When making a donation, you must have in mind the donation value for purposes of making a claim on taxes at the end of the year. This is particularly true if the donation is not made in cash. You need to establish the fair market value of non-cash gifts especially if a receipt is to be issued by the registered charity.
The fair market value represents the best/highest price, usually expressed in dollars, that the donated property would fetch in the open and unrestricted market, having been arrived at between willing buyer and willing seller who are both informed, knowledgeable, prudent, and acting independently of each other.
In knowing how to determine a donation value for taxes, you must understand the fair market value of non-cash gift items. Normally, registered charities will deduct the fair market value (FMV) of any advantage from the FMV of gifts for purposes of establishing the presence of an eligible amount of a gift for receipt purposes. An advantage refers to what the donor may receive from the done for his or her donation such as a meal or even tickets to a show or movie. The Canadian Revenue Authority (CRA) has provided a donation value guide for taxes that comes in handy when doing your tax returns.
The Canadian Revenue Agency (CRA) stipulates that the following organizations can issue official donation receipts:
- Registered charities
- Registered Canadian Amateur Athletic Associations (RCAAAs)
- National arts service organizations
- A registered housing corporation set up in Canada to provide low-cost housing for the aged
- Registered municipalities in Canada
- Registered municipal or public bodies performing a function of government in Canada
- The United Nations and its agencies
- Foreign charitable organizations that have received a gift from Her Majesty in right of Canada
- Registered universities outside of Canada that are prescribed to be universities the student body of which ordinarily includes students from Canada
- Her Majesty in right of Canada, a province, or a territory, and the United Nations and its agencies
- Foreign charitable organizations that have received a gift from Her Majesty in right of Canada
These registered charities will not provide an official receipt if the FMV of a non-cash gift or an advantage cannot be determined at the time of donation. The onus is placed on the charity to ensure that the FMV reflected on an official donation receipt is accurate.
How to Determine the FMV of Non-Cash Gifts
The following process is used to determine the donation value for tax return reasons: if the fair market value of a donated property is below $1,000, the law stipulates that a member of the registered charity or any other individual who has adequate knowledge of the property may go ahead and determine its value.
The individual who undertakes the determination of the FMV of a donated item should be competent and qualified to evaluate the particular property being donated for example an experienced land appraiser for purposes of determining the FMV of a piece of donated land.
Where the FMV is thought to be higher than $1,000, it is recommended that the property is professionally appraised by a third party which essentially means by an individual who is not associated with either the donor or the concerned charity. The name and address of the appraiser must be included on the official donation receipt following determination of FMV after appraisal.
Take note that the deemed fair market value rule applies if a property was donated within ten years of acquisition or was acquired through a tax shelter arrangement.
How the FMV of an Advantage is Determined by the Registered Charity
A similar process is followed in determining the fair market value of an advantage to what happens in the donation price guide for taxes and arriving at the FMV of a donated item. An advantage is what a donor receives from the registered charity as appreciation for their donation. For receipt purposes, the value of an advantage must be considered when determining the eligible amount of gift for tax credits. WEALTHinsurance.com has an interesting article about charitable planned giving.
The fair market value of any type of advantage including meals, accommodation, and services must be considered when arriving at the eligible amount of a gift for receipt purposes.
- If the value of an advantage is 80% or less of the FMV of a donation, a receipt may be issued to the donor for the difference in value.
- If the value of an advantage is greater than 80% of the FMV of a donation, no gift is deemed to have been made to the charity and a receipt cannot be issued to the donor.
- If the value of an advantage is not more than $75 or 10% of the value of a donation, whichever is less, it is considered nominal (de minimis), and must not be deducted from the FMV of the gift for receipt purposes.
- If the FMV of an advantage cannot be determined, a receipt must not be issued.
The following example will suffice in showing how the calculations can be done.
You donate $500 to a registered charity and in appreciation, the charity gives you two theatre tickets worth a combined value of $110. The following calculations will be used to determine the eligible amount of the gift for official receipting purposes:
- Nominal threshold: 10% of $500 is $50. It implies that the advantage must be $50 or less for it to be considered de minimis.
- Advantage threshold: 80% of $500 is $400. It, therefore, implies that the advantage must be less than $400 for an official receipt to be issued by the charity.
Using this example, the advantage cannot be considered nominal and must be deducted from the value of the gift. Additionally, the value of the advantage does not exceed 80% of the value of the donation meaning that an official receipt can be issued.
Therefore, it will be required in law that the registered charity issues an official receipt for the eligible amount of $500 – $110 = $390.
In conclusion, couples can combine their donations to charity so as to optimize their use in claiming tax credits. The CRA allows for pooling of donations by spouses when making tax returns.