10 May 2011 External T.I. 2010-0388751E5 - Charitable donation credit versus business expense

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.

Principal Issues: Whether the donation of property by a Canadian resident individual to a U.S. charity constitutes a gift for tax purposes when the donation is required under a distributor arrangement with a U.S. company. Alternatively, whether the cost of the property would qualify for deduction as a general business expense.

Position: In this situation, it is our view that the donation of property by the individual to the U.S. charity would not constitute a gift for tax purposes. However, the cost of the donated property could be considered a general business expense.

Reasons: Common law definition of "gift" requires that the transfer of property be voluntary. Consistent with prior positions.

XXXXXXXXXX
				2010-038875
				Robert Demeter
May 10, 2011

Dear XXXXXXXXXX :

Re: Charitable Gift or General Business Expense

We are writing in response to your letter dated November 19, 2010, requesting our views on claiming goods purchased for donation to a U.S. charity. We also acknowledge our telephone conversations of December 20, 2010 (Elsey/XXXXXXXXXX), and February 7, 2011 (Demeter/XXXXXXXXXX).

You have described a hypothetical situation in which a Canadian resident individual carries on business in Canada, acting as an independent distributor for a U.S. corporation. Under the terms of their distributor arrangement, the individual earns a commission based on the volume of goods sold on behalf of the U.S. corporation. The terms of the distributor arrangement also require the individual to purchase units of a XXXXXXXXXX ("Product X") on a monthly basis from the U.S. corporation for donation to a U.S. charity. We understand that the individual will be paid a commission by the U.S. corporation in respect of each unit of Product X purchased for donation, as determined under the terms of the distributor arrangement. You have asked us to confirm whether the individual would be able to claim a charitable donation tax credit in respect of units of Product X donated to the U.S. charity. Alternatively, you have asked whether the purchase of units of Product X may be deducted by the individual as a general business expense.

Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency (the "CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.

Section 118.1 of the Income Tax Act (the "Act") provides that an individual may claim a credit against taxes payable, within specified limits, for an eligible amount of a gift made to a qualified donee, if supported by an official receipt. Generally, donors can claim gifts in the year of the gift or in any of the five years immediately following, up to a limit of 75% of net income.

A donation made by an individual may only be eligible for the charitable donation tax credit if the donation is considered to be a gift. As the term "gift" is not defined in the Act, the common law definition of gift is used in the determination of "total charitable gifts" made by an individual for purposes of subsection 118.1(1) of the Act. The common law definition is described in CRA's Interpretation Bulletin IT-110R3, Gifts and Official Donation Receipts, at paragraph 3. It states that in general, there must be a transfer of property voluntarily given with no expectation of right, privilege, material benefit or advantage to the donor or a person designated by the donor. Draft legislation released by the Department of Finance in December 2002 proposes to permit the recognition of a gift, for tax purposes, in some circumstances where the donor receives consideration or a benefit for the transfer of property. The draft legislation is discussed in CRA's Income Tax Technical News No. 26.

In the situation described, we understand that the monthly purchase and "donation" of units of Product X by the individual is a requirement in respect of the individual's distributor relationship with the U.S. corporation. That is, if the individual does not participate in the "donation" program, the individual is not able to sell goods on behalf of the U.S. corporation. In light of this, it is our opinion that the transfer of units of Product X to the U.S. charity cannot be said to be voluntary. Consequently, it is our view that the monthly "donation" would not constitute a gift for income tax purposes.

However, to the extent that the amount paid by the individual for the purchase of units of Product X for donation, as required under the terms of the distributor arrangement with the U.S. corporation, is both reasonable and incurred for the purpose of gaining or producing income from a business, such amount may be deductible by the individual as a general business expense. Any commissions earned from the U.S. corporation, including those relating to the purchase of units of Product X, would have to be included in computing the individual's business income.

While we trust that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC 70-6R5 and are not binding on the CRA in respect of any particular situation.

Yours truly,

Jenie Leigh
Section Manager
for Division Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch