salaried employees get “paid vacation”, which means they receive their normal salary without interruption even when on vacation. There is no change in the rate or frequency of their pay; they just get paid time off. In the payroll records, 4% vacation pay is accrued each week. That is, the employer sets aside the vacation pay amount as money owing to the employee for their holiday. Since the process is seamless for both the employer and the employee, the accrual process may be omitted: if the employee gets their regular pay, the requirements have been fulfilled!
Method 2B – Pay with holiday – Non-Salary:
Part-time, casual and hourly-paid staff often have an irregular stream of earnings. From the employer’s viewpoint, the accounting is the same: you accrue 4% of each week’s earnings, setting it aside as an amount owed to the employee. However, when the employee takes time off, their vacation payout will not correspond to a normal paycheque — so from their point of view vacation pay is a lump sum.
Example: The employee is about to take her/his annual vacation, and no vacation pay has yet been paid. Therefore, the employer bases vacation pay on the employee’s total gross pay since the last time s/he took vacation. In this case, the employee has earned $13,978.65 in gross earnings since his or her last vacation. 4% of those gross earnings warrants vacation pay of $559.15.
Visit the Ontario Ministry of Labour website (or a comparable website for your area) for more information on vacation pay.
Vacation pay is remuneration for time off! The Ministry of Labour, through the Employment Standards Act, allows for 2 weeks of paid vacation per year worked. This is the legal minimum — and many employers offer their employees more than the standard 2 weeks, often to reward long service with the company.
The 2-week amount is often expressed as 4% of your regular pay. (Out of 52 weeks in the year, you work 50 and go on holiday for 2; the 2 weeks is 4% of the 50.) If you’ve worked less than a full year, the amount of paid vacation you receive is pro-rated accordingly. So, summer students, for instance, would receive vacation pay amounting to 4% of their summer earnings.
Visit this Q & A for methods on calculating vacation pay. Vacation pay is treated in the same manner as regular pay in terms of tax, EI, and CPP deductions.
Visit the Ministry of Labour website for more information on vacation pay in Ontario, or find a comparable government resource for your location.
I understand that assets and equity both have to do with the value in my organization. Why don’t they match?
If your organization had no liabilities, then its assets would equal its equity. This may be the case for very tiny organizations, but otherwise rarely happens. Most organizations accrue liabilities in the normal course of day to day operations.
For instance, if you open a credit account with a supplier, they will invoice you for goods or services and allow you a period of time – often a month – in which to pay. For that month, you are officially in debt, although you aren’t in any trouble! Your balance sheet needs to show that the supplier has a claim on a portion of your assets. You own a certain amount of cash, receivables and other assets… but your organization’s residual value is lower by the value of the outstanding debt.
Here are a few ideas that may help:
Revenue and expense allocations are pretty much up to you, the manager. Do you want a single expense account for Salaries? That’s entirely correct. Would you prefer to have a separate expense account for each salaried position? That’s also correct. Do you want one account for Office Overhead? Not a problem. Would you prefer to have a series of accounts to distinguish amongst various supplies, phone, insurance, etc.? Also entirely acceptable.
Management (perhaps with input as appropriate from your Treasurer, Board, accountant, bookkeeper, staff) needs to decide what level of detail works best for your organization’s situation. Once you’ve established a set of revenue and expense accounts, it’s important to confirm on a regular basis that transactions are being allocated to the right place. Many accounting software packages provide detailed reports that allow you quite easily to scan the contents of these accounts for misplaced items.
Your cash resources – contained in your bank and investment accounts – are the lifeblood of your organization. It’s important to know how much money is readily available to your day to day operations. See our FAQ on how to tell for sure what’s in the bank.
Knowing who owes you money, how much, and since when, is very important. Most accounting software will produce a “customer aging” report that contains this information. (See the glossary for a definition.)
In the same way, you need to be able to review your list of payables, itemizing the suppliers to whom you owe money, how much and since when. On most software, a “vendor aging” report provides this detail.
Beyond that, if your bookkeeper is on their game, they will be able to provide an explanation of the contents of each account, and to pull out documentation from the files that substantiates the amounts. If your organization is audited, your chartered accountant will also be able to provide these explanations, as at your fiscal year-end. If these folks can’t provide a satisfying explanation, you need to challenge them! They should be able to help you understand your accounts, and justify that each balance is properly stated.
It’s typical for the bank statement to show a different month-end balance from your general ledger.
Now that online access to banking records is so prevalent, it’s easier to keep track of the differences. However, they still exist, and you need to understand why.
For one thing, you need to pick up bank charges and any interest earned. For another, there may be errors to deal with – yours or the bank’s – which must be identified and corrected by comparing the two sets of records. Finally – and most significantly – there are timing differences between when you initiate a transaction and when the bank sees it.
Your books record payments and deposits in the order in which you issue them. The bank’s records will also contain these amounts – but in the order in which they were presented at the bank. That might be quite a different thing!
Let’s say you issued a batch of cheques dated on the 25th of the month. Getting them signed and into the mail took a couple of days. Some payees may have received and banked their cheques before the 30th, but others won’t cash them till the new month. As far as your books are concerned, these cheques are all current month items – but from the bank’s point of view, some belong to this month and some to next.
Therefore, at the end of this month, the bank will have a higher balance than your books, because the bank doesn’t know what cheques may be in transit.
As this example demonstrates, it’s very important for you to keep your bookkeeping up to date, and use your balance rather than the bank’s. Once you’ve issued a payment, you need to assume the money is gone, even if it hasn’t cleared from your account. You don’t want to try spending the same money twice!
The same problem can happen with other transactions. The deposit you made at the ATM on Friday may not be processed by the bank until Monday. The online purchase you made, or the online donation that a supporter made from their home may be logged on your system today, but may not arrive in the bank’s records until tomorrow.
The tool that you need to understand is the bank reconciliation. It is the document that proves your bookkeeper has compared your general ledger to the bank statement, and identified all problems and timing differences to the penny. If you put your general ledger at your right hand, the bank statement at your left hand, and the bank rec document in the middle, you should be able to see your balance, the bank’s balance, and an itemized explanation of any differences.
Auditors are engaged to express an opinion on the quality of your financial statements. A typical positive audit opinion will say that your statements present your financial position “fairly, in all material respects.”
This isn’t the same as being free from error!
Straight from the CICA Handbook (Canadian Institute of Chartered Accountants): “An item of information, or an aggregate of items, is material if it is probable that its omission or misstatement would influence or change a decision.”
As part of their audit, your accountant makes a determination on what amount is material for your organization. They assess any errors they identify relative to this materiality threshold. Thus, they may pass small errors without making corrections.
This would be a good point to discuss with your auditor, so that you understand their process around addressing any bookkeeping errors they find.
I received a grant to help with my capital asset purchases. My bookkeeper says this is a liability. How does this make sense?
Donations to a capital campaign (e.g. from individuals and businesses) are treated in the same way as grants (e.g. from foundations and governments).
Your funders and donors have provided money that is intended to benefit your organization over the life of the capital purchases. In the same way that the cost of a capital asset is spread over the years of ownership, the benefits of a capital grant must be spread over the same years, using the same technique.
You should discuss your organization’s capital policies with your accountant, to make sure they are appropriate to your particular situation.
This question came from the Executive Director of a small organization – and she asked it repeatedly, with a great deal of very genuine concern! The issue, it seems – and this is a common concern for non-financial folks – was understanding the nature of accrual accounting.
“Real,” in her terms, meant that money had changed hands. Even in the days of electronic transfers, cash in the bank still feels indisputably legit and tangible! However, non-cash transactions can be just as “real” as those involving money. For example, they may record agreements or management estimates that provide the basis for measuring financial results.
Accounts receivable and grants receivable are amounts owed to you by clients/customers and funders. A state of obligation exists when you have delivered work, and the promised payment is due. This state of obligation felt real to the Executive Director, because she was well aware of the costs her organization had incurred, and the urgency of collecting the receivable amounts.
By the same token, accounts payable were not questioned: the state of obligation between the organization and its suppliers was evident, because the organization had received goods or services for which it hadn’t yet paid, and the invoices were sitting in the “bills to be paid” file.
Prepaid expenses and deferred revenues posed a challenge. In both of these cases, money actually has changed hands – but those transactions are not recorded on the income statement as expenses and revenues; rather, they are recorded on the balance sheet as assets and liabilities (respectively). Eventually, when the obligations are satisfied, these items will be recognized as expenses and revenues. Read on…
A prepaid expense item is an asset – something you own. It arises when you have paid for goods or services ahead of time. A classic example would be a rent deposit. Often, when a lease is signed, the lessee must pay “first and last.” Obviously, you receive the first month of your tenancy right away. However, you have paid up-front for the last month on your lease, and you won’t receive that service for a period of years. You own the right to receive it, because you have prepaid it… and the landlord is effectively in your debt for that month of occupancy.
When the last month rolls around, the landlord provides the month of occupancy. At that point, the organization no longer has an asset, because it has collected on the obligation. In the accounting records, the asset must be removed – and the rent expense can be officially recognized. Note that the last month’s rent eventually does appear as an expense, but not until it’s being used. In that last month, it’s a non-cash expense item; the cash changed hands back when the lease was signed.
A deferred revenue item is a liability – something you owe. It arises when someone else has prepaid you for goods or services that you have not yet delivered. A classic example from the performing arts is a subscription. Many organizations run intensive campaigns during the spring and summer to sell subscription packages for the next fall/winter series of shows. At the point when the subscriber pays, they have a promise from the organization, but they won’t enjoy the concerts or plays for months down the road. The organization owes the subscriber those shows.
When the organization delivers its performances, it discharges its liability. In the accounting records, the liability must be removed – and the ticket sales revenue can be officially recognized. Thus, eventually those subscription packages do turn into revenue, but as a non-cash revenue item; the cash changed hands back when the subscriber made the purchase.
The depreciation of capital assets can also cause confusion. A capital asset is an item of significant value that an organization will own for a period longer than a year, and use in carrying out its operations. Depreciation (or amortization) is the process by which the cost of that asset is spread over the years of ownership. Elsewhere in the FAQ section are questions and answers that present the process in detail.
- I’m still using a capital asset that has been fully depreciated. Is this ok?
- I discarded my capital asset before it was fully depreciated. Now what?
- How do I estimate the useful life of a capital asset?
- I bought my capital asset part-way through the year. Should I take a full year of depreciation?
- I just bought a computer. Why doesn’t it show up as an expense?
For our purposes here, the important thing to understand is that the asset (usually) must be paid for when it is bought. Each year’s depreciation is a non-cash expense item, representing that year’s estimated share of the cost.
One of the purposes of accounting is to measure the expenses and revenues associated with each year of operations, regardless of when money changes hands. As you can see, items may be paid for either before delivery or afterwards. The exchange of cash does not create the revenue or expense: rather, the usage of the goods or services in the course of operations. Balance sheet accounts are used to “park” or accrue items so that they can be properly recognized in the correct operating year. Non-cash revenues and expenses can be just as real as those paid “cash on the barrel head.”
I know that my capital assets are worth more (or less) than my financial statements show. What’s with that?
- I’m still using a capital asset that has been fully depreciated. Is this ok?
- I discarded my capital asset before it was fully depreciated. Now what?
- How do I estimate the useful life of a capital asset?
- I bought my capital asset part-way through the year. Should I take a full year of depreciation?
- I just bought a computer. Why doesn’t it show up as an expense?
It’s also true that the capital assets on your balance sheet indicate the investment your organization has made into significant purchases that support and enable your operations. It’s important to declare that you’ve purchased sufficient equipment to allow staff to carry out their work, and that you own a building, or have invested in renovations to improve the property that you lease.
Indeed, in the commercial world (not so much in the not-for-profit) companies calculate “return on assets” as a measurement of their productivity and success.
However, consider how hard it would be to show market (or resale) value.
You may just have bought a nice, state of the art computer for $1500 – but the moment you take it out of the box, it’s used equipment. You may not even have plugged it in – but you couldn’t expect to get $1500 if you tried to resell it. After you’ve used it for a year, how much would it be worth as a second-hand machine? And yet, as far as your organization is concerned, it’s still a useful and functional item in the office.
If that’s the case with equipment, which wears out and becomes obsolete, you can imagine that dealing with real estate – where market values can float up and down over time – would be much more complex.
To create meaningful financial statements, it’s essential to have a constant unit of measurement. Generally Accepted Accounting Principles (GAAP) recognize this through the Stable Dollar Concept, which assumes that the purchasing power of a dollar remains unchanged over time. This allows us to make reasonable comparisons between fiscal years.
That said, there are circumstances where it is permissible to “write up” or “write down” an asset to reflect a permanent change in its value. Your accountant can advise whether this pertains to your organization.
That’s good news!
Capitalizing and depreciating (or amortizing) major purchases allows you to spread out expense over estimated useful life. When you buy a new asset, you have no way of knowing how it will perform. You might find yourself discarding some purchases early – and you might own others for longer than you had expected.
If you wind up using your asset after it has been fully depreciated, then those extra years of useful life get a “free ride,” from the viewpoint of expense.
Remember, the function of depreciation is to spread the purchase price over an estimated time span. Once the original cost has been fully expensed, that’s it!
It’s important to make sure that you are depreciating your capital assets over a reasonable time frame. Be sure to discuss capitalization and depreciation policies with your accountant, to confirm that you’re following methods that work for your organization and its belongings.
When you purchase a capital asset, you need to estimate what its useful life will be. The key word, here, is estimate. You don’t know at the outset what will happen… what will turn out to be a lemon, what will break, or what will (amazingly) last years longer than you anticipated. You also don’t know what advances will come along, that may make it more economical to replace something early than to use it ‘till it wears out.
If you discard something earlier than expected, then the year of disposal must take all remaining undepreciated cost.
This makes sense: the mechanism of depreciation is intended to spread the cost of an asset fairly over the years of ownership. If you dispose of an item early, then your accounting records must show that the asset is gone. The only way to do this is to take the expense.
Managing the journal entries around discarding capital assets is a good topic of discussion with your accountant. You need to follow your organization’s accounting policies, and make sure you’re recognizing the expense correctly.
There are norms around estimating useful life, which may vary by sector. These are often set by, or influenced by, tax authorities.
In the commercial world, where companies pay income tax on their profit, depreciation policies are important for taxation, because by shortening or extending the amortization period, a company can affect its bottom line. The Canada Revenue Agency’s term for depreciation is “capital cost allowance,” and you can find information on its rules here.
Capital cost allowance (CCA) works on the “declining balance” method of depreciation, where you expense a percentage of the asset’s remaining undepreciated value each year. Nonprofits often use the simpler “straightline” method, where you divide the cost by the estimated years of useful life, and expense an equal amount each year.
Not-for-profit organizations generally do not pay income tax, and so do not have to deal with capital cost allowance rules. However, it’s interesting to know how things work in the commercial sector, because we often follow similar patterns.
As with the CCA rules, nonprofits typically group their assets together in a way that makes sense. Thus, computers and office equipment are commonly depreciated over five years. Within that group, you might have a laptop computer that you don’t expect will last more than three or four years, and a photocopier that you think will probably last something over five years. However, on the whole, five years is considered to be a reasonable estimate for purchases of this sort.
Grouping saves you from having to estimate useful life for each item, and track every capital purchase separately.
Vehicles are often depreciated over five years, office furniture and fixtures over seven years, and buildings over 40 years. These may be common periods, but you and your accountant need to discuss what makes sense for your organization and its belongings.
The short answer on this one is that, no, for the sake of accuracy, you probably should not charge a full year of depreciation when you owned the asset for only part of the year.
A good question is, how accurate should you be?
To be right on the nose, of course you would count how many days you used the asset in the year of purchase, and allocate depreciation expense accordingly. Thus, if my organization uses a calendar year for its fiscal year (i.e. January to December), and I bought a new computer on May 22, I owned the computer for 223 days out of 365.
Now, remember, useful life is an estimate: you don’t know how long you will actually own your new purchase. So, it’s generally not considered necessary to be quite that particular about measuring depreciation expense.
One common method would be to go by the month of purchase. So, if I bought the computer during May, I would take 8 months of depreciation expense – that is, 8/12 of the full year’s depreciation cost.
Another common method is the “half-year rule.” Under this method, for every asset you buy, you take 6 months of depreciation in the year of purchase. The thinking is that if you do this consistently over a period of years, your total depreciation cost will more or less even itself out. You may under-depreciate some purchases, but you’ll over-depreciate others, and at the end of the day your depreciation expense for any given year will be within the zone of reasonable – plus there’s less finicky bookkeeping to do.
Remember, the last year of depreciation must make up the compensating time period. So, if I’m depreciating a computer over five years and I take eight months of depreciation expense in the year of purchase, I need a four-month period at the tail-end to make a full five years. Thus, six fiscal years would be affected:
- Year 1 – 8 months’ depreciation expense
- Year 2 – a full year of depreciation expense
- Year 3 – ditto
- Year 4 – ditto
- Year 5 – ditto
- Year 6 – 4 months’ depreciation expense
Of course, major purchases such as equipment most definitely are major costs to your organization! The short story is that it does show up as an expense. The longer story involves explaining how that happens.
Anything treated as an expense is of minor value, and is generally consumed within a year. By contrast, capital assets (also known as fixed assets) cost a significant amount of money, last longer than a year, and are instrumental in carrying out your daily operations.
Buildings and equipment are the most typical examples. Major renovations (as opposed to maintenance work) are also treated as capital assets. Computer software and websites may also be capitalized, depending on their scope.
When an item is capitalized, the purchase cost is recorded in the assets section of the balance sheet. It moves gradually into the expense stream over a period of years, through the mechanism of depreciation (also known as amortization).
A key aspect of managing capital assets is estimating their useful life. Computers and other office equipment are often estimated to last five years. Vehicles are often depreciated over five years, office furniture and fixtures over seven years, and buildings over 40 years. These may be common periods, but you and your accountant need to discuss what makes sense for your organization and its belongings.
Once you’ve estimated useful life, you and your accountant need to select a method of depreciation. The simplest – and one that is commonly used in the not-for-profit sector – is straight-line depreciation.
If you estimate that you’re going to get five years out of your computer before you need to replace it, you divide the purchase cost by five. This year, you will see one-fifth of the cost of the computer in your expenses – and the same over the next four years.
Why is it done this way? An intuitive way to grab hold of the accounting theory might be to imagine it as a question of fairness. It wouldn’t be fair to charge this year’s bottom line with the full burden of a five-year purchase. Nor would it be fair to give the next four years a “free ride” in terms of computer cost. Depreciation allows the price of the computer to be spread fairly over the years of ownership.
Most revenues are received, and most expenses are spent, during the year to which they belong. However, in the early days of this year, you might still be collecting some of last year’s money (e.g. grant holdbacks and other receivables), and paying some of last year’s bills. In the later days of this year, you might start to receive or spend money in preparation for next season. And you’ll probably find that some of this year’s transactions just can’t be settled till the early days of next year.
Besides these timing issues, cashflow involves tax transactions that are not part of your revenues and expenses. For instance, everywhere in Canada we pay GST or HST (depending on your province) on the purchase of goods and services. Cash flows out to pay the sales tax – but for most organizations it’s partly or fully recoverable. Only the non-recoverable part is an expense.
The budget document doesn’t care about the timing of cash payments: it is based on the idea of accrual accounting, where revenues and expenses are “accrued” to the year where they belong, and the actual exchange of money might happen either earlier or later.
The cashflow document is all about the timing of cash, without respect to which year various things belong.
It’s probably a timing issue.
This year’s losses might be floated by money that you made in the past.
Or perhaps next year’s money has started to arrive. This is common for performing arts companies that sell seasons on subscription: in the spring, when next year’s tickets go on sale, money arrives that might make you feel flush, but that actually should be carefully stewarded so it can be used to pay for the next season. In the same way, grant instalments might arrive early.
Perhaps the bank is in good shape despite your losses because you haven’t paid the bills yet. You may know that you’ve lost money, but still be awaiting invoices from suppliers
It’s probably a timing issue.
You might be strapped for cash if you are paying off bills from past year losses. In the same way, if you’re doing some early spending on future projects, this year’s money might be flying out the door to get ready for next year.
You could also be tight if you haven’t collected all the money people owe you. For instance, maybe you’ve rented a lot of studio time or gathered a lot of event registrations. If those people have booked but not yet paid you could be in trouble. In the same way, you could have solid fundraising pledges, or a confirmed grant, but still be awaiting the funds.
Tax and Law
We were audited by the Canada Revenue Agency but we don’t understand or agree with the outcome. What recourse do we have?
The results of your audit should be contained in a formal letter from the Canada Revenue Agency (CRA). It should advise you on the procedure for filing an appeal: the contact information, the time limit by which you must file, and the required documentation. Or, you can contact the CRA’s Business Window at 1-800-959-5525 for assistance.
If you’re in doubt about the findings of the audit, consider this. If you file an appeal, you can always withdraw it – but if you don’t file by the expiry of the time limit, you will be considered to have accepted the audit results.
This is a great example of a case where you should seek expert professional advice on your particular situation. Many accounting and legal practices have tax experts on staff, or can evaluate whether you would benefit from discussing a tax appeal with a specialist.
Those services might be valuable. Charities benefit from many types of “pro bono” assistance – accounting, legal, grant writing, performing, design… But the Canada Revenue Agency’s rules are clear: charitable donation receipts can be issued only for gifts of property, not for gifts of services.
The fact that there might be a clearly understood and publicized fee (i.e. the fair market value is unambiguous) does not change this ruling.
There is something you can do, though: you can pay your supporter for their services, and they can donate the money back to you. These transactions create a gift of property, which is eligible for a charitable donation receipt.
It’s not good enough to exchange an invoice marked “paid.” Your supporter must invoice you for the services (and you must retain this invoice as part of your accounting records). You must actually pay the service provider, and they must give you the donation of money (and your banking records must show these transactions).
This process requires the donor to receive payment, which must be declared by them as taxable income. The charitable donation receipt confers a tax credit against this income.
The whole process is often referred to as a “cheque exchange.”
Here are a couple of citations from the CRA website:
We held a fundraising auction. Some patrons paid more than the value of the items. Can I issue charitable donation receipts?
Only under specific circumstances.
Charitable donation receipts can be issued only for gifts. They cannot be issued for purchases of goods or services. Your auction patrons have bought something; that’s different from an outright gift. (Here’s the citation from the CRA website).
In the case where an auction patron has paid more than the fair market value of the item, a charitable donation receipt can be issued for the portion of the auction price in excess of fair market value if these three conditions are fulfilled:
- It must be possible to determine the item’s fair market value
- The value must be posted before the start of the auction
- The fair market value cannot exceed 80% of the purchase price
Here are two references to CRA articles that discuss receipting:
- General guidelines for issuing receipts applicable to all fundraising events or activities
- Income Tax – Technical News No. 26
To restate point #3 in a different but equivalent way, the buyer must pay 25% (or more) over the fair market value of the item.
Let’s say one of your auction items is a camera with a fair market value of $400. In order to qualify for a charitable donation receipt, the successful bidder must pay at least $500. If you do the math, you’ll find the $400 fair market value is 80% of $500. A $500 successful bid is 25% over the $400 FMV.
If the successful bidder paid you $500 for the camera, they would be entitled to a charitable donation receipt for $100, the amount in excess of fair market value.
What if the bidder paid more than $400 but not quite as much as $500? Well, if they fail to meet the test, then they’ve just bought themselves a very expensive camera! In the CRA’s eyes, that 80% rule is the threshold for establishing that a donation has been made.
We held a fundraising auction. Can I issue charitable donation receipts for the donated auction items?
It depends what the items were.
You can issue tax receipts for gifts of property. Thus, the donors of tangible auction items – artwork, an iPad, a bicycle, anything you can touch – can receive a tax receipt for their gift.
You cannot issue tax receipts for gifts of services (e.g. a tax consultation, a spa treatment) or for promises of services (e.g. a gift certificate, a voucher for hotel accommodation).
One important point of clarification: the company that issues its gift certificate or the hotel that issues the accommodation voucher has given you only a promise; they have not transferred property. However, if someone other than the issuer purchases a gift certificate or voucher (i.e. pays for it with cash) and then donates it to you, they have acquired property and made a gift of that property – and in that circumstance, a tax receipt can be issued.
In Canada, the function of a charitable donation receipt is to confer an income tax credit on the donor. This credit reduces the amount of tax payable. Foundations are registered charities and, as such, are exempt from paying income tax. They cannot use the tax credit for any purpose.
As the CRA suggests, you can provide a thank-you letter and/or an ordinary receipt (not an official receipt for income tax purposes). Also, your foundation supporter will need your charitable registration number in order to complete their own T3010 Charities Return reporting.
The bonus becomes part of your total compensation for the year. Let’s say your salary is $36,000 and your employer gives you a $500 bonus. You now need to be taxed as though you’re making $36,500. The bonus calculations need to adjust for the boost in your annual earnings.
Employment Insurance (EI) is a straight percentage of earnings up to an annual maximum. It’s not the culprit, here.
Canada Pension Plan (CPP) is a straight percentage of earnings over $3,500, to an annual maximum. The first $3,500 of earnings is not pensionable. This exempt amount is spread over all of the pays in the year. So, on a salary of $36,000, your weekly gross would be $36,000 ÷ 52 = $692.31. Your weekly non-pensionable earnings would be $3,500 ÷ 52 = $67.31. You pay CPP on only $692.31 – $67.31 = $625.00.
However, if you receive the $500 bonus on a separate cheque, you need to pay CPP on the whole bonus, because you’ve already had the exempt amount on your paycheque. That may make the CPP feel extra expensive.
Tax works in a similar way. In Canada, the first chunk of our income is tax-free: the basic personal exemption (for 2012, $10,822 federally). Thereafter, increasing tax rates apply to different slices of our income. Here are the rates for 2012.
The tax amount on your weekly paycheque is a blended rate: 0% on the first slice, 15% on the next slice, and so on. However, a lump sum such as a bonus must be taxed at the marginal rate: the tax rate that applies to the next dollar of earnings. This can feel very costly, but in fact it’s fair.
Bonuses are compensation and, as such, are taxable. Here’s a link to the Canada Revenue Agency’s Special Payments Chart. It lays out the requirements for source deductions on an array of payments, including bonuses.
Can I lend my charitable registration number to another organization or issue tax receipts on their behalf?
No. According to the Canada Revenue Agency, “a registered charity is responsible for all receipts issued under its name and registration number” and “it must be able to account for the corresponding donations on its annual information return and in its books and records”.
It risks losing its charitable status by lending out its number.
Sometimes a charity acknowledges a donation with some sort of advantage. Common examples include providing a donor with complimentary tickets to a performance, or providing anyone who purchases a ticket to a fundraising event with a catered meal. In cases like these, where the patron is both making a gift and buying something, it is possible that only a portion of the amount of the donation would be eligible to be tax receipted. This is called split receipting.
Anytime a donor receives an advantage, the charity must deduct the value of the advantage – (click here for information on calculating fair market value) – from the amount of the donation and determine whether split receipting is necessary. The donation, less the advantage, must still represent a voluntary transfer of property by the donor to the charity.
Sometimes, even when a donor receives an advantage, split receipting is not necessary. It is important to remember the following:
- The 80% rule – If the advantage the donor receives is valued at more than 80% of the amount of the donation, the CRA does not consider the donor as having intended to make a gift and the charity cannot provide a tax receipt at all.
- The de minimis rule – Some advantages are too small to warrant split receipting. The de minimis rule dictates that if the value of an advantage (or combined advantages) does not exceed the lesser of $75 or 10% of the value of the gift, it is too minimal to have any effect on the amount of the gift. In these cases, a charity can issue a tax receipt for the full amount of the donation.
Visit this page on the CRA website for information on split receipting.
If you have received a non-cash gift of property, you need to have it appraised for fair market value (FMV) – for your charity’s books, and so you are able to issue a tax receipt to the donor. According to the Canada Revenue Agency, fair market value is normally the highest price that the property could bring in if the market was open and unrestricted and the buyer and seller are both willing, knowledgeable, informed, prudent, and independent of one another.
It is important to keep in mind the following:
- The $1,000 threshold – If the FMV is less than $1,000, a member of the registered charity or other competent, knowledgeable individual can determine the property’s value. If the FMV is likely more than $1,000, the CRA recommends third party professional assessment of the property. Remember to include the name and address of the appraiser on the tax receipt.
- Deemed fair market value – The FMV of the property might be different at the time of donation then when the donor originally acquired it. In some cases the charity would then only be able to issue a tax receipt for the lesser amount. This can also be the case when the donor originally acquired the property as part of a tax shelter. Read this page on the CRA website for more information on when deemed fair market value is applicable.
- Fair market value for Advantages – For any donation, a charity must deduct the FMV of the advantages the donor receives (if any) to determine if only a portion of the amount of the gift can be receipted. Depending on the ratio of the value of the advantage to the value of the donation, the charity will: a) only be able to receipt for the amount of the donation less the value of the advantage, b) be able to issue a receipt for the full amount of the donation, or c) might not be able to issue a receipt at all. See this FAQ or visit this page on the CRA website for more information on these ratios and on how to handle split receipting.
Remember, it is the onus of the registered charity, and not the donor, to ensure that the FMV recorded on tax receipts is accurate.
No. A donation of services is not a gift, according to the Canada Revenue Agency (CRA) which states: “At law, a gift is a voluntary transfer of property without consideration. Contributions of services (for example, time, skills, effort) are not property”. However, a charity can issue a tax receipt if the service provider participates in a ‘cheque exchange’ with the charity. In this case, the service provider does the work and invoices the charity, the charity pays the service provider for the work, and then the service provider voluntarily donates the money back to the charity.
Why does a cheque exchange make the transaction acceptable? Because the service provider has been paid for their work. It’s now taxable income for them, and they have made a gift of property (the cash) from their after-tax income. That’s the scenario that charitable donation receipts are designed to serve.
Make sure to keep a copy of the invoice issued by the service provider, but remember, you can only issue the tax receipt once you’ve paid the service provider and they donate the money back to your charity.
Read this page on the CRA website for more information.
An editorial note on the term “gift”: ”Gift” is frequently used colloquially to describe any kind of donation (be it of cash, goods, or services). Even Young Associates uses it – see our glossary entry for “donation”. The varied and widespread use of “gift” and “donation” to cover all kinds of charitable contributions (whether they are eligible to receive a tax receipt or not) is a source of confusion. Make sure you are up to date with the CRA (or other appropriate body, depending on your location) regulations and wording to be absolutely sure you are operating within the law.
According to the Canada Revenue Agency charities glossary, “Gifts-in-kind, also known as non-cash gifts, are gifts of property. They cover items such as artwork, equipment, securities, and cultural and ecological property.
A contribution of service, that is, of time, skills or efforts, is not property and, therefore, does not qualify as a gift or gift in kind for purposes of issuing official donation receipts.”
See also the Young Associates glossary entry on in-kind donations.
The Canada Revenue Agency (CRA) provides templates to guide you in what information should appear on a tax receipt (donation receipt). In addition to showing what basic identification information about the charity and donor should appear, the CRA provides ‘4 flavours’ of sample receipts:
- Cash gift (no advantage) – The most common scenario, this receipt acknowledges the full cash amount donated (e.g. $20 donation = $20 tax receipt).
- Cash gift with advantage – This receipt is issued for only the eligible amount of the cash donation – the full amount minus the amount of the advantage, or what the donor receives in exchange for the gift (e.g. a $50 donation to attend a fundraising lunch for which meal is valued at $20 receives a tax receipt for $30). The full gift amount, the advantage value, and the eligible amount are all noted on the tax receipt.
- Non-cash gift (no advantage) – This receipt includes the appraised value of a non-cash item donated to a charity (e.g. a donation of an artwork appraised at $1500 receives a tax receipt for $1500).
- Non-cash gift with advantage – This receipt is issued for only the eligible amount of the non-cash donation – the full amount minus the amount of the advantage, or what the donor receives in exchange for the gift (e.g. if an individual donates a house valued at $100,000 but receives $20,000 cash in return, the tax receipt is issued for $80,000). The full gift amount, the advantage value, and the eligible amount are all noted on the tax receipt).
Visit this page on the CRA website to view sample receipts. Remember, these are guides. They are intended to show you what relevant information needs to appear, but you can format yours differently and brand it for your own organization.
A tax receipt is actually not obligatory. A charity may choose not to issue receipts because of the administrative burden, or it may elect to set a threshold policy dictating that only donations above a certain cash value will be issued a tax receipt. While it is not the law that charities must issue tax receipts, remember that donors can only claim their charitable tax credit if an official tax receipt is issued. So consider your donors when setting this policy – weigh the administrative burden against the value they place on their tax credit.
Visit this page on the Canada Revenue Agency website for more information.