Donations

Accounting for In-kind donations

Staff Post
By Heather Young

The topic of accounting for in-kind donations came up on one of my LinkedIn groups, and I thought I would share some content.

The person asking the question reported that her not-for-profit agency has an operating budget of about $300,000, but each year secures about $200,000 more in donated goods and services. She’s been struggling for years with how to reflect this appropriately to her donors and funders – particularly given an accountant who doesn’t understand the issues and can’t provide the advice she needs.

That seems like a good place to start. A chartered accountant with not-for-profit expertise is a tremendous resource when it comes to measurement, reporting and disclosure issues such as this. The not-for-profit sector has specific accounting needs, and having the right expertise on board is crucial to getting the best financial advice and reporting.

The reporting – or not – of in-kind donations in your financial statements is a matter of accounting policy. You – with advice from your accountant – need to develop the best policy framework for your organization. Here’s what the Canadian Institute of Chartered Accountants offers as guidance:

“Donations-in-kind also present accounting considerations that require judgment. If the accounting policy is to record donations-in-kind, a contribution of goods or services may be recognized in the financial statements when a fair value can be reasonably estimated and when the donated goods or services would otherwise have been purchased. Fair value would be estimated using market or appraisal values at the date of the donation.”

(From A Guide to Financial Statements of Not-For-Profit Organizations, available online.)

Can you substantiate the fair market value of the donations? That tends to be relatively easy for physical objects, much harder for services/pro bono work/volunteer time. Because of this measurement difficulty, an accountant might steer you away from including in-kind gifts in your financials – or they might agree with reflecting tangible gifts but advise against trying to quantify volunteer time and other services.

The Charities Directorate of the Canada Revenue Agency has specific requirements for determining the fair market value of donated items, detailed here.

If your policy is not to include the value of in-kind donations in your statements, you should be able to find other avenues for conveying the full scope and impact of your organization. For instance, you might discuss with your accountant the appropriateness of a detailed note to your financial statements describing the in-kind support you receive.

You could also look at the different types of financial reports you produce. Your formally prepared audit may not capture in-kind gifts, but you might also present to donors and funders a supplementary statement that adds the value of in-kind items to your formal statements.

An annual report could provide an avenue for describing these resources and what they mean for your organization’s work. Annual reports often contain photos, graphs, charts and other illustrations that add impact to your description.

The area of social accounting tries to get to grips with this issue – an important one for many nonprofits, because cash transactions reflect only a portion of our economic activity. Here are a couple of links to publications that might help by discussing the accounting issues and proposing practical solutions:

On the whole, it’s to your advantage to reflect all the value you can within your organization. However, it’s also important to know the government regulations and generally accepted accounting principles that guide the reporting of this information.

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.

Here’s the citation 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:

  1. It must be possible to determine the item’s fair market value
  2. The value must be posted before the start of the auction
  3. The fair market value cannot exceed 80% of the purchase price

Here are two references to CRA articles that discuss receipting:

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.

My charity has received a gift of professional services. Can I issue a charitable donation receipt?

No.

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:

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We received a gift from a foundation and they want a tax receipt. Should I send one?

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No.

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.

Here’s the Canada Revenue Agency’s word on the topic.

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.

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What should appear on a tax receipt?

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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:

  1. Cash gift (no advantage) – The most common scenario, this receipt acknowledges the full cash amount donated (e.g. $20 donation = $20 tax receipt).
  2. 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.
  3. 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).
  4. 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.