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Where a donor makes a significant gift to a charity, it is not uncommon for the donor to request, or the charity to offer, naming privileges in connection with the gift. This often consists of naming a building, or portion of a building, after a donor whose donation financed its construction or who has provided significant support to the charity. When issuing official donation receipts for donations for gifts in respect of which the donor will receive naming privileges, it is important to consider whether these naming privileges will constitute an advantage that must be subtracted from the fair market value of the gift to arrive at the eligible amount of the gift.
A recently-released technical interpretation offers some clarification of Canada Revenue Agency’s position on when naming rights will constitute an advantage. This document responded to an inquiry from a taxpayer as to whether an advantage would arise where a donor receives naming rights in gratitude for a gift, and in particular where the name to be displayed by the charity identifies a business of the donor – either one carried on as a sole proprietorship or by a partnership or corporation with which the donor does not deal at arm’s length.
CRA confirmed that the amount of advantage, if any, in respect of a gift, is the fair market value of any property, service, compensation or other benefits received (or expected to be received) in gratitude for the gift by the donor, or by a person or partnership that does not deal at arm’s length with the donor. In the context of naming rights, CRA stated that the question is whether such rights will provide an economic benefit. In the absence of such a benefit, the amount of the advantage is nil. This would occur, for example, where the name recognition is provided to the donor and the donor’s name is not identified with the business or corporation. CRA noted that the question of economic advantage is considered from the perspective of both the donor and all non-arm’s length persons or partnerships.
CRA stated that where an economic benefit would be associated with the naming rights, then the fair market value of this benefit would reduce the eligible amount of the gift. CRA also noted that to the extent that the transfer of property can reasonably be considered to have been made for business purposes – i.e., to produce income from business or property – rather than as a gift to charity, then such amount may be deductible in computing the income from the business or property.
Charities need to ensure that they consider the economic value of any naming rights provided to donors, particularly where the donor is a corporation or partnership, or where the naming right identifies a business with which the donor has a connection. Where the naming rights have value, this value must be determined and subtracted from the value of the receipt.
Miller Thomson’s Charities and Not-for-profit lawyers can assist in determining the appropriate treatment of gifts for which naming rights are conferred.