year ended March 31, 1999
Scope of audit work In addition to the annual financial audit, we examined the Foundation’s systems for issuing official receipts for income tax purposes for gifts received.
Use of official receipts for income tax purposes
Recommendation No. 21
It is recommended that the Alberta Sport, Recreation, Parks and Wildlife Foundation comply with the Income Tax Act (Canada) when issuing official receipts for income tax purposes.
The Foundation operates a Donation Fund program to collect gifts from individuals and corporations. The Foundation then makes grants from some of the gift revenues so received to Provincial sports associations to benefit their affiliated clubs and athletes designated by donors under its Adopt-An-Athlete program.
The Foundation has known for some time that some gifts for which it issues official receipts may not qualify as gifts under the Income Tax Act (Canada)
At least since 1988, the Foundation has known, through correspondence with accountants, lawyers and Revenue Canada, that some gifts, for which it issues official receipts for income tax purposes, may not qualify as gifts under the Income Tax Act (Canada). Donors of such non-qualifying gifts should not be issued official receipts for income tax purposes.
Income tax rules about gifts
In the Income Tax Act (Canada), section 110.1 permits corporations to deduct and section 118.1 permits individuals to claim income tax credits for gifts made to the Crown.
References to the Crown in these sections include agents of the Crown such as the Foundation.
Revenue Canada’s Interpretation Bulletin IT-110R3 states that a gift is made when a donor voluntarily transfers some property, usually cash, to the Crown without expectation of return. An official receipt for income tax purposes may not be issued if the donor has directed the funds to a specified person or family as opposed to a program. In reality, such a gift is made to the person or family and not to the Crown.
Gifts can be subject to a general direction, if no benefit accrues to the donor, the directed gift does not benefit any person not dealing at arm’s length with the donor, and decisions regarding specific beneficiaries and utilization of the gift within a program are the exclusive responsibility of the Crown.
Court ruling about non-qualifying gifts from parents
In 1988, the Alberta Sport Council (a predecessor of the Foundation) was informed by its consultants that the Courts had upheld a Revenue Canada decision to disallow a gift to a sports association because it was made to secure a material advantage for the donor’s daughter. The consultants
suggested that, to preserve the integrity of the Alberta Sport Council, a policy be established that official receipts would not be issued for gifts made to fund children’s activities.
This suggestion does not appear to have been adequately implemented by the Foundation.
In view of Revenue Canada’s position on gifts directed to individuals, the Foundation has agreed to get a ruling from Revenue Canada on its Adopt-An-Athlete Program.
Ministry’s Internal Audit findings
In April 1999, the Ministry’s Internal Audit Branch reported to the Foundation that it had found numerous instances of gifts for which official receipts for income tax purposes should not have been issued. Several gifts designated for three sports associations and their athletes likely would not qualify for official receipts for income tax purposes. Also, one of these associations was giving all the designated funds it received to the designated athletes, and another association was giving designated athletes the surplus funds in their individual accounts. Through these associations, parents could transfer tax-free funds to their children and, at the same time, get official receipts for income tax purposes from the Foundation.
Our findings During our examination, we found several instances of donations that likely would not qualify as gifts. We believe the doubtful gifts should have been investigated prior to official receipts for income tax purposes being issued. Some problems noted were:
• Apparent reciprocal gifts for $10,000 in January 1998 between three parties. A reciprocal gift involves two or more parties making “donations” to benefit each other’s dependants. There was another apparent reciprocal gift for $1,200 between two families. In 1997, we had noted several instances of apparent reciprocal gifts. Such reciprocal gifts would likely not qualify for official receipts for income tax purposes.
• Gifts from a parent, a grandparent, an aunt and other donors with the same last names as the designated athletes. These are probably non-qualifying gifts from parents or guardians.
• Three gifts totaling $7,000 from one person were designated for one athlete, five gifts totaling $17,500 from a private corporation were designated for another athlete, and six gifts totaling $4,900 from another donor were designated for a third athlete. The donation letter from the last-mentioned donor was copied to a person with the same last name as the designated athlete. These cases are unusual and should have been investigated.
• Gifts from several corporations for designated athletes were either not investigated, or the investigation procedures were not adequately documented, to ensure they qualified as gifts.
• Ten letters from individual donors did not specify relationships with designated athletes. In these
situations, the Foundation is unable to determine whether the amounts qualify as gifts. Such gifts should be
investigated.
• Parents of participants at two organizations could be getting official receipts for income tax purposes for their children’s fees.
Receipting procedures should be improved
The Foundation improved some gift receipting procedures after Internal Audit reported its findings in December 1998.
For example, the donation letters have been revised to require the relationships to designated athletes to be
disclosed. However, in light of the above findings, I believe the Foundation should further improve its procedures to ensure that official receipts for income tax purposes are only issued for qualifying gifts.
Possibility of Revenue Canada sanctions
The Foundation and the Ministry should consider the impact on their operations and good reputation that would result if Revenue Canada questioned the validity of official receipts issued. This would seriously impair the Foundation’s ability to raise funds from corporations for special events and for its programs.