By George Dube
Question: I have donated units rent-free to those displaced by the Fort McMurray fires, and my taxes are coming due soon, and I’m not sure how to report this? Although my intention was never to “benefit” from it and only to give back to those in need, I am wondering if it is an official donation?
With the Fort McMurray fires, we’ve seen terrible disaster. But we have also seen the generosity of many, many people reaching out to provide help however they can. For those with rental properties, this has taken the form of offering those displaced by the fires a place to stay, rent-free or at a very discounted rate, in their vacant units. Eventually, as tax time rolls around, real estate investors who have generously offered their units need to somehow report this, and many are wondering if this should be reported as a donation. Or is it something else altogether?
Donations of services or goods
The Canada Revenue Agency (CRA) recognizes that gifts can be made in cash or other assets. But, donations of services, such as providing a rent-free place to stay, creates an issue. The CRA believes the provision of services fails to qualify for donation credits or deductions. Time and effort cannot create donation benefits as the CRA notes that time and effort are not in themselves taxable. So they don’t provide tax deductions/tax credits.
For those arguing that providing a rental unit is actually donating “goods” and not services, you’re no better off. The CRA argues that you’ve sold the “goods” at fair market value when you donate them and you have to take the fair market value of the goods into income.
However, it is possible to “cross cheque”. This means that you can invoice the charity for services – or rent – and in turn the charity would receive a cash donation from you. For example, you donate a rental property that has a rent of $1,000/month. You invoice the charity $1,000 for the cost of the rent, they pay you, and you deposit the money. To fund this, you would provide a donation to the charity of $1,000 for which they would give you a charitable receipt. The problem, of course, is that the net result for the donor is that they have to take the $1,000 rent into “income”, which offsets any deduction/credit. No net gain, in other words.
Keep in mind that the ultimate recipients of the donated rental properties are not registered charities. Thus, gifting the use of a rental property for a period of time would fail to provide for a charitable donation where contributions are made directly, and not through a registered charity.
An alternative way to treat the “donation”
As a potential alternative, instead a “donation”, you could take the position that providing a rental unit to those in need, either free or at a reduced rental fee, is more promotional and advertising in nature. How? By offering this service, you are:
- Promoting goodwill and enhancing the image of your activities in the community which could result in the referral of future tenants
- Improving relationships with suppliers and those you would otherwise normally deal with in the community, which could result in more referrals
- Getting more attention from future possible tenants who could like to see that their landlord is community minded
I am not suggesting that universally you will obtain such a deduction – and the deduction is indirect-- but rather that a deduction is possible. The deduction, however, cannot be for the fair market value of the rent (or essentially you would need to one way or another show the “disposition” of the rental value as income).
So, are you really that far ahead financially? Perhaps not. But, investors are most concerned about helping people first and foremost. However, beyond the charitable purpose to your activities, it’s possible to make a reasonable argument for deducting expenses that otherwise can at times be disallowed (maybe capitalized as part of the property) for vacant properties such as utilities, property taxes, interest expense, etc.
However this is treated from a tax perspective, the human perspective is really what matters. The generosity of spirit surrounding the Fort McMurray fires has been truly uplifting in the face of such devastation.
George E. Dube, CPA, CA is a veteran real estate investor and Tax Partner at BDO Canada LLP. He has spoken, written various articles, and co-authored two books on real estate accounting. Reach George at: email@example.com or on Twitter @georgeEdube.