Auctions: advantage and 80% rule
The scenario in this segment will help you understand how to calculate donor advantage and the 80% rule to winning bidders at auctions.
Before beginning the scenario, it is important to understand the concepts of an "advantage" and the "80% rule." Both are covered in some detail in the video "Gifting and receipting 101."
Let's remember - An advantage is the total value, at the time the gift is made, of all benefits that a person is entitled to receive in relation to the gift.
An advantage also applies at auctions. If an auction item has a fair market value of $100, then this is the advantage to the winning bidder. But if the value of the advantage is 80% or less of the fair market value of the donation, then you may issue a receipt for the difference.
A simple way to calculate the minimum bid for which an official donation receipt can be issued is to multiply the fair market value of the auction item by 1.25. Therefore, an auction item with a fair market value of $100 multiplied by 1.25 equals $125. This means, in our example, that a minimum bid of $125 is required before an official donation receipt can be issued.
However, in order to issue a donation receipt, it's important to note that the fair market value of the item must be displayed before bidding begins.
Now, on to the scenario.
You received many items for the charity's silent auction, but you did not display their fair market values at the auction.
During the auction, the winning bid for a television set was $1,000 and the bidder asked for an official donation receipt. The fair market value of the television set is not known.
Q4: Can you issue an official donation receipt to the winning bidder of the television?
A4: No. You cannot issue an official donation receipt because the fair market value of the auction item was not displayed at the auction before the bidding began. If the fair market value is not displayed before bidding begins, then bidders do not know whether they're voluntarily making a gift by bidding higher than the value of the television.
To figure out the amount you can enter on the receipt, you have to know the fair market value of both the donation (or bid) and the advantage (or item) when the donation is made so you can see how much the donor intended to give as a gift.
Q5: Can you issue an official donation receipt to the winning bidder if the fair market value of the television can be established later?
A5: No. As mentioned earlier, the fair market value of the auction item must be displayed at the auction before the bidding begins. If the bidders don't know an item's fair market value, they don't know when they're intentionally making a voluntary gift to the charity.
Ask yourself these three questions when figuring out if you can issue an official donation receipt:
First - Is it a gift of property? (remember, gifts of service are not property)
Second - Is the donation made voluntarily?
And third - Is the donor getting an advantage? If so, you need to apply the 80% rule.
(The Charities and giving website address appears on the screen: cra.gc.ca/charities)
(Icons appear on the screen with the following words beside each related icons: “What's New” electronic list, Twitter account: @CanRevAgency and the YouTube Channel CanRevAgency)
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