Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: 1. Does a donation of a gift certificate, redeemable for goods and/or services qualify as a gift for the purposes of paragraph 110.1(1)(a)?
2. Is it relevant whether the gift certificate is donated by a third party or issued by the donor to the charity directly?
3. Is the appropriate valuation of the donation of a gift certificate the cost to the issuer of redeeming the certificate or the fair market value of the goods or services received by the charity?
Position: 1. and 2. The donation of a gift certificate qualifies as a gift for the purposes of paragraph 110.1(1)(a) if the gift is made by a person who has given consideration for that gift certificate to the issuer thereof. Where a donor issues a gift certificate directly to a charity, no gift is made at the time the gift certificate is issued. If, however, the gift certificate is issued voluntarily and without consideration, a gift may be recognized at the time that the charity redeems the gift certificate for property. If, instead, the charity transfers the gift certificate to a third person, no gift may be recognized at the time that the third person redeems the gift certificate.
3. If the gift is made by a person who has given consideration for the gift certificate, the value of the gift is the fair market value of the right evidenced by that gift certificate. Typically, this would be less than the face value of the gift certificate, unless the gift certificate is redeemable for cash. If the gift is made without consideration such that a gift occurs when the gift certificate is redeemed by the charity, the value of the gift is the fair market value of the property given to the charity on redemption of the gift certificate.
Reasons: A gift certificate is essentially, a promise to provide goods or services on the presentation of the certificate. A promise bestows a right if it is enforceable. A right is a property and hence, can be gifted. A promise is enforceable if it is made for consideration. Since a donor cannot receive consideration for a gift, it is not possible for a person to make a gift by issuing a gift certificate directly to a charity. In those circumstances, however, if the gift certificate is issued voluntarily and without consideration, the property transferred on redemption of the certificate may be a gift.
July 25, 2000
Charities Directorate Income Tax Rulings
Directorate
Attention: Carl Juneau R.Maley
957-9226
2000-003023
Donations of "Gift Certificates" for Goods and /or Services
This is in response to your memorandum dated June 5, 2000 requesting our views as to whether a donation of a gift certificate, redeemable for goods and/or services would qualify as a gift for the purposes of paragraph 110(1)(a). In particular, you ask whether it is relevant that the gift certificate is issued by the donor to the charity directly.
We have the following comments, which are discussed in further detail below.
1. The act of donating a gift certificate entitles a donor to a donation receipt for the purposes of paragraph 110.1(1)(a) if the giving of the gift certificate amounts to the gifting of a right. It is not relevant, in this respect, whether or not the gift certificate is redeemable for goods, for services, or for a combination of both.
2. Donating a gift certificate constitutes the transfer of a right where the donor has an enforceable claim under that certificate that may be transferred to a charity. In our view, this would only be the case where the donor has given consideration for the acquisition of the gift certificate.
3. Where the donation of a gift certificate constitutes the transfer of a right, the amount of the gift is the fair market value of that right. The value of any right is a question of fact. In our view, the fair market value of a right evidenced by a gift certificate would typically be less than its face amount in money, unless there is a right to redeem the gift certificate for its face amount in money.
4. The issuer of the gift certificate is not entitled to a donation receipt in respect of the issuance of a gift certificate directly to a charity. However, a gift may occur at the time that the gift certificate is redeemed, if the certificate was issued voluntarily and without consideration, and it is redeemed by the charity for property (but not for services) of the issuer.
5. Where the redemption of a gift certificate constitutes a gift, the amount of the gift is the fair market value of the property transferred to the charity in satisfaction of the gift certificate.
6. Where a charity has transferred to a third party, a gift certificate that has been transferred to it by the issuer of the gift certificate, the redemption of that gift certificate by the third party does not constitute a gift by the issuer to either the charity or the third party.
7. There is no tax advantage to the issuer of a gift certificate in the issuance or redemption of a gift certificate being treated as a gift for the purposes of the Act.
8. In view of disbursement obligations, a charity is likely better off not having to issue receipts in respect of donations of gift certificates.
Is the Donation of a Gift Certificate the transfer of a Right?
We note XXXXXXXXXX that a gift certificate is akin to a promise. It is our understanding that, the making of a promise creates a right only if the promise is legally enforceable. A right is a property and hence, may be gifted. In order for a promise to be enforceable, there must be consideration.
It is inherent to the nature of a gift that the donor cannot receive consideration for the subject matter transferred. Therefore a gift certificate issued directly by a donor to a charity, whether it be for goods, services or a combination thereof, cannot not be a gift, because the promise evidenced by the gift certificate would not bestow any legal rights on the charity unless the charity gives consideration for the promise.
If, however, a third party gives consideration for a gift certificate such that there is an enforceable right under the certificate as against its issuer and if the terms of the gift certificate permit its assignment1, the donation of the gift certificate to a charity by that third party would constitute a gift.
If the charity should transfer the gift certificate to a third person for consideration, the issuer of the gift certificate may, at that point, become "estopped" from refusing to honor the gift certificate for lack of consideration. However, it is our view that this, in and of itself, would not be sufficient to transform the character of the original transfer of the certificate into a gift. Thus, no donation receipt may be issued by the charity in respect of the gift certificate at the time it transfers the gift certificate, nor at the time that the gift certificate is subsequently redeemed by the third person.
These positions are supported by our previous opinions respecting the gifting of promissory notes in F9333517, which was attached to your referring memorandum, and in E9124123, E923712 and E73714, copies of which are attached. The donation of a promissory note constitutes a gift if made by a third party who had a legal right to enforce under the note, but does not constitute a gift if made by the issuer of the note.
Further support may be found in paragraph 9 of IT-110R3 (Gifts and Official Donation Receipts) which deals with the honoring of pledges to charities:
9. Generally, any legal obligation on the payor to make a donation would cause the donation to lose its status as a gift. However, when a taxpayer honors a personal guarantee concerning a loan made to a charity or honors a pledge, the amount can be considered to be a gift despite its having been paid to honor an obligation, if the obligation was entered into voluntarily and without consideration.
In other words, a donation made to a charity in satisfaction of a pledge may be viewed as a gift for the purposes of the Act if the donation would otherwise have had the status of a gift and the pledge was entered into voluntarily and without consideration. A donation would not otherwise have the status of a gift unless the subject matter of the donation is property. It is implicit from the IT that no donation is viewed to have been made at the time the pledge is given.
Consistent with the position in the IT respecting pledges, a donation deduction may be available to the issuer of a gift certificate at the time that the gift certificate is redeemed, if the certificate was issued to a charity voluntarily and without consideration, and if the gift certificate is redeemed for property by the charity.
The Application of the Act on the Issuance and Redemption of Gift Certificates.
Subparagraph 69(1)(b)(ii) of the Act provides that, in absence of an express provision to the contrary, where a taxpayer has disposed of anything by way of gift inter vivos, the taxpayer shall be deemed to have received proceeds of disposition therefor equal to its fair market value. Thus, where the issuance or redemption of a gift certificate results in a gift being made within the meaning of subsection 110.1(1), there would be an inclusion in the donor's income.
From this, it can be seen that the issuer of a gift certificate is no better off where a gift is considered to have been made, than when it does not. Where a gift is made, the donation deduction in respect of the gift is offset by its income inclusion under subparagraph 69(1)(b)(ii). The donor would be entitled to a deduction for its cost of property which would be the case where no gift is made.
The charity, on the other hand, is clearly better off where it is not required to issue a donation receipt in respect of the receipt of a gift certificate as it does not take on any attendant disbursement obligation.
Where a Gift results, what is its value?
Where a gift certificate is donated to a charity by an individual who acquired the gift certificate for consideration, the amount that may be deducted in respect of the gift under paragraph 110.1(1)(a) or the amount of the credit that may be claimed under 118.1(3) is based on the fair market value of the right gifted. While fair market value is a question of fact, it is our view that typically, the fair market value of a right evidenced by a gift certificate would be less than its face amount in money, unless there is a right to redeem the gift certificate for its face amount in money.
Where a gift certificate is donated by the issuer directly to the charity such that a donation deduction would be available when the gift certificate is redeemed (as discussed above), the fair market value of the property is used to calculate the deductible gift under paragraph 110.1(1)(a) as set out IT-297R2 (Gifts in Kind to Charity and Others).
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of a taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (613) 994-2898. A copy will be sent to you for delivery to the client.
F. Lee Workman
Manager
Financial Institutions
Financial Industries Division
Income Tax Rulings Directorate
ENDNOTE
1 In this respect, it needs to be kept in mind that "gift certificate" is not a defined legal concept, but a colloquial term that potentially encompasses any variety of documents evidencing any variety of entitlements, enforceable or otherwise. The terms of any "gift certificate" should be understood on a case by case basis in applying this analysis.
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