General Rules

Fair market value (FMV), which is not defined in the Income Tax Act, is understood as

• the highest dollar value you can get for your property
• in an open and unrestricted market
• on the day that it was transferred
• between a willing and knowledgeable buyer
• and a willing and knowledgeable seller
• who are acting independently of each other.

This concept is important for several reasons.

• To issue an official donation receipt, a charity must know the fair market value of what it has received. If the fair market value cannot be reasonable determined, then an official donation receipt cannot be issued.
• A charity must also determine the fair market value of any advantage that it provides to the donor.
• The fair market value is required to calculate the eligible amount of the gift; as well, calculations are required to determine the amount of the advantage in relation to the intention to make a gift and the de minimis thresholds.
• If the charity’s receipts are not based on the concept of fair market value, it risks its registration as a charity. Charities bear the onus of ensuring that the fair market value reflected on official donation receipts is accurate.

Short answer

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.

Long answer

The conditions of the deemed fair market value rule are that

1. the gift was donated after December 5, 2003

and

1. the gift was acquired by the donor as part of a tax shelter arrangement

or

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

and

• some ecological gifts, which have their own set of rules, unless the charity is a private foundation

Example

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.

More…

For more information on the deemed fair market value rule, see the following Canada Revenue Agency Publications:

• P113 – Gifts and Income Tax

and

• Registered Charities Newsletter No. 24 – Late Summer 2005

Short answer

A donor must inform the charity that the deemed fair market value rule applies.

Long answer

If a donor gives a gift in kind to a charity for which a receipt is issued and the donor fails to notify the charity that the deemed fair market value rule applies, the value of the donor’s gift could be reduced to zero.

 More… Deemed Fair Market Value

Short answer

To determine the fair market value of gifts in kind, your charity requires knowledge of the property being appraised or valued and a specialized knowledge of the principles, theories, and procedures with respect to that property. If no one in your organization has these skills and knowledge, you should find someone who does.

Long answer

A valuator should research the property and obtain market data in the appropriate market place. In the case of personal property, various market levels need to be analyzed to determine the most relevant market for the subject property. The effective date of the valuation is another key factor since economies, markets, and market levels change frequently and rapidly.

If valued at less than $1000

Generally, if the fair market value of the property is less than $1,000, a member of the registered charity or another individual with sufficient knowledge of the property may determine its value. That person should be competent and qualified to evaluate the particular property.

If valued at more than $1000

If the value of the donated property is anticipated to have a fair market value greater than $1,000.00 an independent appraiser or valuator—someone who is not associated with either the donor or the charity—should determine the fair market value of the items. The Charities Directorate strongly recommends that the property be appraised by a third party. The services of a competent, qualified individual in the appropriate specialty area are important to obtaining a supportable, well-reasoned opinion of value. When the property is appraised, the name and address of the appraiser must be included on the official donation receipt.

The CRA also uses the services of professional appraisers and valuators to ensure the fair market value of the property is appropriately stated.

In some circumstances, the cost of the appraisal may represent a significant cost to the charity relative to the worth of the gift. This is not a basis for foregoing the appraisal. when this is the case, however, the charity may wish to seek an additional cash gift from the donor to defray the cost of the appraisal.

Note

Under certain conditions, the deemed fair market value rule<D2> may also apply.

More…

See www.cra-arc.gc.ca/E/pub/tg/p113/p113-e.html#P157_17621 for further information.

Short answer

No. Your charity, however, must be satisfied that the appraised amount accurately reflects the fair market value of the item.

Short answer

If the fair market value of an item cannot be reasonably determined, an official donation receipt cannot be issued.

No.

The fair market value of an item should not include taxes paid on purchasing the item. Taxes are a cost incurred by the purchaser and are payable to the Crown. The seller merely acts as an agent of the Crown in collecting the taxes

For example, a donor purchases a book from a dealer, pays the dealer the GST/HST on the transaction, then gifts the item to a registered charity. The amount entered on the official donation receipt should be the fair market value of the book before taxes.

Short answer

The term “split receipting” refers to the fact that, from the charity’s perspective, the donation is split into two portions:

• the portion for which the charity can issue a receipt (that is, the eligible amount)
  and
• the portion for which the charity cannot issue a receipt (that is, the advantage).

Long answer

Split receipting is a legislative concept in which a donor can receive something in return for a gift and still be eligible for a tax receipt. In such a case, the donor is said to receive an advantage and split receipting is required. The gift must, however, still be a voluntary transfer of property and must meet the intention to make a gift threshold, which means that there is a limit on how much advantage a donor can receive and still get a tax receipt.

Note that, to be taken into account for split receipting purposes, an advantage must meet the intention to make a gift threshold and exceed the de minimis amount for purposes of the donation). If the intention to make a gift threshold is surpassed, that is, the value of the advantage exceeds 80 per cent of the gift, no receipt may be issued for the transaction. If the de minimis amount is not met (the lesser of 10 per cent of the gift or $75), the advantage is not taken into consideration in determining the amount of the receipt.

More…

For more information on split receipting, see

• Registered Charities Newsletter No. 22

Short answer

An advantage is the total value of any property, service, compensation, use, or any other benefit that a donor receives in return for his or her donation. This value must be taken into consideration when determining the eligible amount of a gift for receipting purposes. In other words, your charity must know this amount in order to issue an official donation receipt for the correct amount.

Example

You donate money to your town’s opera company, which is a registered charity. In gratitude, the company provides you with three tickets to a performance that are valued in total at $150. You are therefore considered to have received an advantage of $150.

Long answer

The concept of advantage is very broad. It includes the value of property, the use or enjoyment of property, services, user licences, or other benefits granted to the donor or to a person who is related

For receipting purposes, the manner in which the advantage is handled depends on the amount in question.

• If the value of the advantage is 80 per cent or less of the fair market value of the donation, then a receipt may be issued for the difference (see split receipting<R20>).
• If the value of the advantage is greater than 80 per cent of the value of the donation, no gift is deemed to have been made and an official donation receipt cannot be issued.
• If the value of an advantage is the lesser of $75 or 10 per cent of the value of the donation, it is considered nominal (called de minimis<D9>) and it need not be deducted from the donation amount of the gift for receipting purposes.
• If the fair market value of the advantage cannot be determined, a receipt cannot be issued.

Short answer

Determining the fair market value of an advantage is similar to determining the fair market value of a gift in kind. While only donations of property can be receipted as gifts in kind, the fair market value of any type of advantage (for example, services, accommodation, or meals) must be taken into consideration when determining the eligible amount of a gift for receipting purposes.

The determination of the fair market value of the advantage must be done regardless of the item’s actual cost to the registered charity. That is, even if the charity did not pay for the item it offers as an advantage, its fair market value must be calculated.

Example

100 books are donated to the charity by a retailer. These books are worth $25 each on the open market.  So the fair market value of the advantage is $25.  If the Charity decides to give these books to their donors, this advantage of $25 has to be taken into consideration in determining the eligible amount on the official donation receipt.

 Note

If the fair market value of the advantage cannot be determined, receipts cannot be issued.

Short answer

The de minimis threshold rule allows a donor to receive an official donation receipt for the full amount, when the advantage that the donor receives does not exceed the lesser of $75 or 10 per cent of the amount of the gift to the registered charity.

Example

A museum gives small gifts to acknowledge donations of certain amounts:

• For a $150 donation, donors receive a calendar worth $14
• For a $200 donation, donors receive a tote bag worth $25
• For a $1,000 donation, donors receive a gift certificate worth $100

 Can the museum issue donation receipts for these gifts?

• The $14 calendar is worth less than the lesser of $75 or $15 (10 per cent of the $150 donation) and is therefore not considered an advantage. An official receipt can be issued for $150.
• The $25 tote bag is worth more than the lesser of $75 or $20 (10 per cent of the $200 donation) and must be considered an advantage. An official receipt can be issued for $175.
• The $100 gift certificate is greater than the lesser of $75 or $100 (10 per cent of the $1,000 donation) and must be considered an advantage. An official receipt can be issued for $900.

Short answer

No. Not all the advantages are included in calculating the de minimis amount. But all the advantages are included in determining the eligible amount on the official donation receipt.

 Long answer

The first consideration is the object of the event. For the purpose of determining the eligible amount of the donation,

• some items may be viewed as an advantage and
• some items may be included in calculating the de minimis threshold.

The value of the activity that is the object of the event is not to be included in the calculation of the de minimis threshold. At the same time, the object of the event is considered an advantage when calculating the eligible amount. Elements of an event offered as benefits or consideration in addition to the activity that is the object of the event, for example, T-shirts given to participants in a fundraiser, are taken into account for purposes of calculation of the de minimis threshold.

 Example

At a fundraising dinner, while the gourmet dinner is a value received, the object of the event is a meal. If donors pay $100 per ticket for a fundraising dinner and the meal is valued at $45 per person, the official donation receipt should read $55. If there is also a draw for a $50 door prize, it is counted in determining whether the de minimis threshold is surpassed. That is, are the benefits or consideration beyond providing the meal more than $75 or 10 per cent of the ticket price?

 Other examples of objects of an event

• the value of a comparable ticket for a concert
• the value of green fees, cart rental, and meal at a golf tournament

Short answer

Yes.

Long answer

The value of any complementary benefits provided to participants for attending the event (for example, caps and pens) and the value of door prizes that all attendees are eligible for will be viewed as an advantage unless the aggregate value of such items, per ticket sold, does not exceed the de minimis threshold—that is, the lesser of 10 per cent of the ticket price or $75.

Therefore, for the purpose of establishing the eligible amount, that is the amount of the official donation receipt, your charity needs to combine and average out across all participants the value of all the benefits.

Short answer

Your charity can issue an official donation receipt for only the “eligible” amount of the gift. This is the fair market value of the gift minus the fair market value of the advantage.

Example 

A donor donates $5,000 to a registered charity.

• As a thank you, the registered charity gives the donor a $250 hotel stay.
• The eligible amount of the gift is calculated as follows:
  • The fair market value of the property transferred to the charity               $5,000
    • Less the fair market value of the advantage to the donor                 $  (250)
    • Equals the eligible amount of the gift                                                    $4,750

Long answer

• If there is no advantage to the donor or if the advantage is of a de minimis amount, the eligible amount will be the same as the donation amount (and it is not a split-receipting situation).
• If there is an advantage to the donor, the amount of the gift is not the same as the amount that appears on the official donation receipt (and it is a split-receipting situation).

 Note

When completing this calculation, a charity must keep in mind the concept of the “intention to make a gift” threshold. In order to meet this threshold, the amount of the advantage received by the donor cannot exceed 80 per cent of the fair market value of the total property transferred. And the advantage received by the donor must not exceed the de minimis amount.

Short answer

When a donor has received an advantage in return for his or her gift to a registered charity, in order for the donation to qualify for an official donation tax receipt, the gift must meet what is called the “intention to make a gift” threshold.

In order to meet this threshold, the amount of the advantage received by the donor cannot exceed 80 per cent of the fair market value of the total property transferred.

Example

A donor gives a charity $200 and receives in return dinner theatre tickets worth $175.

• The intention to make a gift threshold is $160 (80 per cent of $200)
• The tickets, which have a fair market value of $175, exceed the threshold ($160) by $15.
• Therefore, the gift is not eligible for an official donation tax receipt.

Short answer

Contributions of services (that is, time, skills, or effort) do not qualify as gifts. At law, in order for there to be a gift, there must be a transfer of property; services do not involve such a transfer.

Long answer

A charity can, however, pay for services rendered and later accept the return of all or a portion of the payment as a gift, provided it is returned voluntarily. This is often referred to as a cheque exchange. In such a case, a charity should make sure that it keeps a copy of the invoice issued by the service provider. The invoice and cheque exchange not only ensure that the charity is receipting a gift of property, but they also create an audit trail, as the donor must account for the taxable income either as remuneration or as business income.

A charity should not issue an official donation receipt to a service provider in exchange for an invoice marked “paid”. This procedure raises questions about whether any payment has been transferred from the charity to the service provider and, in turn, whether any payment has been transferred back to the charity.

Example

ABC Landscaping ploughs the snow and sands the parking lot of a charity.

• Between January and March, ABC cleans the charity’s parking lot ten times.
• Each cleaning is worth $200.
• At the end of March, the owner of ABC says, “Just give me a tax donation receipt for $2,000.”

Can the charity issue a receipt to ABC?

• No. The charity cannot issue a tax receipt. Gifts must involve a transfer of property; providing a service does not involve a transfer of property.
• ABC should bill the charity for the $2,000. The society should pay the invoice. If ABC subsequently gives the charity $2,000, or another amount, ABC can receive a tax donation receipt for that amount.

Longer answer

Sometimes the line between what constitutes a property and what constitutes a service is quite clear. If an individual or company cleans the charity’s office, the individual or company is providing a service rather than a property and this cannot be receipted as a gift in kind.

Other scenarios are less clear, either because it is not certain whether the scenario involves a service or property or whether the donor can be considered to have transferred property to a charity. For example, can a website be considered property for the purposes of making a gift? The Income Tax Rulings Directorate considers such proposed transactions on a case-by-case basis.

Short answer

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.

Long answer

The following properties are generally capital properties:

• cottages
• securities, such as stocks, bonds, and 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

and

(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.

Note

Because of the complexity of capital property as gifts, a charity will benefit from seeking professional help in sorting out all related issues.