Charities, like any other actor in society, should consider opportunities as they arise—some should be discarded, and others pursued. Charities, though, must consider the additional constraints that come with normal economic operations.
An interesting opportunity that charities are sometimes fortunate enough to receive are major (and often unexpected) gifts in-kind. Sometimes donors feel they are helping the charity by donating property which can be used to create a revenue stream for the charity, thus allowing it to leverage the donation. However, given that charities are restricted from engaging in certain aspects of business, accepting such a donation could be fraught with difficulties.
Monetizing the donation
The easiest way to deal with a donation of this type is to consider selling it to some other entity. The advantage of such an approach is that the organization does not have to engage in running a business it may know nothing about, thus curbing legal problems down the road. The other advantage of simply monetizing the donation is to avoid the disbursement quota rules that apply to any asset not used in the organization's charitable activities. This requirement forces the charity to spend 3.5 per cent of the value of the asset every year, regardless of whether or not the property was, in fact, producing an income. If the property cannot be effectively monetized quickly (or at all), the charity could be left trying to fund a disbursement quota obligation out of its general revenues.
Another difficulty in trying to sell the property may lie in the difference between the sale price and the valuation price found on the receipt. While the receipt must reflect fair market value (defined as the price a third party would pay for the item), this is generally a theoretical calculation, whereas the price that the property can actually fetch at market may be considerably different. If that is the case, the CRA may question the appropriateness of the amount included on the receipt in the first place. Of course, if the valuation obtained on the property is reasonably defensible, this concern may be ameliorated.
When the donation cannot be monetized
A recent document released by the CRA (document # 2011-0431051R3) discusses another common method through which a charity may operate a business through a corporation. In this type of scenario, the donated property would be organized within a corporation, and the charity would hold all the shares of that corporation. The charity is not involved in running the business itself; even so, it must pay attention to disbursement quota obligations and other obligations (such as using charitable assets in prudent investments).
In contrast, the charity could consider running the business. In such a scenario, the charity would either have to be run by those who are not employees or the business would have to be both related to and ancillary to the charity's objectives. Of course, this is not impossible, but it does mean starting a business that would have to be shoehorned into the restrictions placed upon it by the law and the CRA. Starting a business can be difficult enough without accepting those types of restrictions.
Fundamentally, this means that charities must think about the long-term consequences that come with accepting a donation meant to increase overall cash flow. Like most enterprises, charities have a great deal of experience in one area and expansion into another can sink the whole ship. Even a quick foray into a different area with the intention of selling property can result in problems given the special restrictions that are placed upon charities. For these reasons, charities must think carefully before accepting major gifts in-kind.
Adam Aptowitzer of Drache Aptowitzer LLP is a charity law lawyer with a national practice based in Ottawa. He has been published in Canadian Taxpayer, Canadian Fundraising & Philanthropy and the Not-for-Profit News. He has also published a widely distributed study on the regulation of Canadian charities with the C.D. Howe Institute. For speaking engagements and consultations, contact him at 613-237-3300 or visit http://www.drache.ca.