The CRA recently published its response1 to a letter asking about the treatment of “gift cards” which apparently were received by an individual from a charity…though details were not given.
But while the answer probably was not of a lot of help to the individual, the response did set out the approach which charities which make distributions to needy beneficiaries should be following.
The individual asked whether the charity was correct in issued a T5007 form in respect of the gift cards and thus whether the value of the cards should be included in income.
“Paragraph 56(1)(u) of the Act includes in a taxpayer’s income social assistance payments received in the year that are made on the basis of a means, needs, or income test (except to the extent that such payments are not otherwise included in the taxpayer’s income or the income of the taxpayer’s spouse or common-law partner). However, amounts included in income under paragraph 56(1)(u) are matched by an offsetting deduction under paragraph 110(1)(f) of the Act, so that the amount is not taxable to the individual, although it may affect certain income-tested benefits.
Generally, social assistance means a system whereby financial assistance is extended to those individuals on the basis of need. In our view, social assistance may be provided by a private organization, as well as a government. Generally, a gift card can be considered a form of payment. For a social assistance payment to be included in income under paragraph 56(1)(u) of the Act, it must be made on the basis of a means, needs, or income test. Each one of these tests is considered to be a financial test. An “income test” is based solely on the income of each taxpayer. A “means” test encompasses both an income test and an asset test. A “needs test” takes into account assets, income and needs of the taxpayer.
When an organization concludes that it has provided social assistance to an individual, section 233 of the Income Tax Regulations requires the organization that provided the social assistance to report the payment on a form T5007, Statement of Benefits, unless the payment is specifically excluded from this reporting requirement. For example, under subsection 233(2) of the Regulations, organizations are not required to report a payment that is made in a year as part of a series of payments, the total of which is $500 or less in the tax year, or a payment that is not a series of payments.
It is the practice of the CRA not to require payments excluded from the T5007 reporting requirements to be included in a recipient’s net income, so that these items will not affect the calculation of income-tested benefits.
If the gift cards were provided without reference to a “means, needs, or income test”, or were not a part of a series of payments, the amount received could be considered to be a gift or windfall. Gifts or windfalls are not taxed under the Act.
The (charity) appears to have made a determination that it provided you with social assistance on the basis of a means, needs or income test and therefore, must be reported in accordance with the Regulations. The T5007 slips make it easier for recipients of the assistance payments to determine the amounts they received during the year. As previously mentioned, any payments included in income under paragraph 56(1)(u) of the Act are also deducted when calculating taxable income on your income tax return. The assistance received is reported on line 145 and the deduction is claimed on line 250 of the General 2013 – Income Tax and Benefit Return.”
In our experience, the contents of the letter insofar as reporting by the charity is concerned is accurate and certainly many charities seem to be unaware of these procedures. So the letter is useful as a primer for charities making distributions to the needy.
The letter went on to deal with the specifics…sort of.
“In response to the questions you have asked from the point of view of an organization giving away gift cards, we have the following general comments, which may be of assistance. You are subject to the reporting requirements mentioned only if you provide social assistance on a “means, needs, or income test” and that assistance does not qualify for a reporting exemption under the Act. Alternatively, if you provide a gift card on a random basis to individuals without regard to a means, needs, or income test, or not as a series of payments, it could be viewed as gift. As noted, gifts are generally not included in computing income of the recipient for tax purposes. However, gifts of this nature would not qualify as a charitable gift or donation on your tax return.”