By: Arthur Drache
More and more often we have been seeing significant payments by businesses to charities, not just modest support of annual campaigns but often payment in the tens of thousands of dollars.
The fundamental question which must be understood by both the business and the charity is whether the transfer of funds is in fact a donation or whether it is, to use the common but imprecise term, a sponsorship.
In the past couple of years, we have had many questions posed to us about the distinction between gifts and sponsorships than on almost any any other topic. It has become apparent that neither organizations nor “donors” have a clear idea of the distinction and we have been forced to try to simplify the distinction between the two methods of support.
It is important to understand that the word “sponsorship” does not have a precise meaning in this context. A whole array of arrangements may be categorized as sponsorships. But the key issue, whatever the nature of the arrangement may be, is that it must be distinguishable from a very precise legal concept, that of “gift”.
A gift is a transfer of property without “consideration”, the legal term for a benefit, no matter how small. (Revenue Canada offers a small amount of breathing room saying that a benefit of nominal value will not taint what is otherwise a gift, nominal value being the lesser of $50 or 10% of the gift.) Once a gift is made, the general rule is that the donor has no control over what is done with it, though of course the donor can indicate a preference as to how it is used and the organization may well do what the donor requests.
The key point is that once the gift is made, the donor has no legal right to direct the usage of the money or to demand any benefit. (we’d note that in many cases of foundations they follow a policy of a directed gift where the donor can “advise” about the use of the funds, but such an arrangement is not legally binding on the charity.)
A receipt for tax purposes can be given for a gift.
On the other hand, a sponsorship is a contract. While there will normally be a transfer of money or other assets of value to the organization, as in the case of the gift, the sponsor can set the terms for the transfer. These terms can include a direct benefit to the sponsor (advertising at an event to certain specifications or the hosting of a major party by the organization where the sponsor sets the guest list are common examples).
The key thing in a sponsorship is that because it is a contract, the sponsor can sue the organization to enforce the terms of the agreement, something which cannot be done with a gift. We often suggest that organizational fundraisers who are dealing with major supporters put the question of sponsorship versus gift in this context…does the supporter want to have the right to enforce his, her or its wishes at law or will the supporter be satisfied to rely on the organization’s non-legally binding undertaking to try to do what the sponsor wants.
In the case of a sponsorship, no charitable receipt can be issued. However, it is important to note that where the sponsor is a business, in many cases the amounts laid out for the sponsorship can be deducted for income tax purposes as a business expense, usually under the rubric of “promotion”.
Normally, the GST will be applicable to amounts involved in a sponsorship (but not for a gift) though this is usually a “non-issue”, because the outlays immediately become an input tax credit to the sponsor and can be recouped in full.
We would make a further point. In a lot of cases, sponsorships are more attractive from all sides than is a gift, providing the sponsor is in a position to get tax relief for the outlay associated with the sponsorship. It is attractive because the terms of the arrangement can be precisely set out in writing in advance so that both parties know exactly what is expected. This of course is the norm of any well-drafted contract. From the organization’s point of view, the sponsorship may be attractive in that without having to issue a receipt, there is no increase in the annual disbursement quota, yet the funds received may be spent in whole or in part on charitable activities which will go to meeting that quota.
We have been advising clients for some time to deal with the issue of sponsorship as opposed to gift head on, from the outset, when discussing such matters with major corporate donors. Do not assume that the people you are dealing with at the company are sophisticated enough to know, without explanation, the benefits of sponsorship over a gift. We have found that many companies insist on a charitable receipt as a sort of a knee-jerk reaction, probably because as individuals, when they make a gift, they would want such a receipt.
In the appropriate cases, we suggest that organizations have a candid talk with potential sponsor/donors to determine the most appropriate route to take for both parties. In our experience, a lot of aggravation and ruffled feathers can be avoided by taking this simply step at the beginning of discussions or negotiations.
 Revenue Canada has a new discussion paper out on making donations to charities and in that paper it deals with administrative variations on what is considered to be a “benefit” when trying to determine whether a gift has been made.