Sometimes turning down a gift, or at least pondering long and hard whether to accept it, and on what terms, is the better part of valour, says Robert Hayhoe of Miller Thomson.

Speaking at the annual conference of the Canadian Council of Christian Charities, Hayhoe notes that gifts to avoid include: terrorist funding, annuities, gifts in kind, gifts of residual interest, tax shelter program gifts, and those where the donor fails to disclose an advantage accruing to him/her through making the donation.

It is, he points out bluntly, a criminal offence to support terrorism, directly or indirectly - any gifts which might have the slightest hint of being tarred with that brush should be denied.

As for annuities, they're fine if issued by an insurer, but self-insured/reinsured annuities carry issues of corporate authority and regulatory problems with the Canadian Charitable Annuity Association approval process, as well as challenges inherent in the startup process, he says.

Onus on charity

Gifts in kind may be sometimes useful, Hayhoe notes, but they can be problematical because the onus is on the charity, not the donor, to establish Fair Market Value of the donation for purposes of issuing a tax receipt. The question becomes whether to rely on in-house expertise, external expertise, or even multiple appraisals, a time-consuming and perhaps unreliable process.

Private company shares provide their own problems with questions of liquidity and who is going to manage them, he says.

Donors gifting tangible property, real or personal, subject to a life interest, may create capital gains issues for themselves. There can also be problems with dividing the interest or donation and benefit, although these are less pressing since the instigation of split-receipting regulations.

There are also property management issues to be considered, such as insurance, the long-term suitability for the donor of giving away the residual interest, and making repairs/continuing maintenance on the property.

Tax shelters, where the actual value of the donation is less than the tax receipt expected, are the bane of both Canada Revenue Agency and the Department of Finance, and steps are being taken as much as possible to shut them down altogether, Hayhoe warns. These may include schemes of "buy low/donate high", or leveraged gifts where the donor borrows to give.

Actual cost

As of December 2003, he reports, a donor's tax recognition is limited to the donor's actual cost of the property if it was acquired as part of a tax shelter, or it was acquired in the last three years (unless it is a bequest), or it was acquired in the last 10 years (except in the case of a bequest) with a major reason for its acquisition being to make a gift to charity.

This reduction to cost values does not apply to gifts of inventory, real property, certified cultural property, public shares/debt/mutual fund units, or private company shares acquired in the contest of some corporate reorganizations.

The penalties for both donors and their professional advisers can be very high if they are seen to be participating in a tax shelter scheme, Hayhoe warns; they may be avoidable with appropriate due diligence, but charities should be aware of how much the government wants to stamp them out, and that CRA will revoke registrations of charities found to have participated in them.

Undeclared advantage

Another area where charities must exercise caution in accepting gifts, or sometimes reject them, is that where the gift is only partially eligible for a tax receipt, ie there is within the property transferred to the charity, some advantage/benefit to the donor or a non-arm's length person (this includes limited recourse borrowing to make the gift).

Such gifts require a split receipt which recognizes the benefit to the donor, and discounts the amount of the receipt to that degree.

At one point, the indication was that the onus would be on the charity to interrogate donors to establish the degree of benefit, if any. Representation to the government removed this onus from the charity and put the requirement to disclose an advantage on the donor - failure so to disclose will result in declaration of nil eligible amount, CRA says.

Even with this recognition that charities could not take on this investigative chore, charities should still exercise diligence in accepting large gifts requiring split receipts, Hayhoe warns.