Donations and Sponsorships: Giving back through a corporation isn’t as simple as you think
Canadian are a generous lot. Each year we make life-changing donations to our preferred charities and, despite data showing that slightly fewer of us are giving back, the overall value of those donations is on the rise.
According to a Statistics Canada report released this year: “Total donations reported by Canadian tax filers rose to $9.6 billion in 2017, up 7.7 percent from 2016.” The median donation nationally in 2017—the most recent year for which data is available—was $300, with seniors being the most generous demographic group. They comprised 30 percent of the total donor pool, and donated $2,500 per person, on average. 93
Small and medium-sized business owners are no less philanthropic. Whether making straight cash donations to a favored cause, supporting a community program or backing a kids’ sports team, Canadian entrepreneurs are eager to make their mark and leave a lasting legacy. But how they do it can sometimes land them in hot water with the Canada Revenue Agency.
Specifically, many business owners looking to give back don’t understand the difference between a sponsorship and a donation. Both have the same tax benefit, but the CRA treats them very differently.
According to the agency:
Sponsorship occurs when a business makes a financial contribution toward the cost of a charity’s activity or event and, in return, the charity advertises or promotes the business’s brand, products or services. By comparison, if a business makes a contribution and receives no special treatment, and the recognition is minimal … the funds will be considered a donation and the charity can issue the business a receipt for the full amount of the gift.
To be clear: If a business receives special recognition for its donation, or if it receives more than minimal recognition … this is considered sponsorship and the cost of the sponsorship should be treated as an expense.
In other words, if the donor expects a benefit from the donation, such as a return on investment for their brand or any sort of financial gain, it cannot be claimed as a donation.
Donors can accept minor recognition that doesn’t carry any significant or calculable value—a ‘thank you’ at an event, for example—but if that acknowledgment comes in a publication available to the public, such as a newsletter, or on a banner displayed at an event that could constitute an advertisement, it will likely be considered a benefit and, therefore, a form of sponsorship.
The simple rule is that a gift comes with no strings attached and doesn’t benefit the corporation that donates it. A sponsorship is essentially a marketing expense that can also be deducted but must be accounted for and claimed differently on a corporate tax return.
But what about establishing a charitable foundation for your company, then using it as a vehicle for sponsoring charities? Good question. That’s a potential minefield that we help clients navigate all the time.
We’ve worked with organizations that have done exactly this–placing funds earmarked for donations into their charitable foundation with the intent of using those dollars for sponsorships—before we can advise them that foundations are not allowed to fund sponsorships, and can only disburse gifts/grants to other registered charities or qualified donation recipients.
Of course, penalties for non-compliance and misreporting a disbursement from a foundation can be stiff. The CRA could fine or de-register a corporate foundation, while its directors could also be fined. And any organization that attempts to claim a charitable sponsorship as a donation can face penalties and see the deduction disallowed altogether.
It goes without saying that running afoul of the CRA is never worth the headache. Work with your accountant or foundation manager to avoid these pitfalls and ensure that your good intentions don’t result in unnecessary fines or additional scrutiny from the regulators.
J. Denise Castonguay is the founder and CEO of Canada Gives, a Toronto-based organization committed to helping philanthropists build and grow high-impact foundations.
For more information, visit www.canadagives.ca