It is the start of a new year, for most that may mean a New Year’s resolution.  But for charities that means they have a deadline approaching of February 28 to ensure that all the donation receipts are issued for the previous calendar year.  This is common knowledge for most charities but what may not be known is some of the documentation and responsibilities relating to donations.  We will now discuss the top four areas relating to donations that you should be aware of:

Timing of Donations

Donors are thinking ahead and trying to achieve the highest tax refund on their upcoming tax returns by getting tax receipts, possibly before they are entitled to.  However, it is the charity’s responsibility to ensure that they issue the donation receipt accurately and in the correct period.  For most donations, the date it can be receipted is the date that it is received.  So, if a donation was received in January 2018, then it must be receipted for the 2018 calendar year.  However, for donations that are mailed, charities will need to pay attention to the post marked date.  All donations that have been postmarked on or before December 31 , 2017 are entitled to a donation receipt for the 2017 tax year.

Donation Documentation Trail

Charities have been given the responsibility of issuing donation tax receipts to their donors.  As part of this responsibility the CRA wants to ensure charities maintain proper documentation to prove that these donations are accurately issued for the amount that was received.  This is typically an area that the CRA will focus on when auditing charities.  To help ensure that the proper documentation exists for each year we recommend the following records be maintained and procedures be considered:

1. Copies of the donation receipts
2. Envelope records
3. Deposit slips
4. Any source documentation is to be kept and organized efficiently
5. A summary list of all the donation receipts that are issued is prepared each year.
6. An annual donation reconciliation of the receipts to the general ledger.

The CRA requires that charities keep this documentation for seven years.

Donation Reconciliations

Since charities are to ensure donation receipts are issued correctly, the CRA typically requests that a reconciliation be done between the donation receipts issued and the donation income recorded in the General Ledger.   This process should be implemented on at least an annual basis before the donation receipts are issued to ensure that the records balance to the donations received.  Larger charities should consider preparing the reconciliation on a quarterly basis since variances and errors will be easier to detect.  The total donations that were receipted are also required to be reported on the T3010.

Externally Restricted Donations

Charities will often receive donations that have been restricted by the donor for a specific purpose.  When a donation has been externally restricted, charities are given the responsibility to ensure that they are spent according to the purpose that the donor indicated.  An issue may arise where restricted donations received for a project exceeds its cost.  What does a charity do with these excess donations? Without a restricted donation policy, the donor would have to be contacted and asked what project they would like to have their excess donation re-directed.

However, if an organization has a restricted donation policy that is clearly communicated to the donors this allows for additional flexibility for where these funds could be spent without contacting the donor. An example of a restricted donation policy would be as follows:

“Spending of funds is confined to [board/charity] approved programs and projects. Each contribution directed toward an approved program or project will be used as restricted with the understanding that when the need for such a program or project has been met, or cannot be completed for any reason as determined by the [board/charity], the remaining restricted contributions will be used where most needed.” (https://www.cccc.org/members_sample_documents_view/html/10)

This policy could also be communicated to the donors through remittance forms or posted on the organization’s website. If this process is not in place, the charity is legally prevented from using the funds in another program unless they make an application to the courts.

Conclusion

Charities are entrusted by the government with the responsibility of handling all donations properly and ensuring that they are accurately receipted and carefully documented.   As this is so important, this is one of the principal areas that the government focuses on when they audit charities.  Charities need to ensure that their documentation is adequate and that donation reconciliations are accurately completed every year.  If you need assistance with any of these areas, please contact us and we can help you.

Sources:

https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/operating-a-registered-charity/books-records.html

https://www.canada.ca/en/revenue-agency/services/charities-giving/charities-listings.html