What's Fair?

AuthorBroder, Peter

One of the far corners of charity law is the fair market value of donations. For economists, the classic definition of fair market value is how much, in an open market, a knowledgeable, willing, and unpressured buyer would pay a knowledgeable, willing, and unpressured seller for a property. In the context of charitable donations and the Income Tax Act (ITA), it is a bit more complicated than that.

Since the advent of preferential ITA treatment for donations to charities, there have been numerous court cases both about what constitutes a donation and, when a gift isn't of cash, how it should be valued. At common law, a gift has to be a voluntary transfer of property without consideration (i.e., without receiving anything of value in return). For purposes of charitable donations, it has long been established that getting a tax credit or deduction for a donation does not constitute consideration. That said, a credit or deduction for a donation may be disallowed where a transaction is a sham to enrich taxpayers, rather than a bona fide gift.

There is some ambiguity in the case law with respect to valuation of donation property obtained in bulk and assessed as individual items for purposes of determining how much should be receipted when it is gifted. As well, in 2013, the law was changed (with some retroactive application), so that in certain cases where consideration was received by a donor, he or she could still claim a reduced credit or deduction. Such practice is commonly known as split-receipting. The credit or deduction will equal the value of the gift less the value of the consideration received. This allows for situations such as where a property with a mortgage on it is given to a charity to still be eligible for preferential tax treatment. Under the old rule, because the assumption of the mortgage by the charity was consideration the transaction did not qualify as a gift.

But recent legislative measures have not all been favourable to donors. Owing to the proliferation of dubious donation schemes in the early 2000s where a donor often claimed fair market value far exceeding the original cost paid for property, section 248(35) was added to the ITA. The subject matter of these arrangements included everything from time-shares to pharmaceuticals to comic books. The schemes had to register as tax shelters but were not in-and-of-themselves illegal. Section 248(35) deems a generally more modest value (essentially the cost of acquisition)...

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