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Scenario: A consultant provides services-in-kind (let's say valued at $x) to a charitable organization. There are two options for how this can be accounted in a manner that creates a paper trail for both parties:

  1. Consultant issues a receipt with a line item for $x that also includes a discount line item in the amount of $x. As a result the total of the invoice is $0 and no payment needs to change hands. This will result in the consultant not having any income to report, but the value of the work contributed has been documented and can be reported on later.
  2. Parties do what's commonly referred to as a "cheque exchange". The consultant issues a receipt for $x, receives full payment from organization, then makes a donation back to the organization in the amount of $x and receives a tax receipt in the amount of $x.

Assuming the donation would be fully deductible, aside from reinforcing the value of the donation in the mind of the recipient, are there any advantages to the latter? It results in more administrative burden for both parties (writing cheques, issuing tax receipt, recording donation, claiming on tax returns) and yet despite this appears to be a fairly common practice.

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Value added taxes.

Legally, the consultant must remit to the government the value of the VAT for the services they performed even though it was donated - the services were supplied and the consultant is liable for the tax; the consultant is not allowed to donate the government's money.

Assume a VAT rate of 10% and services to the value of $100 + VAT = $110. The charity pays $110, the consultant remits $10 to the tax office and donates $100 back to the charity. The charity has paid $110, received $100 and is entitled to a VAT credit of $10 - everyone is square.

Note that this has exactly the same effect on government finances $0 but the second way is legal and the first isn't.

  • In Canada (where the question is tagged) both options are legal. If a discount is given on an invoice, GST/HST is charged on the discounted total, and if that discount happens to be 100%, no GST/HST needs to be collected. In essence services given away for free are not GST/HST taxable. Thanks for your answer though as it will apply in some jurisdictions. – Steven Oct 9 '15 at 14:01
  • I've accepted this answer despite it not being applicable in my jurisdiction because it provides a clear reason, supported by facts, as to why one option would be preferable to the other. Happy to revisit if others provide or elaborate on answers specific to Canada. – Steven Nov 21 '15 at 18:29
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It provides clear documentation for tax purposes, if the donation is partially or fully deductable.

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    In (1) no tax deduction or documentation thereof is needed since there is never any income to report in the first place. Income reduced by a discount is not reflected in gross income. The documentation that (2) provides is only necessitated by (2). The only problem it solves, is the one that it creates. – Steven Oct 9 '15 at 0:48
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As well as the GST/HST issue, it is not true that the consultant has no income to report. The consultant does have income to report, certainly if he is also trying to claim the tax donation. You cannot claim that one of the transactions did not occur but the other one did.

You should also be aware that CRA can declare a deal to be void if it was carried out solely for the purpose of avoiding tax. Also donations must be "without strings" to be eligible for tax relief. If the CRA believes that the donation was tied to the consultancy (which would seem to be the case) then they will disallow the claim.

  • "You cannot claim that one of the transactions did not occur but the other one did." The question does not suggest that. In (1) neither income nor a tax credit occur. In (2) they offset one another. To your second point, I am aware that a donation cannot be stipulated in the contract, and that a contract to be void, but I am not clear on how you feel either of the proposed options would be interpreted as tax avoidance. The intention is to donate the services. The question is how to record it. Are you suggesting that because of your points one approach is preferable to the other? Thanks. – Steven Oct 12 '15 at 2:25

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