Making the Most of Your Assets
Adam Aptowitzer, October 20, 2006
Canadians are familiar with making donations of cash or securities and getting a charitable donation tax credit for such donations. However, with the possible exception of artwork and used cars, they are less familiar with getting a tax receipt for donations of assets. Nevertheless, donations of these types of items can also result in tax credits for the donor.
Technically, anything that’s property can be donated to a charity. Property includes a right to something. From a practical perspective this includes (among others):
– Bottles of wine
– Air Miles
– Shoppers Optimum
– Religious Items
– Gift Certificates
– Hobby items
– Comic books
– Model trains
– Land (i.e. fishing hole)
There are several notes to make about the type of property donated. The first is to ensure that the charity you have in mind is interested in the property you have to donate. The second is to make sure that the property is actually transferable. Some premium points plans will not allow you to transfer the points to anyone else, and so you cannot donate them. In this scenario, you may consider redeeming the points and then donating the actual item. Of course, this may prove to be of limited assistance to the charity that all of a sudden finds itself obligated to use a plane ticket to some place it did not want to go, on a date it did not want to travel.
Most importantly, both the individual and the charity must be careful about obtaining a reliable valuation. From the perspective of the individual an improper valuation could lead to a donation tax credit disallowed by the CRA. The charity on the other hand, incurs disbursement quota obligations when it issues receipts, so if the receipts are overvalued, the charity may find itself in the position of having to spend money it does not have.
Another aspect of donating property is that some property may have preferential tax treatment. For example, donations of public securities and certified ecological property to public charities and conservation charities respectively do not create a tax liability to the donor. Neither do donations of certified cultural property to designated institutions (i.e. museums). If people have cultural property, or land, which may qualify as ecological property it may be worthwhile investigating the possibility just to avoid the tax debt which might otherwise accrue on its disposition or the death of the owner.
Donations of personal use property (generally items you buy for your personal use like clothes, hobby items, cutlery etc.) and listed personal property (such as artwork, rare books, jewellery, stamps and coins) also have special treatment. The Income Tax Act deems these items to have a minimum cost base of $1000 and minimum fair market value (“FMV”) of $1000. So if, someone donates a piece of property that is worth less than $1000, there is no tax liability due and a donation tax credit equal to the actual value of the item. On the other hand, if the item has a cost base and a FMV of more than $1,000 there will be a tax liability based on the gain in value of the item (unless of course the item qualifies as certified cultural or ecological property).
Generally, most people want to hold on to their property until they die. They may not need cash but they enjoy looking at their model trains. Fortunately, gifts made by will can be used to offset 100% of tax due in the year ending at the date of death. This is useful because the Income Tax Act will deem a person’s assets disposed of at death – usually causing a large tax debt (assuming that the individual does not take advantage of certain provisions in the Act to avoid that possibility). By donating items which may be of little or no use or interest to the individual’s beneficiaries to a charity the testator may be offsetting the tax debt which will accrue on the person’s more desirable assets. To do this though, one needs a well drafted will meeting both the technical details of will drafting and the CRA requirements.
The preceding article is based on a presentation I recently gave at the Ottawa Estate Planning Council. You can see a copy of the presentation at www.drache.com/downloads.
If you have any questions about this article please feel free to contact me at firstname.lastname@example.org.