2019-0800941E5 In-kind contributions to a NPO
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether a deduction is available to suppliers who contribute in-kind contributions of goods or services to a non-profit organization.
Position: Question of fact.
Reasons: Depends on whether the in-kind contribution is an expense made to earn income from a business.
Section: 9(1); 18(1)(a)
January 6, 2020
Re: In-Kind Contributions to a Non-Profit Organization
We are writing in response to your email of March 14, 2019 regarding whether in-kind contributions made by local suppliers (the “Suppliers”) to a non-profit organization in XXXXXXXXXX would be considered deductible business expenses.
In the situation you described, a non-profit organization was formed in XXXXXXXXXX (the “NPO”) to carry out a XXXXXXXXXX. To help achieve its project, the NPO has been soliciting in-kind contributions of goods and services, including XXXXXXXXXX, from Suppliers in the local community. It is believed that Suppliers will benefit from word of mouth advertising and promotion that would result in increased revenue for them. However, you have also indicated that contributions by some Suppliers may be derived from activities that appear to be personal endeavors or hobbies.
This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R9, Advance Income Tax Rulings and Technical Interpretations.
In order to be able to deduct business expenses incurred in a particular year, it must first be concluded that a business exists in that year. The Canada Revenue Agency Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income states that generally, a business is an activity that an individual intends to carry on for a profit and there is evidence to support that intention. The existence of a source of income (in this case, a business) is a question of fact and will depend on the particular taxpayer’s efforts and degree of involvement. Generally, if a taxpayer carries out an activity in a sufficiently commercial manner, the activity will likely be considered a source of income for purposes of the Act.
Where it is determined that a taxpayer's activity constitutes a business, income from that business is the profit for the year determined by subsection 9(1) of the Act and in accordance with various specific rules. Paragraph 18(1)(a) provides that no outlay or expense is deductible in computing the income of a taxpayer from a business unless it was made or incurred for the purpose of gaining or producing income. Paragraph 18(1)(b) further prohibits the deduction of capital outlays unless they are expressly permitted under Part I. The deductibility of any outlay or expense is also subject to the general rule in section 67 of the Act which states that such an amount must be reasonable in the circumstances.
A barter transaction takes place when two persons agree to a reciprocal exchange of goods or services between them usually without using money. Generally, where goods or services are bartered by a taxpayer for either goods or services in return, the value of those goods or services provided must be brought into income where they are of the kind generally provided by the taxpayer in the course of earning income from, or are related to, a business carried on by him. In arm's length transactions, the value that must be brought into income is the price which the taxpayer would normally have charged a stranger for his services or would normally have sold his goods or property to a stranger. Where capital property is provided by a taxpayer as part of a barter transaction, the value of the property would be considered proceeds of disposition. The cost of the goods or services received by a taxpayer in a barter transaction is generally the same amount as the total value of the goods or services given up, plus any cash given as part of the barter, and minus any cash received as part of the barter. Additional information on barter transactions can be found in Interpretation Bulletin IT-490, Barter Transactions (archived).
It is always a question of fact whether a particular expense is deductible. In the situation at hand, the arrangement may be one of bartering where the Suppliers are providing goods or services to the NPO in exchange for advertising and promotional services. For example, if a self-employed landscaper barters landscaping services to a local non-profit organization in exchange for advertising and promotion for their business, the landscaper would be required to include in income the value of the services provided to the non-profit organization. The landscaper would then claim a deduction for advertising and promotion used in the business for the same amount as the total value of the services given up. Additionally, the landscaper could also generally deduct costs of materials, etc., incurred in providing the landscaping services.
We trust these comments will be of assistance to you.
Pam Burnley, CPA, CA
Business Income and Capital Transactions
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.
© Her Majesty the Queen in Right of Canada, 2020
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2020
Video Tax News is a proud commercial publisher of Canada Revenue Agency's Technical Interpretations. To support you, our valued clients and your network of entrepreneurial, small businesses, we choose to offer this valuable resource to Canadian tax professionals free of charge.
For additional commentary on Technical Interpretations, court cases, government releases, and conference materials in a single practical document specifically geared toward owner-managed businesses see the Video Tax News Monthly Tax Update newsletter. This effective summary and flagging tool is the most efficient way to ensure that you, your firm, and your clients are fully supported and armed for whatever challenges are thrown your way. Packages start at $400/year.