Election to designate the amount of proceeds when
capital property is donated
Income Tax Act s. 13(1) recapture, 110.1(3) corporation
donation deduction, 118.1(6) individual donation tax credit
When an individual donates capital property, normally
the fair market value (FMV) is the amount used
as the proceeds of disposition for calculation of the
capital gain, and
as the eligible amount of the gift, after deducting
any advantage (payment or other benefit) received, for purposes of the
donations tax credit (individual) or deduction (corporation).
The capital gain is determined by calculating the excess
of the FMV over the adjusted cost base of the capital
property. When certain types of capital property are donated, capital
gains can be eliminated.
When the property donated is not eligible for the capital
gain elimination, an individual can reduce or eliminate a resulting capital gain by electing to designate
an amount of proceeds that is less than the FMV. The amount that is
designated
cannot be greater than the FMV, and
cannot be less than the greater of
any advantage in respect of the donation; and
the adjusted cost base
(ACB) of the property (for depreciable
property, lesser of ACB and undepreciated capital cost (UCC) of the
class of the property)
The election is made on the income tax return for the year in which the
property is donated.
The designated proceeds, less any advantage received, will be the eligible
amount of the gift for the donations tax credit (individual) or donation
deduction (corporate).
If, at the time of the donation, the FMV of a
non-depreciable capital property is less than the ACB, the proceeds of
disposition must equal the FMV, resulting in a capital loss.
If the taxpayer has donated depreciable property and the
designated proceeds exceed the UCC of the class of property, recaptured
capital cost allowance (CCA) must be added to
income. It is calculated as the lesser of designated proceeds and ACB,
less the UCC.
Example:
Mr. X donates depreciable capital property to a
registered charity. He receives $5,000 from the registered charity in
exchange for the property. The values related to the property are
fair market value $50,000
ACB $20,000
UCC $6,000
advantage received $5,000
Mr. X can designate proceeds of an amount from $6,000 up
to $50,000.
If he chooses to designate proceeds of $28,000, the
results are:
capital gain of $8,000 ($28,000 - $20,000)
taxable capital gain of $4,000 (50% of $8,000)
recapture amount of $14,000 ($20,000 - $6,000)
total included in taxable income is $18,000 ($4,000 +
$14,000
eligible amount of gift is
$23,000 ($28,000 - $5,000)
If the designated proceeds had been equal to the ACB of $20,000:
there would be no capital gain
recapture would still be $14,000, and
eligible amount of gift would be $15,000 ($20,000 -
$5,000)
Due to the limitations on the amount of donations that
can be claimed annually based on net income, and the fact that unused donations can only be carried
forward for 5 years, this election can be very useful. It can also be
useful when donations of property are made from the estate of a deceased
person. The election can also be
utilized for donations of
non-qualifying securities to a qualified donee.
The information on this site is not intended to be a
substitute for professional advice. Each person's situation differs, and
a professional advisor can assist you in using the information on this web
site to your best advantage.
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