Tax Consequences of Returning Gifts

March 22, 2011 | Kate Lazier

Occasionally a charity or a donor will want to return a gift.  For example, a charity may wish to return a gift to a donor whose association with the charity may harm the charity’s reputation or where the gift turns out to be proceeds of a crime.  Donors may also seek the return of a gift where the gift was not used as the donor originally intended.  Typically, gifts are irrevocable transfers of property and therefore, at law, it is rare that a charity can legally return a gift.   Where gifts are returned improperly in Ontario, the Public Guardian and Trustee may seek the return of the returned gift.  Charities should seek legal advice to determine if it is legally possible to return the gift before taking action.

Before the 2011 Budget, the Income Tax Act and CRA policy were relatively silent on the tax consequences that arose when a charity returned a gift to a donor.  The Budget now addresses this issue directly with the following rules:

If a qualified donee issues a charitable tax receipt to a donor and then subsequently returns the gift to the donor, the donor is deemed not to have made the gift at the time the gift was originally made.  The donor is also deemed not to have disposed of the property at the time the gift was made.   Essentially the gift is undone retroactively for tax purposes.

If the returned property is identical to the original property, it is deemed to be the same property.  Thus, if a $100 gift is returned, it will be considered the same $100 and the tax consequence is limited to disallowing the donation credit or deduction.  However, if the returned property is not the same or identical property, then the person is deemed to have disposed of the original property at the time the person acquires the returned property.  For example, if the donor donated securities and receives cash in lieu of the securities (presumably because the charity sold the securities), then the donor is deemed to have disposed of the securities on the day the cash is received by the donor. Thus, the donor will have tax consequences with respect to the disposition of the securities at the time the gift is returned.

Where the returned amount exceeds $50, the new rules require the charity to issue a revised official donation receipt and file a copy of the receipt with CRA.

The government now has the authority to reassess a return of income in respect of a return of property from a qualified donee.  Thus, even if a taxpayer’s return for a particular taxation year is statute-barred — that is, CRA cannot otherwise reassess the taxpayer for the year in question — the proposed change will allow CRA to reassess the taxpayer in respect of the returned gift and disallow the deduction or credit in the earlier year. Further, if as indicated above, the rules cause a deemed disposition because the returned property is not identical to the gifted property, the taxpayer may have a tax liability in the year the gift is returned.

The changes do have a certain logic as they will prevent donors from obtaining windfalls. However, they do have the possibility of imposing hardship on donors in limited circumstances.

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