D17. What are the general principles on receipting of capital property as gifts?
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Capital property is depreciable property that, if sold, would result in a capital gain or a capital loss to the owner. Capital property does not include the trading assets of a business, such as inventory. The deemed fair market value of a gift of capital property made by a taxpayer is used by the charity to determine the eligible amount of the gift for receipting purposes.
The following properties are generally capital properties:
- securities, such as stocks, bonds;
- units of a mutual fund trust and land, buildings, and equipment used in a business or a rental operation
Generally, a taxpayer or corporation that gives capital property as a gift is deemed to have received proceeds of disposition equal to the fair market value of the property, subject to the deemed fair market value rule. If the fair market value of the property exceeds its adjusted cost base, the taxpayer or corporation will realize a capital gain as a result of such a disposition. A taxpayer or corporation can reduce the capital gain, however, when the gift or bequest of a capital property is made to a registered charity.
In addition, if a donor makes a gift of capital property to a registered charity and the fair market value (or deemed fair market value, if applicable) of the donated capital property is determined to be more than its adjusted cost base, the donor may designate an amount that is less than the fair market value to be the proceeds of disposition. This may allow a donor to reduce the capital gain otherwise calculated.
Any such amount that a donor chooses to designate in respect of the donation must be within the following limits:
(a) it cannot be more than the fair market value of the property at the time the gift is made
(b) it cannot be less than the adjusted cost base of the property.
The designated amount is deemed to be the proceeds of disposition of the property. It is also considered to be the fair market value (or deemed fair market value, if applicable) of the gift made by the taxpayer for the purposes of determining the amount of the deduction or tax credit. Furthermore, this amount is used by the charity to determine the eligible amount of the gift for receipting purposes.
Keep in mind that a charity always issues the receipt for fair market value or deemed fair market value. The donor may choose to use the adjusted tax base.
Because of the complexity of capital property as gifts, a charity will benefit from seeking professional help in sorting out all related issues.