ARCHIVED - Gifts of Capital Properties to a Charity and Others
What the "Archived Content" notice means for interpretation bulletins
DATE: January 16, 1995
SUBJECT: INCOME TAX ACT
Gifts of Capital Properties to a Charity and Others
REFERENCE: Subsections 110.1(3) and 118.1(6) (also subsections 13(1), 20(16), 110.1(1), 118.1(1), 118.1(4) and 118.1(7), paragraphs 69(1)(b) and 70(5)(a) of the Income Tax Act and sections 3501 and 3504 of the Income Tax Regulations)
This bulletin cancels and replaces Interpretation Bulletin IT-288R, dated May 30, 1988.
This bulletin discusses a designation that is available to a taxpayer (a donor) who makes a gift of capital property to a registered charity or certain other entities. If the fair market value of the gifted property is greater than its adjusted cost base, this designation allows the donor to reduce the capital gain that would otherwise result. The donor may reduce the capital gain by designating an amount that is less than the property's fair market value (but not less than its adjusted cost base) to be the proceeds of disposition. This designated amount is also deemed to be the fair market value of the gift for purposes of the deduction or tax credit for charitable gifts. Certain gifts by a non-resident taxpayer of real property situated in Canada to a prescribed donee can also qualify for this designation. The availability of this designation to gifts of capital property by artists, authors and composers is also briefly discussed. In addition, the bulletin contains a comprehensive example of such a designation.
Discussion and Interpretation
Designation to reduce capital gain on certain gifts
1. Generally, a taxpayer who disposes of a capital property by way of gift, or an individual deemed to have disposed of a capital property immediately before death, is deemed to have received proceeds of disposition equal to the fair market value (FMV) of the property at that time, under paragraphs 69(1)(b) and 70(5)(a) respectively. If the FMV of the property exceeds its adjusted cost base (ACB), the taxpayer will realize a capital gain as a result of such a disposition. However, subsection 118.1(6) provides for a designation that can reduce a capital gain that would otherwise result from the application of the deemed disposition rules in paragraphs 69(1)(b) and 70(5)(a) when an individual makes a gift or bequest (gift) of a capital property to:
(a) a registered charity;
(b) Her Majesty in right of Canada or a province, including an agent of the Crown;
(c) a registered Canadian amateur athletic association;
(d) a Canadian municipality;
(e) a registered national arts service organization; or
(f) any other recipient described in the definition of "total charitable gifts" in subsection 118.1(1).
In addition, a designation can only be made if the FMV of the capital property gifted is greater than its ACB.
Subsection 110.1(3) provides for a similar designation that can reduce the capital gain that would otherwise result when a corporation makes a gift of capital property to these same types of recipient and the FMV of the capital property gifted is greater than its ACB.
2. Subsections 110.1(3) and 118.1(6) allow a taxpayer who makes a qualifying gift of capital property (or, if applicable, the taxpayer's legal representative) to designate a value for the gift. The designated amount must be within the following limits:
(a) it cannot be more than the FMV of the property at the time the gift is made; and
(b) it cannot be less than the ACB of the property.
The designated amount is deemed to be the proceeds of disposition of the property. It is also deemed to be the FMV of the gift made by the taxpayer for the purposes of determining the amount of the deduction or tax credit under subsection 110.1(1) or 118.1(1).
3. A designation under subsection 110.1(3) or 118.1(6) must be made in the corporation's or individual's income tax return for the year in which the gift is made. In addition, the gift must be proven by filing an official receipt containing the information required by section 3501 of the Regulations. Even in those cases where an individual files an income tax return electronically, a designation is required in writing and must be submitted, along with an official receipt, to Revenue Canada.
Recapture of capital cost allowance
4. If a taxpayer gifts a capital property that is depreciable property, the recapture provisions of subsection 13(1), or the terminal loss provisions of subsection 20(16), may apply (see example in 8 below). For additional information on thes topics, see the current version of Interpretation Bulletin IT-478, Capital cost allowance - Recapture and terminal loss.
Cannot create a loss
5. As discussed in 1 above, a designation under subsections 110.1(3) or 118.1(6) can only be made if the FMV of the capital property gifted is more than its ACB and, as discussed in 2 above, the designated amount cannot be less than the ACB of the property. Accordingly, a taxpayer cannot create a capital loss by making such a designation (assuming that there are no outlays and expenses related to the disposition). However, if the FMV of a non-depreciable capital property is less than its ACB, a capital loss can be incurred on a gift of the property because of the operation of the deemed disposition rules in paragraphs 69(1)(b) or 70(5)(a).
Gifts by non-residents to a prescribed donee
6. A corporation not resident in Canada and an individual who is a non-resident may also make a designation under subsection 110.1(3) or 118.1(6). However, these non-residents may only make such a designation if:
(a) the gift is real property situated in Canada;
(b) the gift is made to a "prescribed donee" listed in section 3504 of the Regulations; and
(c) the prescribed donee provides an undertaking in a satisfactory form to the effect that such property will be held for use in the public interest.
The Nature Conservancy, a United States charity, is the only prescribed donee as of the date of this bulletin.
Donations by artists, authors and composers
7. When an artist, author or composer creates a work of art, literary manuscript or musical composition with the intention of selling it, but later donates it to another person, the donation is considered to be a disposition of property from inventory. However, the donation by an artist, author or composer of certain other types of property (e.g. diaries or correspondence) is considered to be a disposition of capital property. Similarly, the donation by an author or composer of original manuscripts or musical compositions, letters, memoranda or similar papers is generally considered to be a disposition of capital property, since it is not usually the business of authors or composers to sell such original documents. Donations of property that are considered to be dispositions of capital property are subject to the same general provisions outlined in 1 to 5 above. Donations that are dispositions of property from inventory are not subject to these provisions but may be subject to the provisions of subsection 118.1(7), which are discussed in Interpretation Bulletin IT-504, Visual Artists and Writers.
8. The following example illustrates the income tax consequences of a designation under subsection 118.1(6) for a donation of a building by an individual to a registered charity.
|FMV of building||$100,000|
|ACB and capital cost of building||$ 40,000|
|Undepreciated capital cost of class||$ 17,500|
|Amount designated under subsection 118.1(6)||$ 50,000|
|Other income of individual||$120,000|
|Recapture of capital cost allowance ($40,000 - $17,500)||$ 22,500|
|Taxable capital gain|
|(75% x ($50,000 - $40,000))||$ 7,500|
|Other income of individual||$ 120,000|
|Net income of individual||$150,000|
Amount of charitable gift
Under subsection 118.1(1), the amount of the charitable gift that is used in determining the total gifts for the purpose of calculating the non-refundable charitable tax credit for the year is the lesser of:
|(a) the individual's total charitable gifts for the year (in this example, the designated amount)||$ 50,000|
|(b) 20% of net income (20% x $150,000)||$ 30,000|
The amount of the charitable gift that is not used to calculate the charitable tax credit in the year may be carried forward to any of the immediately following five taxation years. However, if the individual is deceased, any gift made by the individual in the year of death is deemed, under subsection 118.1(4), to be a gift made in the immediately preceding taxation year, for the amount of the gift for which a tax credit is not claimed in the taxation year in which the individual dies.
If you have any comments about this bulletin, please send them to:
Director, Technical Publications Division
Policy and Legislation Branch
875 Heron Road
Ottawa ON K1A 0L8
Explanation of Changes
Interpretation Bulletin IT-288R2
Gifts of Capital Properties to a Charity and Others
The purpose of the Explanation of Changes is to give the reasons for the revisions to an interpretation bulletin. It outlines revisions that have been made as a result of changes to the law, as well as changes reflecting new or revised departmental interpretations.
Interpretation Bulletin IT-288R2 describes the designations that allow a corporation or an individual to reduce or eliminate a capital gain that would otherwise result from a gift of capital property to a registered charity or certain other entities. This revision was undertaken to reflect the 1988 Tax Reform amendments that replaced the tax deduction for gifts by individuals with a tax credit. Other revisions have also been made to improve the readability of the bulletin. This revision also takes into account the amendments to subsection 110.1(3) and 118.1(6) contained in S.C. 1993, c. 24 (former Bill C-92).
Legislative and Other Changes
New No 1 (a portion of former No 1) explains the requirements to be met for a taxpayer to make a designation under subsection 110.1(3) or 118.1(6).
New No 2 replaces the comments in former No 4 concerning the designated amount.
New No 3 outlines the filing requirements, including those for electronic filing, for a designation under subsection 110.1(3) or 118.1(6).
New No 4 is based on the last sentence of former No 1. It alerts readers to the possibility of recapture of capital cost allowance, or a terminal loss, when a gift of depreciable property is made.
New No 7 replaces and updates the commentary in former No 5 concerning donations by artists, authors and composers. Former No 6 on donations of artists' inventory has been deleted because that topic is fully discussed in Interpretation Bulletin IT-504, Visual artists and writers.
New No 8 contains an example (formerly in No 4) of the application of this provision to an individual. The example has been updated to reflect current law, including the present income inclusion rate for capital gains.
Throughout the new bulletin we have changed some of the wording and the order of some of the paragraphs to improve readability without altering the substance of what was said in the previous bulletin.
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