Transcript

Here we get into the general receipting transaction. So basic receipting is a very straightforward transaction, we have cash in and receipt out. So in this case we have a $75 donation and a $75 receipt is issued. Very, very straightforward, we don't have to worry about determining the FMV because cash is being donated; we don't have to look at some of those other examples.

Split Receipting

Here we get into split receipting, which is a little more complicated. Before split receipting legislation was introduced, a charity was prohibited from issuing a receipt to a donor if the donor received something in return for the gift.

What split receipting allows now, with this legislation, is that a portion of the donation may be eligible for a receipt. As with regular receipting transactions, it still must be a voluntary transfer of property and the gift must meet the intention to make a gift threshold. What we mean by this is essentially the donor cannot receive back in return for their donation, something worth more than 80% of the value of the gift. For example, I give you $100 you cannot give me back something more than $80 in return. If you did, there was no intention to make a gift and no receipt could be issued.

There are some detailed explanations about the split receipting legislation, if you're interested, and those can be found in the Income Tax Technical News #26 so if you're interested in looking at the details of the legislation itself you can look to that, but I will be explaining in the next slides, the calculations that go into split receipting.

Information you need to Know Before Issuing a Receipt

There is generally 4 pieces of information that a charity needs to know before they write a receipt.

The first is what is the FMV of the item being transferred, so in this case we're going to be examining how you determine the FMV and FMV vs. the Deemed FMV.

Second, has the donor received something in return for their gift, we'll be examining the de minimis rule and what application that has. Is the gift eligible for a tax receipt? So has it met that intention to make a gift threshold, that 80%? We'll look at a calculation for that.

Lastly, what is the amount to be receipted, the eligible amount of the gift is the amount you would put on the receipt, we'll look at that as well.

What is the Fair Market Value?

We start with the first element, so what is the FMV. Establishing the FMV can be one of the greatest challenges charities face when trying to issue receipts. The definition of FMV is not contained in the Income Tax Act, so we do look at the generally accepted definition. Any accountants out there, if you're logged in, you will likely be familiar with the definition on the screen here. It is the highest price expressed in a dollar amount that the property would fetch in an open market between a willing buyer and seller that are both knowledgeable, informed, prudent and acting independently of each other.

When we discuss FMV we often get questions around appraisals (does a charity require an appraisal for a particular gift?). The Charities Directorate does not require that an appraisal by a third party be completed to establish FMV, however we do strongly recommend if the item is expected to be over $1000 that a third party appraisal be undertaken. It will give a bit more confidence for you, and make for better books and records in terms of supporting that transaction.

In addition, we often get questions about Ebay, whether or not Ebay can be used to appraise certain items, can you look to Ebay for a valuation. We recommend that you do not. Ebay is an online auction environment, and auction environments are charged with emotion and people are looking for particular items that could have sentimental value, so the value that an item fetches on Ebay is not necessarily an indication of the true FMV.

Why is the FMV so important?

Without the FMV a charity can't issue a receipt. So number 1, you need it to enter into these receipting transactions, so that makes it very important to establish. It's also the charity's responsibility to establish the FMV, not the donor's. That sometimes is a point of confusion. It is the charity's responsibility to ensure that the FMV is appropriate and documented. It is important that the charity establish the value on the day it's transferred. This may not be as important for items such as desks and chairs that don't change in value very quickly, however it could be very important for stocks. Those as we know, can change and fluctuate throughout the day so it's important to know the exact moment that the item has been transferred and the value on that day.

Similarly for items where you're looking at foreign exchange rates, perhaps someone is making a donation in another currency you need to know the value of the Canadian dollar on the day it was transferred in order to appropriately record the FMV.

Deemed Fair Market Value

We look at the deemed FMV rule. So when determining the actual FMV of an item, charities must now consider a new rule - the deemed FMV. This rule was introduced in December 2003 as a result of a number of abusive tax shelter arrangements. Essentially under this rule, the individual is entitled to a receipt for the lesser of the actual FMV or the cost if the item was acquired within the last 3 years or as a result of a gifting arrangement within the last 10 years. If you acquired the item in the last 3 years or through a gifting arrangement you are only entitled to a receipt for the cost or the FMV whichever is less.

We'll give you an example. I'm a donor. I purchased a painting last year for $1000, over the course of the year the painting has risen in value to $3000. I choose at that point to make a donation to a charity, to donate this painting to a charity. Because, of the deemed FMV rule and because I acquired that painting only a year ago, I am entitled to a receipt for $1000, not the FMV of $3000.

Of course with everything at the Canada Revenue Agency (CRA) we have some exceptions, we wouldn't be complete without our exceptions. So the deemed FMV rule does not apply to the items listed in the third bullet on the slide. It does not apply to gifts made as a consequence of a taxpayer's death, inventory, real property situated in Canada, certified cultural property, gifts of publicly-traded securities and ecological gifts so any of those gifts are being made you do not have to consider this rule.