Whether we volunteer to coach our child’s soccer team, deliver groceries to those who cannot do it themselves or provide pro bono services in our professional capacity, many Canadians (12.7 million in 2013 according to Statistics Canada) gratuitously give their time to others. With over 1.96 billion hours (the equivalent of 1 million full-time jobs) volunteered, the contributions are incredible! However, as it seems with most aspects of life, it all comes back to tax. In this article we will discuss tax issues from the prospective of the volunteer as well as the recipient, such as a non-profit organization or charity.
Tax Issues for Volunteers
For most of us, what constitutes a volunteer appears pretty obvious – a person who does something for free (or with very little pay) and without obligation. But what if the volunteer receives some type of compensation? What if the volunteer driver, using his own vehicle, receives an allowance or reimbursement to cover some costs of operating the vehicle? These payments or benefits may complicate matters.
If a volunteer is reimbursed for expenses they incur carrying out their volunteer duties, the reimbursement is not taxable. In some cases, a volunteer of a registered charity may waive their right to be reimbursed for expenses and instead receive a donation receipt for tax purposes. That said, CRA encourages the exchange of cheques: the charity reimbursing the volunteer for expenses and the volunteer making a cash donation.
Reasonable allowances for costs incurred by an individual in carrying out their volunteer duties are not taxable (provided the associated costs are not also reimbursed). However, if the allowance is large enough to influence the voluntary position, the amount would generally be taxable as employment or business income. In contrast to waiving the right to be reimbursed, CRA’s administrative policy does not allow a donation receipt to be issued for waiving the right to an allowance.
So, what is a reasonable allowance? CRA has stated that allowances paid to Federal Government employees for travel, as dictated by the National Joint Council, are reasonable. For example, for the period commencing January 1, 2020, for those in Alberta an allowance of $0.475/km for use of a personal vehicle would be reasonable (the rates vary across the country). Of course, other amounts could also be reasonable. It is prudent to maintain a record of how these amounts were determined to approximate expected costs.
Benefits and Other Payments
Provided the expense reimbursement, allowances and benefits are all reasonable and not taxable to the volunteer, the organization is not required to file a tax slip.Benefits received in a volunteer capacity are generally non-taxable. However, as above, if the benefit is large enough to influence the individual’s volunteerism, it would be taxable. For example, CRA previously opined that a volunteer golf marshal who is offered free rounds of golf in exchange for their volunteer services would not generally be taxed on this benefit. However, if the value of the particular golf rounds is unusually high or if rounds are awarded for a disproportionately minimal amount of work performed, it may result in a taxable benefit.
In some cases, a volunteer may receive another payment, such as an honorarium or a director fee. Where the organization provides nominal compensation, the amounts are non-taxable for the individual. If the payment is not nominal, the amounts are taxable. To be nominal, the amount must generally be significantly less in comparison to what would be paid to a regular employee or independent contractor. Nominal compensation would not be enough to influence the individual’s decision to volunteer.
Donation Receipts for Volunteering with Charities
Volunteering time or providing a service to a registered charity does not qualify as a “gift” for the purpose of issuing a donation receipt. That is, no donation tax credit can be claimed. Of course, the value of the volunteer’s services is also not taxable as they did not get paid for those services.
Some individuals may volunteer as a director of an incorporated organization. If the organization does not properly collect and remit amounts held in trust for the government (for example, employee and employer’s EI or CPP, withholding tax on salary, and GST/HST on sales/services), the director may be personally liable for these amounts. To protect oneself, the director must be duly diligent in preventing the failure of remitting the amounts. Also, directors should properly resign (including ceasing all “director-like” activities) to limit their future liability. CRA cannot take action to recover amounts from a director more than two years after the individual last ceased to be a director.
A director may also be liable for other risks of the organization. A director should ensure that the organization has proper director’s insurance and pays the ongoing premiums.
Volunteer or Business in a Loss?
Volunteering time or providing a service to a registered charity does not qualify as a “gift” for the purpose of issuing a donation receipt.If an individual provides “volunteer” services and incurs expenses out of pocket, can they deduct these amounts against other sources of income? A recent Tax Court decision found that a lawyer who charged clients based on their circumstance was providing legal services in a capacity very close to volunteerism. As a volunteer, she was carrying on a personal venture without a view to profit and the associated expenses were not deductible against her employment income from another source. The fees charged in this case were extremely low, determined by the Court to fall well below minimum wage. This was not a case of a for-profit business providing a discount to some low-income clients, nor an occasional pro bono file.
Volunteer Firefighter and Search and Rescuers
Volunteer firefighters and search and rescuers that provide at least 200 hours of volunteer services in the year can claim a tax credit of $450 ($3,000 * 15%) to reduce their federal tax liability. Eligible services can include:
- responding to and being on call for firefighter duties;
- search and rescue or related emergency calls;
- attending meetings of the organization; and
- participating in required training.
However, if a volunteer is paid by the same organization for providing similar services, both the paid and volunteer hours for that organization are not counted towards the 200-hour test.
As an alternative to the tax credit, volunteer firefighters and search and rescue volunteers may claim a $1,000 exemption to reduce otherwise taxable amounts received from the organization. An individual can claim either the credit or the exemption, not both.
A number of provinces and territories (British Columbia, Manitoba, Quebec, Newfoundland, Nova Scotia, Prince Edward Island, Nunavut and, beginning in 2020, Saskatchewan) have credits for certain volunteer emergency responders.
Tax Issues for Organizations
Organizations that benefit from volunteers may also have a number of tax-related concerns, such as the impact of providing payments to volunteers.
… CRA’s administrative policy does not allow a donation receipt to be issued for waiving the right to an allowance.Provided the expense reimbursement, allowances and benefits are all reasonable and not taxable to the volunteer, the organization is not required to file a tax slip. It is also beneficial for the organization to maintain records of the reasoning which led to the conclusion that specific payments were not income to the recipients. This demonstrates the organization undertook due diligence.
If an organization is reimbursing volunteers for expenses or providing allowances, it should have a clear policy in place specifying both the type of expenditures they are willing to reimburse (for example, for reasonable accommodation if travelling as part of the organization’s operations), and procedures to document the expenses and payments. This can be even more important for a registered charity, as such a policy demonstrates the charity uses its funds for charitable purposes.
If the organization is providing more than a nominal payment (such as an honorarium), then a tax slip (typically a T4 or T4A) may be required. Director’s fees are employment income. The organisation should report these amounts on a T4 issued to the director. For employment income, the payer is also required to withhold EI and CPP, where applicable to the specific employment, and remit these amounts plus an employer portion. If the payment relates to an amount other than employment earnings, the organization should issue a T4A to the individual. Note that CRA administratively does not require a T4A to be issued where the total of all payments (subject to this filing) in the calendar year are less than $500 and no taxes were withheld.