Handout # 2: Allocating Fundraising Expenses to the T3010

Transcription

1 Handout # 2: Allocating Fundraising Expenses to the T3010 The following information is organized to assist a charity in allocating fundraising expenses to the appropriate reporting line on the T3010 Information Return. The accurate allocation of fundraising expenses will ensure that the Fundraising Ratio is properly calculated and reflective of the fundraising effectiveness of a charity. The information has been taken or adapted from a variety of CRA resources. Topics covered in this information summary are: 1: Setting up the accounting system 2: Allocation of expenditures to various expense categories 3: Guidelines for allocation of direct and indirect expenses 4: Common ways to allocate expenses between categories 5: Transferring a charity's expenditures to the T3010 Information Return 6: Easing the transfer of financial information to the T3010Information Return 7: What are the expense categories on the T3010 Information Return? 8: Where are the expenses recorded on the T3010 Information Return? 9: How do I decide what is a fundraising expense? 10: What are some examples of fundraising expenses? 11: Thoughts about fundraising events and implications for the Fundraising Ratio 1: Setting up the accounting system Having accurate and meaningful financial information is essential to properly running a charity and complying with the CRA requirements. An important first step is deciding how to record expenditures in your financial records. Generally, expenses are recorded in specific general ledger accounts within an organization s accounting system. There are several ways that a charity can organize their accounts, often reflecting a structure which is most useful to the stakeholders requiring the financial information. One method of organizing accounts is by the type of expense; namely, placing expenses in categories such as heat, consultants, salary and benefits, office supplies, etc. This type of structure can be effective for small charities or those with a limited number of programs. A more common method used by charities is to organize accounts by functions, activities, or programs of the charity; such as administration, fundraising, counselling services, educational programs, and so on.

2 In this way, a charity can easily answer questions such as: How much have we spent on fundraising so far this month? this quarter? this year? How much did we spend on administration compared to our charitable programs? I It may be useful to have a professional accountant set up a charity's accounting system to ensure it meets the charity's needs and provides the information required by the CRA. 2: Allocation of expenditures to various expense categories It is likely that many expense items will relate to more than one account, especially if a charity has a detailed or complex set of expense accounts. When an expense relates to more than one expense account, the charity will have to split or allocate that expense to each relevant account. Depending on the nature of the expense and account structure, this may be a simple or a complex task. A charity must develop a fair and consistent way for allocating expenses to the different accounts. This is extremely important when some expenses are related to a charity's programs (where the majority of a charity's resources should be allocated) and other expenses are allocated to non-charitable functions such as fundraising, administration and management, or political activities. Office supplies might be purchased for use in charitable programs, but also used for administration and management needs as well as fundraising activities. The salary paid to the executive director might compensate her for fundraising, charitable program, and administrative responsibilities. 3: Guidelines for allocation of direct and indirect expenses Direct expenses are expenses that are directly linked to an activity. If you did not do the activity, you would not have the expense (e.g. purchasing laboratory supplies to run a research program). These expenses might be easy to allocate to a specific appropriate category or might require some analysis to ensure the expenses are either isolated or pro-rated in a reasonable fashion to different expense categories. An instructor's travel expenses are included in a larger invoice from the travel agency that booked all the organization s travel for the month. Each flight, hotel room charge, and so on must be identified and charged to the right activity. If an invoice for telephone expenses included hundreds of long distance calls at a few cents each, it would be reasonable to estimate the total value of calls for each activity rather than to individually identify the purpose of each call and adding these up.

3 Indirect Expenses are expenses that support more than one activity of the charity or that permit the charity to carry on its work. Even if you did not carry out a specific activity, you would still incur some or all of these costs. The charity publishes a regular monthly newsletter that provides news and information to members and thanks donors and funders for their support as well as promotes the upcoming events of the organization. The executive director travels across the country, teaching education programs, visiting funders, and doing performance reviews with regional staff members. It is important to establish a reasonable and consistent approach to allocating expenses between different categories. 4: Common ways to allocate expenses between categories Expenses that relate to more than one activity or to the general operations of your charity need to be allocated to the relevant accounts. Generally, this allocation is based on some underlying way of measuring the cost item. For example, the allocation could be based on the: number of staff or volunteers who work on each activity staff time spent on each activity floor space taken up by each activity the direct costs, etc., of each activity the revenues of each activity A charity distributes a monthly newspaper highlighting its programs and promoting an upcoming fundraising event. The newsletter is 8 pages, of which the advertisement for the event is 2 pages. The newsletter's cost could be allocated based on: the number of pages used to promote the event compared to the total number of newsletter pages (1/4 of the pages is fundraising related, 3/4 program related) the number of words in promotion compared to total number of words in newsletter the staff time spent to write the promotion compared to the total staff time to write the newsletter

4 5: Transferring a charity's expenditures to the T3010B Information Return Charities must itemize their expenses twice on the T3010 Information Return. First: Expenses must be allocated to one of the reporting lines from 4800 to 4920 These lines represent the common expenditure categories used in accounting systems (e.g. Line Travel and vehicle). Total of all expenses are reported on Line 4950 (except donations to qualified donees) Second: Expenses must also be recorded on one of the 5000 Series lines Expenses must be reorganized by function, so they can be reported as charitable, administration and management, political, fundraising, or other The 5000 series of lines provide the CRA with a clear picture of the expenditures for each function of the charity. The general guideline used by the CRA is that a minimum of 80% of a charity's expenditures should be program focused, with the remaining expenses on the other functions such as fundraising or administration and management. Previous to the 2010 Federal Budget, the CRA used the Disbursement Quota calculation to ensure that a charity was devoting adequate resources to their charitable programs. While the formula for this calculation has been changed, this target of 80% is still the minimal benchmark for charities to aspire to. 6: Easing the transfer of financial information to the T3010 Information Return Three strategies which will help a charity to accurately transfer financial information to the T3010 Information Return are: A: Mapping accounting system to the T3010 lines It is recommended that a charity map out each expenditure category in their accounting system to the relevant reporting line on the T3010. In this way, a charity can easily transfer the financial information from their accounting system to the relevant T3010 reporting line Given that a charity must itemize their expenses twice, this mapping could occur for both reporting requirements.

5 First reporting - All travel expenses are reported to Line 4810 Then amount reported on Line 4810 is broken down on the 5000 series of lines Travel expenses for programs - reported on Line 5000 Travel expenses for administration and management - reported on Line 5010 Travel expenses for fundraising - reported on Line 5020 B: Clarifying confusing categories to ensure consistency over time. Many expenses can be easily allocated to a relevant T3010 reporting line. However, some situations are confusing and might require clarification and interpretation by either the CRA and/or an accounting professional. It is recommended that the charity discuss these situations, record the recommended allocation and ensure future reporting of similar situations reflect these recommendations. C: Construct separate spreadsheets for certain reporting lines Some transitions should be recorded on separate spreadsheets to easy the transfer of information to the T3010. For example, records about gifts-in-kind, revenue from government agencies, and financial transactions with external fundraisers require specific schedules to be completed with the T3010 Information Return, thus should be tracked separately. 7: What are the expense categories on the T3010B Information Return? Line 4800: Line 4840 Line 4810: Line 4850 Advertisement and promotion Amounts paid to draw attention to charity and its programs Office supplies and expenses Includes postage, minor equipment purchases, meeting expense, cost of preparing and distributing annual reports Travel and vehicle Includes travel and accommodation costs, costs, vehicle costs such as gas, repairs, upkeep, and lease payments. Occupancy costs Includes rent, mortgage payments, utilities, maintenance/repairs, taxes, other costs related to maintaining premises

6 Line 4860 Line 4870 Line 4880 Line Line 4920 Line 4950 Professional and consulting fees Includes legal, accounting, fundraising costs Education/training staff/volunteers Cost of courses, seminars, conferences Total expenditure on all compensation Salaries, wages, benefits, honoraria Fair market value of all donated goods used in charitable programs. If the donated asset is being used for charitable programs, the fair market value of that asset should be reported as an expenditure on this line and also on line Other This line should only be used if a charity cannot allocate those expenditures in any of the other categories. A charity would record the amount on the "Other Line" and then provide specific information about the expense in the text box (line 4930). This description will provide the CRA with an idea of what was included in line 4920 and an opportunity for education if the expense belongs on another line Total expenditures before gifts to qualified donees add lines 4800 to : Where are expenses reported on the T3010 Information Return? The CRA provides two options for a charity to report their financial information on the T3010: Option A: Schedule 6: Detailed Financial Information (usually larger charities) Option B: Section D: Shortened version (D4) Charities can use Section D: Shortened version (D4) if NONE of the following apply: The charity's revenue exceeds $100,000 The amount of all assets (investments, rental properties) not used in charitable programs exceeds $25,000 The charity has permission to accumulate funds during this fiscal period

7 Option A: If using Schedule 6: Detailed Financial Information Schedule 6 has a more detailed breakdown of expenditure categories and provides a more transparent summary of where expenditures are occurring. This detailed information is useful in analyzing fundraising effectiveness, provides more specific information to donors and board members, and fostering better decision making. Charities will be required to report expenditures on lines (see below) Then re-categorize expenses so they can be reported on the 5000 series lines NOTE: LINE 4950 should equal total of lines 5000, 5010, 5020, 5030 and 5040.

8 Fundraising expenses are recorded on Line This amount is part of the formula that charities use to calculate their Fundraising Ratio. Option B: If using the shortened version (D4) - usually smaller charities The shortened version has fewer reporting lines, which can lead to varied expenses being reported on the same line (4920) resulting in less clarity about specific costs. These charities are ONLY required to report on three lines in the 4000 series expense categories: Line 4810 Travel and Vehicle Line 4860 Professional and consulting fees This is where a charity would include expenses related to contracted or external fundraisers. Line 4920 Other expenditures not included in the amounts above. Enter the total expenditures not included on lines 4860 and This line can include expenditures on charitable programs, grants that must be returned, amounts spent further to a compliance agreement with the Charities Directorate to make up prior year shortfalls, etc. This is where a charity using D4 would include all Fundraising expenses These charities must also report expenses in the 5000 series expense categories: Line 5000 Charitable Programs Line 5010 Administration and Management

9 This information helps the CRA determine whether adequate resources are being directed to charitable programs. Charities using the shortened version (D4) are not required to isolate all fundraising expenses for one of the 5000 series reporting lines. LINE 5020: FUNDRAISING IS NOT USED ON THE SHORTENED VERSION IDENTIFIED ON 9: How do I decide what is a fundraising expense? Information Sheet #1: What is and isn't fundraising provides more detail about what is considered a fundraising expense. Basically, activities that include a solicitation of support are fundraising activities and expenses related to these activities are fundraising expenses. There are "tests" that can reduce the allocation of expenses to the fundraising reporting line 5020 and provide an option for allocated the expense to another line such as charitable programs., e.g. using the substantially all or four part test. The chart below provides an overview that should assist a charity in determining whether an expense is considered fundraising or not. Description of activity 1 Activities that include a solicitation of support such as: - planning, researching, or preparing to ask for support; - profile raising, donor stewardship, and donor recognition; and - sales of goods or services (except as part of a related business) 2a Activities that include asking for support but that would still have taken place without asking for support, where: substantially all" of the activity is not fundraising (90%) 2b Activities that include asking for support but that would still have taken place without asking for support, where: the four part test is met (all answers are no) 3 Activities that would not have taken place without asking for support but that include charitable activities designed to prompt an action or change a behaviour. Allocation of Expenses All expenses allocated as fundraising No expenses allocated to fundraising A portion of the expenses allocated as fundraising. A portion of the expenses allocated as fundraising 4 All other activities that include asking for support All expenses allocated as fundraising 5 All activities that do not include asking for support No expenses allocated to fundraising.

10 The proper allocation of expenses as either a fundraising or not a fundraising expense is critical in the calculation of the Fundraising Ratio. (See Information Sheet #1: Fundraising Ratio) The CRA provides targets for acceptable ratios of fundraising expenses to fundraising revenues (e.g. maximum of 35%). Charities might have a low fundraising ratio, but it could be attributed to the non-inclusion of fundraising related expenses. The following list has been created to assist charities to become more aware of expenses that they might not have identified as fundraising expenses, and thus not included in their fundraising ratio calculations. Many of these examples relate to the cost of staff time for fundraising related tasks. (see #10) 10: What are some examples of fundraising expenses? A: Staff related expenses - Cost of staff time for fundraising tasks such as: Research fundraising options Exploring contracts with fundraising professionals Planning and organizing fundraising activities and events Securing and managing volunteers for fundraising related tasks Creation of marketing and promotional materials Creating and maintaining databases for contacts (e.g. potential attendees) Securing sponsors for event Preparation and distribution of mailers Time required to contact potential attendees, sponsors and donors Creating sponsorship packages Managing donor relations - face to face solicitation, stewardship, reporting Managing the receipting process - organizing and mailing receipts, ensuring appraisals are accurate if required. Creation of gift acceptance policy Website creation and maintenance Engagement outreach - e.g. s, creation of e-bulletins, newsletters Space and equipment required in staff Managing registration Accounting time required to record, track, and financial transactions

11 B: Event related expenses ( hard costs) Production of marketing materials Advertisement related expenses (e.g. ads in newspaper, on TV) Basic event costs - venue, food, entertainment, prizes, swag Mailing costs - paper, envelopes, stamps Preparation and set-up of event - e.g. decorations, swag, collecting and displaying silent auction items, creating displays, establishing FMV and accurate appraisals for donated items. Costs of general (e.g. ad in paper) and specific donor appreciation gifts Website hosting and licences C: Costs for external fundraising supports Payments to contracted fundraisers or telemarketers Costs related to other strategies - e.g. door to door solicitation Costs to secure online donations Costs related to specialized services (e.g. professional auctioneer) D: Professional Development Costs Conferences and learning opportunities related to fundraising Travel, accommodation costs related to learning opportunities Professional memberships E: Increasing profile of charity Presentation booths Securing membership support -e.g. cost of benefits Cost of distributing information through the media 11: Thoughts Re: Fundraising events and implications for the Fundraising Ratio The costs involved in hosting fundraising events vary widely according to the type of event, the number of participants involved and the level of volunteer contribution. From a charity s perspective, events fundraising can be a very effective way to reach out to new audiences and raise awareness of their cause. From a donor s perspective they can be a lot of fun to take part in and provide an opportunity to demonstrate, often very publicly, support for a particular charity. Organizing a fundraising event for a large number of people, (like a celebrity or gala dinner) can take a great deal of time and effort on the part of the organization. Even small events can

12 take months to organize properly, while larger sponsored events can take over a year. These kind of events tend to be very labour intensive. Charities can also encounter significant risk in embarking on an events program because they will often incur expenses in advance, when the number of participants and the revenue they will generate is far from guaranteed. Implications to the Fundraising Ratio: Introducing a new fundraising event will likely increase a charity's Fundraising Ratio in the short term. There are many staff related expenses because of the time required for the tasks important to managing a successful event (see #9). In addition, it will often take several years for an event to become established in the community, thus the revenue from attendees, donors and sponsors will be the less than desirable in the short term. As a consequence some events do little more than break even and only a few charities regularly earn a significant amount of income from them. Over time, this situation should change as tasks related to the event become easier and less staff intensive (reuse attendee contact lists, marketing materials, sponsorship packages, auction donor lists ) and the revenue should increase with greater attendance and sponsorship support. However, even if a charity determines that such events do not generate a significant financial return, many charities conclude that events should still be part of their mix of fundraising techniques as they attract new supporters and generate publicity for the cause. Charities should always be conscious of strategies for reducing their fundraising expenditures and minimizing any involvement in practices of concern as identified in the Fundraising Guidance document.