What are the benefits of doing a "cheque exchange" when contributing services-in-kind?
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:
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 [CO] 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.
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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It provides clear documentation for tax purposes, if the donation is partially or fully deductable.
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 0 + VAT = 0. The charity pays 0, the consultant remits to the tax office and donates 0 back to the charity. The charity has paid 0, received 0 and is entitled to a VAT credit of - everyone is square.
Note that this has exactly the same effect on government finances [CO] but the second way is legal and the first isn't.
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.
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