Glossary


Introduction

This glossary is not a complete list of all terms used in Form T3010-1, Form T1235(09), or Form T1236(10). It includes the most common terms that volunteers at small and rural charities often find confusing.

For official definitions, see the Glossary and the Donors Dictionary on the CRA website.

CRA Charities Glossary www.cra-arc.gc.ca/chrts-gvng/chrts/glssry-eng.html

Links to glossary terms

Accrual accounting
Accumulated property
Arm's length
Cash accounting
Disbursement quota
Gifts to registered charities
Qualified donees
Sanctions
10 year gifts

Glossary Terms

ACCRUAL ACCOUNTING

All accounting systems are not the same. There are accrual systems, cash-based systems, fund accounting, and hybrid forms that combine various elements. The fundamental distinction underlying all systems is between accrual-based accounting and cash-based accounting.

The distinction relates to timing, not to the types of financial instruments used. Both methods use cash, cheques, credit cards, bills, invoices, purchase orders, receipts, etc.

Roughly, cash-based accounting enters transactions into the accounting records in real time: revenue is entered when the money is received; expenses are entered when they are paid. Accrual-based accounting slightly shifts the transactions in time. It reflects the time lag that often occurs between the date of a bill and the payment, or the date revenue is earned and the date payment is deposited in the bank.

In a cash-based system, record transactions as follows:

  • Record revenue when it is received
    • For example, when you deposit money into the bank
  • Record expenses when they are paid
    • For example, when you write a cheque

In an accrual-based system, record transactions as follows:

  • Record revenue when it is earned
    • For example, when a donor pays by credit card, even though the credit card company will not deposit the money into your bank account for a few days or weeks
  • Record expenses when they are incurred
    • For example, when you pay a bill that is due the following month

One of the most common errors on Form T3010-1 is failing to indicate the accounting method used to produce financial statements on Line 4020. Here are some tips to help you decide:

  • Accrual-based systems use accounts with words such as "deferred revenue" or "pre-paid expenses" in the account name. Cash-based systems generally don't.
  • Most computer accounting programs use accrual-based accounting. Manual bookkeeping systems generally use cash-based accounting.

The accounting method is important because it affects how the numbers on your financial reports are produced. It does not necessarily change how the reports look. Given the wide variety of different accounting systems, CRA can't necessarily tell which method you used to record your accounting transactions just by looking at your financial statements.

Examples from the Charity Filing Guide

These simple examples should help you understand which accounting method you use. If you're still unsure, contact an accounting professional or call CRA 1-800-267-2384.

Example 1: Expenses
Situation: You receive the December phone bill at the end of November and pay it immediately.

Cash method: You enter the phone bill in your November expenses. The phone bill is recorded in your November accounting records.

Accrual method: You record the phone bill in November as a prepaid expense for December. The phone bill is recorded in your December accounting records.

Example 2: Revenue
Situation: A donor uses a credit card to make a donation to your charity.

Cash method: You don't record the donation in your books until you actually receive the money from the credit card company.

Accrual method: You record the donation in your books and you record the amount of the donation in accounts receivable. When you receive the money from the credit card company, which could be the following month, you reduce the amount of accounts receivable and record the money as a deposit in your bank account.

ACCUMULATED PROPERTY

On Form T3010-1, the term accumulated property has a special meaning. It does not mean saving money in the bank, investing in real estate, or acquiring material goods. It means that a registered charity has received written permission from CRA to raise funds in order to pay for a specific large project, such as a building fund. The money may be collected over a few years before it is spent.

If you cancel the project after you start to collect funds, or if you have funds left over after the project is completed, CRA has specific rules governing how that money can be used and how it must be reported.

If you want to raise funds for a large multi-year project, call CRA first. This is a legitimate activity, and they can help you raise the funds without affecting your Disbursement Quota or charitable status.

The Charity Filing Guide doesn't go into detail about accumulating property. Call CRA or see Asking for Permission to Accumulate Property on the CRA website for more information: http://www.cra-arc.gc.ca/chrts-gvng/chrts/prtng/rqsts/ccmlt-eng.html

ARM'S LENGTH

Arm's length is an abstract concept used by CRA to describe whether individuals are likely to act independently, or whether it is likely that their interests are intertwined.

Individuals who are "at arm's length" from each other (i.e. distant) are not related in any way and do not have business ties to each other. CRA assumes that they act independently.

Individuals who are "not at arm's length" from each other (i.e. close) have some kind of relationship—blood, marriage, kinship, adoption, business—that ties them together. CRA assumes that they are likely to act in concert.

Broadly, there are two types of relationships that affect arm's length status: family relationships and business ties such as partnerships.

Business partners are deemed to be not at arm's length since it can be assumed that they act together and share a common interest.

Family relationships that CRA considers to be not at arm's length are shown in the diagram on the back of Form T1235(09), copied below. The diagram shows non-arm's length relationships for person X, who is in the middle. The lines indicate relationships by birth, adoption, marriage, or common law.

CRA diagram non-arm's length relationships

In other words, X is in a non-arm's length relationship with the following people:

  • parents by birth or adoption
  • grandparents by birth or adoption
  • children by birth or adoption and their spouses by marriage or common law
  • grandchildren by birth or adoption and their spouses by marriage or common law
  • brothers and sisters by birth or adoption and their spouses by marriage or common law
  • spouse by marriage or common law
  • spouse's children by birth or adoption from a previous relationship
  • brothers and sisters in-law
  • parents in-law
  • grandparents in-law

If your charity is designated as a charitable foundation, the arm's length status of the members of your charity's board of directors or board of trustees determines whether the charity is a public or a private foundation. If 50% or more of the directors/trustees are not at arm's length from each other—in other words they are related to each other—the foundation is designated as a private foundation. Public foundations can have board members who are related to each other, but 50% or more of the board members must be at arm's length—not related—to each other.

CASH ACCOUNTING

Not all accounting systems are the same. There are accrual systems, cash-based systems, fund accounting, and hybrid forms that combine various elements. The fundamental distinction underlying all systems is between accrual-based accounting and cash-based accounting.

The distinction relates to timing, not to the types of financial instruments used. Both methods use cash, cheques, credit cards, bills, invoices, purchase orders, receipts, etc.

Roughly, cash-based accounting enters transactions into the accounting records in real time: revenue is entered when the money is received; expenses are entered when they are paid. Accrual-based accounting slightly shifts the transactions in time. It reflects the time lag that often occurs between the date of a bill and the payment, or the date revenue is earned and the date payment is deposited in the bank.

In a cash-based system, record transactions as follows:

  • Record revenue when it is received
    • For example, when you deposit money into the bank
  • Record expenses when they are paid
    • For example, when you write a cheque

In an accrual-based system, record transactions as follows:

  • Record revenue when it is earned
    • For example, when a donor pays by credit card, even though the credit card company will not deposit the money into your bank account for a few days or weeks
  • Record expenses when they are incurred
    • For example, when you pay a bill that is due the following month

One of the most common errors on Form T3010-1 is failing to indicate the accounting method used to produce financial statements on Line 4020. Here are some tips to help you decide:

  • Accrual-based systems use accounts with words such as "deferred revenue" or "pre-paid expenses" in the account name. Cash-based systems generally don't.
  • Most computer accounting programs use accrual-based accounting. Manual bookkeeping systems generally use cash-based accounting.

The accounting method is important because it affects how the numbers on your financial reports are produced. It does not necessarily change how the reports look. Given the wide variety of different accounting systems, CRA can't necessarily tell which method you used to record your accounting transactions just by looking at your financial statements.

Examples from the Charity Filing Guide

These simple examples should help you understand which accounting method you use. If you're still unsure, contact an accounting professional or call CRA 1-800-267-2384.

Example 1: Expenses
Situation: You receive the December phone bill at the end of November and pay it immediately.

Cash method: You enter the phone bill in your November expenses. The phone bill is recorded in your November accounting records.

Accrual method: You record the phone bill in November as a prepaid expense for December. The phone bill is recorded in your December accounting records.

Example 2: Revenue
Situation: A donor uses a credit card to make a donation to your charity.

Cash method: You don't record the donation in your books until you actually receive the money from the credit card company.

Accrual method: You record the donation in your books and you record the amount of the donation in accounts receivable. When you receive the money from the credit card company, which could be the following month, you reduce the amount of accounts receivable and record the money as a deposit in your bank account.

DISBURSEMENT QUOTA (DQ)

The following information applies to charities with fiscal year end dates on or after March 4, 2010.

The rules governing the disbursement quota changed substantially in the March 4, 2010 federal budget. The 80% rule, which applied to tax receipted donation revenue, was eliminated.

However, CRA still expects registered charities to devote the bulk of their resources to charitable programs and activities. The 3.5% spending requirement on property not used in charitable activities or administration remains in effect.

The Disbursement Quota is the minimum proportion of revenue that CRA expects registered charities to spend on their charitable programs. One of the privileges of registered status is the ability to issue tax receipts. Donors can use tax-receipted donations to reduce their tax payable to the federal government. CRA uses the disbursement quota to help ensure that registered charities spend the bulk of this tax-assisted revenue on charitable activities.

Most small and rural charities have no problem meeting the disbursement quota in the course of normal operations. It isn't designed to be an onerous obligation.

Disbursement Quota Threshold:The disbursement quota only applies if the value of Line 5900 (property not used for charitable activities or administration) is greater than $100,000 for charitable organizations or greater than $25,000 for public and private foundations.

The disbursement quota is also called the spending requirement. The amount is calculated by multiplying Line 5900 by 3.5%. This amount is then compared to the sum of Line 5000 and Line 5050.

If the amount you spent on charitable activities (Line 5000) and gifts to qualified donees (Line 5050) is greater than your spending requirement, you have an excess. Excesses can be carried forward 5 years or back 1 year.

If the amount you spent on charitable activities and gifts to qualified donees is less than your spending requirement, you have a shortfall. To make up the shortfall, you can use excesses from the 5 previous fiscal years. Or you can increase your spending on charitable activities and gifts in the current year to create an excess you can carry back to cover the shortfall in last year’s spending.

If the disbursement quota applies to your charity, track your excesses and shortfalls to help you plan charitable program spending.

CRA calculates the disbursement quota from the information you provide on Form T3010-1. Their disbursement quota calculation is included on Form T1242 Registered Charity Information Return Summary.

Note: Do not use Line 4250 in Schedule 6 to calculate the disbursement quota

Note: The donor charity cannot use designated gifts to satisfy its own disbursement quota. Subtract the amount of designated gifts entered on Line 5050 Gifts made to qualified donees before you calculate your disbursement quota.

Note: If your charity has approval from CRA to accumulate property for a specific purpose, the amount of property accumulated plus any income earned is excluded from the disbursement quota, subject to written approval.

For more information about the disbursement quota see the CRA website http://www.cra-arc.gc.ca/chrts-gvng/chrts/prtng/spndng/menu-eng.html

GIFTS TO REGISTERED CHARITIES

The information in this section applies to fiscal periods ending on or after March 4, 2010.

Registered charities are allowed to give gifts to other registered charities and organizations CRA calls qualified donees. Gifts to qualified donees count towards your disbursement quota (if the disbursement quota, also called the spending requirement, applies to your charity).

Report this type of gift on two forms:

  1. T3010-1: Enter the total amount of gifts made to all qualified donees on Line 5050 in Section D or Schedule 6 as applicable.
  2. T1236(10): Enter the amount given to each registered charity or qualified donee along with identifying information.

Restrictions
CRA does not place conditions on gifts made between registered charities that are at arm’s length to each other. This means that the board members of each charity are not related by blood, marriage, or adoption, and that the two boards do not share members in common. In other words, the two charities are completely unrelated and independent.

CRA does place conditions on gifts made between registered charities that are not at arm’s length. This means that one or more of the board members of each charity are related by blood, marriage, or adoption, and that the two boards share members in common. In other words, CRA assumes that control of the two charities rests with individuals who are not independent.

If your charity wants to make a gift to another charity that is not at arm’s length, you have two choices:

Gift (a regular gift)
This type of gift is subject to the Anti-Avoidance Rule which has the following provisions:

  • The receiving charity must spend the gift on its own charitable programs or on gifts to arm’s length qualified donees.
  • 100% of the full amount of the gift (at fair market value, without deductions of any kind) must be spent in the year the gift was received, or in the following year.
  • If the full amount of the gift is not spent within the designated time period, the charity may be subject to a penalty of 110% of the amount of the gift, or to revocation of its charitable registration.
  • The anti-avoidance spending requirements apply in addition to the disbursement quota requirement. In other words, you cannot use gifts that are subject to the anti-avoidance rule to meet your disbursement quota.

Designated gift
Designated gifts are not subject to the anti-avoidance rule. The receiving charity does not have to spend the gift within a certain time frame.

To designate a gift, the donor charity must identify it as a designated gift on Form T1236(10). Write “designated gift” and the amount of the gift on the blank line.

The donor charity cannot use designated gifts to satisfy its own disbursement quota. Subtract the amount of designated gifts entered on Line 5050 Gifts made to qualified donees before you calculate your disbursement quota.

If your charity makes a designated gift to another charity, CRA recommends that you tell the receiving charity. The gift may affect their disbursement quota calculation if they hold the gift.

See the CRA website for more information on arm’s length status, the anti-avoidance rule, and designated gifts.

 

QUALIFIED DONEES

The definition of Qualified Doneesis important because it affects which organizations your registered charity is allowed give gifts to. You can only give gifts to qualified donees. In general, qualified donees are organizations that are authorized by CRA to issue tax receipts, for example, other registered charities (see list below). Nonprofit organizations and most foreign charities are not qualified donees.

Registered charities are only allowed to use their resources in two ways:

  1. Operate their own charitable programs
  2. Donate funds to organizations that are qualified donees as defined by CRA

In other words, you cannot donate funds to organizations that do not appear on the following list of Qualified Donees (from the back of Form T1236(10)):

  1. a registered charity;
  2. a registered Canadian amateur athletic association;
  3. a housing corporation resident in Canada constituted exclusively to provide low-cost housing for the aged;
  4. a Canadian municipality;
  5. the United Nations and its agencies;
  6. a university that is outside Canada that is prescribed to be a university, the student body of which ordinarily includes students from Canada;
  7. a charitable organization outside Canada to which Her Majesty in right of Canada has made a gift during the fiscal period or in the 12 months immediately preceding the period, and
  8. Her Majesty in right of Canada or a province.
    [Source: Form 1236(09)]

If you're not sure that an organization fits into one of the groups on this list, call CRA for confirmation before you give a gift to an organization that may not be a qualified donee.

To determine if an organization is a registered charity, look it up in the online CRA Charities Listings www.cra-arc.gc.ca/chrts-gvng/lstngs/menu-eng.html

To determine if an organization falls into number 7 above, see Attachment to IC84-3R, Gifts to Certain Charitable Organizations Outside Canada on the CRA website www.cra-arc.gc.ca/E/pub/tp/ic84-3r-attach/README.html

SANCTIONS

Sanctions are one of the tools CRA uses to ensure that registered charities meet their obligations under the Income Tax Act. CRA uses a range of tools to encourage compliance. Listed from least to most severe, the tools are as follows:

  • Education: CRA provides information to help the charity understand the rules.
  • Compliance agreement: CRA works with the charity to develop a plan to bring the charity's activities into compliance with CRA's regulations.
  • Sanctions: A range of financial penalties and suspensions for different infractions.
  • Revocation: Loss of registered charitable status.

In general, the more severe responses, such as sanctions or revocation, are reserved for more serious or repeated acts of noncompliance. However, CRA has zero tolerance for not filing the T3010-1 Annual Information Return. If you do not file on time, they will move directly to revocation.

Note that an audit is not a sanction. CRA performs audits for a variety of reasons unrelated to suspected noncompliance. Most audits clear up a source of confusion and do not result in penalties or sanctions for the charity involved.

For more information, see the Audits and Sanctions page on the CRA website www.cra-arc.gc.ca/chrts-gvng/chrts/prtng/dts-eng.html and the Penalties and Suspensions chart www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/csp/pnlts-eng.html

10 YEAR GIFTS

In general terms, 10 year gifts represent restricted funds that your charity is not allowed to spend right away. 10 year gifts can have a term longer than 10 years.

Definition from the CRA Glossary
A ten-year gift is a donation made to a registered charity that is subject to a donor's written trust or direction that the gift, or any property substituted for it, be held by the recipient charity for ten years or more from the date the gift was made.

Report 10 year gifts on Line 4505 and Line 4180.

Depending on the source of the gift, the amount of 10 year gifts reported on line 4505 will also be included on Line 4500, 4510, 4530, 4565, 4570, 4575, 4630, or 4650 as applicable.

Note: Before the March 4, 2010 federal budget, 10 year gifts were a type of enduring property. The concept of enduring property was discontinued for fiscal periods ending on or after March 4, 2010, but the concept of 10 year gifts is still in effect.