D2. What is the “deemed fair market value” rule? Why is it important?
The deemed fair market value rule states that, under certain conditions, a receipt issued for a non-cash gift—known as a “gift in kind”—must be issued for the lesser of:
the gift’s fair market value or the cost to the donor or, in the case of capital property, its adjusted cost base, immediately before the gift was made.
The conditions of the deemed fair market value rule are that
1. the gift was donated after December 5, 2003
2. the gift was acquired by the donor as part of a tax shelter arrangement
the gift was acquired less than three years before the time of the donation or the gift was acquired less than ten years before the time of the donation and one of the main purposes of the acquisition was to gift the property to a registered charity or other qualified donee.
Exceptions There are also exemptions from the deemed fair market value rule. That is, the following gifts will be valued at their fair market value:
- gifts made as a consequence of a taxpayer’s death;
- gifts of inventory;
- gifts of real property situated in Canada;
- gifts of certified cultural property
, which has its own set of rules;
- gifts of certain publicly traded securities;
- some ecological gifts
, which have their own set of rules, unless the charity is a private foundation.
- A donor purchases a work of art in 2004 for $300.
- Six months later, the donor donates the work of art to a registered charity.
- Prior to the donation, the donor had the work appraised at $1000.
- Because the donor is giving the art within three years of having bought it, the charity must issue a receipt for the lesser of its fair market value ($1,000) or the cost to the donor ($300).
- Therefore, the donation receipt must be made out for $300.
For more information on the deemed fair market value rule, see the following Canada Revenue Agency Publications: