The Dangers of Using AI for Charity Law Answers

Using AI for Legal Answers

To save on legal costs, directors of a charity will sometimes turn to AI to obtain answers to legal questions. This can have serious negative consequences for a charity.

Case Study

Registered charities frequently receive donations or grants from other charities, including private foundations. Often, the private foundation requests an official donation receipt for their donation. The recipient charity may seek to determine whether this is permissible by asking Google:

“Can a qualified donee give another qualified donee a tax receipt in Canada”

AI generates the following incorrect response:

AI Overview

• “Yes, a qualified donee (such as a registered charity) can issue an official donation receipt to another qualified donee in Canada when a legitimate gift of cash, goods, or services is made. The receiving organization must be a qualified donee under the Canada.ca Income Tax Act, such as another charity, municipality, or a registered Canadian amateur athletic association. 

Key Considerations for Inter-Charity Gifts:

• Voluntary Transfer: The transfer must be a true gift, not a contractual payment for services rendered.
• Definition of Qualified Donees: These include registered charities, registered Canadian amateur athletic associations, municipalities, and certain others.
• Receipting: The receiving qualified donee can issue an official donation receipt, which the donating charity can use for tax purposes, though as a tax-exempt entity, this is generally for record-keeping rather than tax credits.
• No Conduit Rule: A charity cannot act as a “conduit” (e.g., accepting a gift to immediately pass it to a non-qualified donee). 

“Ensure the transaction is properly documented as a voluntary gift, notes the Canada.ca website.” 

Reading the above answer and noting that AI cited the official Canada.ca website, one would incorrectly understand that a charity can issue an official donation receipt to another charity for donations or grants received.

Unfortunately, this AI generated response is incorrect and is a common example of AI giving an objectively false answer to a simple question.  The bad information can lead to serious consequences.

Here is the correct response to this question that a client recently received directly from the Charities Directorate after an extensive audit:

• “3. Issued a receipt for a gift or donation otherwise than in accordance with the Act and its Regulations
• A registered charity is in contravention of the Act and its Regulations when it issues donation receipts that are incorrect, incomplete, or contain deliberately false information. The Act and its Regulations 3500 and 3501 set out the requirements for registered charities with respect to the issuing of official donation receipts, and allows for various penalties or sanctions as set out in subsection 188.1(7) to 188.1(10) of the Act. Moreover, as per paragraph 188.2(2)(c) of the Act, the Organization’s receipting privileges and its qualified donee status could be suspended if it has issued a receipt for a gift otherwise than in accordance with this Act and the regulations. In addition, it should be noted that improper receipting of gifts or donations is considered serious enough that it may, on its own, result in the revocation of registered status under paragraph 168(1)(d) of the Act.
• Donation receipts issued to other qualified donees: A registered charity should not issue official donation receipts for gifts it receives from other registered charities. Official donation receipts (ODR) that bear a charity’s registration number and other information required by Regulation 3501(1) of the Act are for tax deduction or credit purposes only; registered charities do not pay income tax and, therefore, do not need a donation receipt. A charity can acknowledge gifts received from other registered charities by way of a letter or ordinary receipt – one that does not state it is an official donation receipt for income tax purposes.
• Based on the audit findings, it appears that official donation receipts were issued to qualified donees…”

The correct answer, obtained directly from the CRA, is that a registered charity should not issue official donation receipts for gifts it receives from other registered charities.

In this case, the total penalties that would have been owed to the CRA for these contraventions were nearly $135K. Additionally the charity was faced with the revocation of its registration for failure to issue donation receipts otherwise than in accordance with the Act and the Regulations.

The Charity Law Team at Mills & Mills demonstrated to CRA that no offending receipts were in fact issued. The CRA entered into a compliance agreement with our client where no penalties were owed, and revocation or suspension of their registered charity status was not required, provided the CRA’s audit recommendations were implemented.

Instead of a Google search, a simple call to the CRA or an experienced charity lawyer would resolve this question quickly and clearly.

Next time a private foundation or public charity requests an official donation receipt from your charity, show them this blog post!

Don’t let AI put your charitable status at risk. Contact our Charities & Not‑for‑Profit team on (416-863-0125) to ensure your charity is fully compliant.

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