Before you can issue a tax receipt for a gift, you must first determine the fair market value of the gift and of any advantage the donor received in return for making the gift. If you are unable to determine the fair market value of either the gift or advantage, you cannot issue a tax receipt.
This section also reviews valuing advantages, items given to donors in return for their gifts.
What is fair market value?
The Canada Revenue Agency (CRA) says that fair market value "is usually the highest dollar value you can get for your property in an open and unrestricted market and between a willing buyer and a willing seller who are knowledgeable, informed, and acting independently of each other."
- "Highest dollar value." Fair market value is a dollar value, even if the property being valued does not have an apparent "price" (for example, if it is a rare and personal collection donated by the owner). The "highest dollar value" suggests that the fair market value is the retail value of the item.
- "Open and unrestricted market." Fair market value must be determined in the context of an open market; in other words, where there are many sellers and many buyers, all competing to buy and sell goods. The fair market value is the highest price that a willing seller can get for the item from a willing buyer. In some situations, however, the fair market value may have to be determined by a professional appraiser or valuator.
- "Willing buyer and a willing seller." Fair market value must be determined without considering that either the buyer or seller may be forced, induced, or reluctant to buy or sell. A person who is forced to sell may have to lower the price of a property below market value to sell it sufficiently quickly; a person who is forced to buy may end up paying more than fair market value.
- "Acting independently." This is also known as acting at arm's length. It means that neither the buyer nor seller control or influence the other or have any connection that might cause one to treat the other in any special way (for example, marriage or other family relationship).
Tip: Determining fair market value can be very difficult. If a gift is complex or very valuable, you are strongly advised to get help from a professional appraiser or valuator.
Basics of determining fair market value
There are several ways to arrive at fair market value.
1. Open market. Many types of property can be valued very easily because they can be purchased on an open market at published prices. You can often use the published price of these types of items as the fair market value for tax receipt purposes.
2. Similar items in an open market. A specific item may not be available on the open market, but very similar items may be. If you can find an item that is very similar to the one your charity has received as a gift, you can use its price as the fair market value for tax receipt purposes. Or you can take the average of the prices of several similar items.
3. Use of an appraiser or valuator. If other approaches don’t allow you to determine the fair market value of an item, you may need the services of a professional appraiser or valuator. Here are some things to keep in mind when selecting an appraiser or valuator:
- Look for a professional who has recognized professional credentials in his or her field.
- Look for someone who specializes in the type of property that you need to value. For example, real estate appraisers do generally not also appraise rare coin collections.
- Look for someone who is independent, or at arm's length, from both the donor and the charity.
Record-keeping for fair market value
You should keep records to show how you arrived at the fair market value of any gifts in kind your charity received. These documents might include:
- invoices for the item or for similar items that show a retail value;
- published price lists, advertisements from flyers or Web sites, etc.;
- newspaper or Web site listings of stock market prices;
- copies of appraiser or valuator reports; and
- details of any calculations done to arrive at the final value used on a tax receipt.
Remember that prices change over time. What may be an obviously fair price today may be very hard to support in the future without documentation produced at the time the gift was made.
Valuing several items together
Sometimes, several items are combined into one gift or one advantage in return for a gift. In this case, the fair market value of the gift or the advantage is determined by assigning a separate value to each identifiable item and then adding up the values to arrive at a total.
In some situations, however, it may be possible to use averages for similar items or to come up with an accurate estimate without specifically valuing each item individually. However you do it, you must still arrive at a valuation that can be substantiated.
Deemed fair market value rule
The Canada Revenue Agency (CRA) sometimes requires that gifts be valued for tax receipting purposes at the original cost to the donor, rather than at the current fair market value. CRA's "deemed fair market value" rule applies to gifts in kind when the property was acquired by the donor:
- as part of a tax shelter arrangement;
- less than three years before the donation was made; or
- less than ten years before the donation was made, if one of the main purposes of acquiring the property was to donate it.
In these cases, the deemed fair market value rule means that the amount of the tax receipt must be the lower of:
- the gift's fair market value; and
- the cost of the property to the donor (or, in the case of capital property, its adjusted cost base immediately before the gift is made).
There are several exemptions from this rule. The following gifts should be valued at fair market value, even if one of the above conditions applies:
- gifts made as a result of a taxpayer's death;
- gifts of inventory from a business;
- gifts of real property located in Canada;
- gifts of certified cultural property (special valuation procedures apply); and
- gifts of certain publicly traded securities.
Example
A donor purchases a work of art for $300 and donates the art to a charity six months later. Just before donating the art, the donor had it appraised at a value of $1,000. Because the donation is made within three years of the purchase of the work of art, the charity must issue a tax receipt for the lesser of its fair market value and its cost to the donor. The tax receipt must be for $300.
Considerations for types of property
There are several special situations where the Canada Revenue Agency (CRA) has set out specific rules or policies on determining fair market value. These are :