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A recent CRA technical interpretation provides a useful review of the rules surrounding donations of depreciable property. CRA was responding to questions from a taxpayer inquiring about the tax treatment of such donations in several different scenarios. Essentially, CRA considered the implications where a corporation donates depreciable property having a fair market value of zero as well as the implications where the property has a positive fair market value. The document serves as a useful reminder that corporations need to take care to ensure that they take account of the full tax implications of a charitable donation.
In general, when a corporation makes a gift, it may claim a tax deduction for the eligible amount of the gift (that is, the fair market value of the property donated less any advantage to the donor in respect of the gift). Where the gift is made inter vivos, the donor is deemed to receive proceeds of disposition equal to the fair market value of the property. CRA notes in the technical interpretation that as a general proposition the corporation may need to account for:
- income, if the donated property was inventory;
- capital gains or losses, if the property was capital property; and
- recapture of capital cost allowance, if the property was depreciable property.
CRA focused on the issue of depreciable property. Under the Income Tax Act, depreciable property is pooled into different classes, with different rates of capital cost allowance prescribed in respect of each class. Corporations may deduct the capital cost of each class of depreciable property at the prescribed rates when determining income from business or property. Corporations must track the undepreciated capital cost (UCC) of all property for each class, reducing it annually by the amount of capital cost claimed as well as for any dispositions of property in the class. When new properties in a class are acquired, the UCC of that class increases by the cost of the property.
When depreciable property is sold or gifted, the corporation’s UCC in respect of that class of property decreases by the corporation’s proceeds of disposition (less any disposition costs), up to the original cost of the property. Put simply, the Act provides that where, in a year, the amount of all decreases in the class (i.e., proceeds of disposition plus capital cost allowance claimed) exceeds all increases in the UCC of the class (i.e., the cost of all property in the class acquired in the year plus any recaptured amounts), the corporation must recognize the recaptured excess as income. Where the reverse is true, and all increases in the UCC of a class exceed the total of all decreases in the year, the corporation may claim a
terminal loss when calculating its income.
CRA commented in the technical interpretation that when a corporation makes a gift of property with a fair market value of zero, there will be no deemed proceeds of disposition and thus no decrease to the UCC in the class.
Where a corporation gifts donated property with a positive fair market value, this fair market value is deemed to be the corporation’s proceeds of disposition. The corporation’s UCC will accordingly be decreased by this amount, up to a maximum of the original cost of the property. There may be recapture or a terminal loss depending on whether the decrease exceeds the increases to the UCC in the class or vice versa.
CRA also commented on the calculation of capital gains in respect of a donation of depreciable property, pursuant to proposed rules in the Act. Where the fair market value of the donated depreciable property exceeds the lesser of the UCC of the class and the adjusted cost base (ACB) of the property, the Act permits the donor to elect the fair market value of the property provided that this amount is between the fair market value of the property, on one hand, and the lesser of the ACB and UCC of the class, on the other.
The technical interpretation notes also that certain anti-avoidance rules apply where the donated property was acquired by the donor less than three years before the gift, or less than ten years before the gift if the property was acquired for the specific purpose of making of the gift. In these circumstances, the fair market value of the gift is deemed to be the lesser of the fair market value otherwise determined and the ACB of the property.
It is clear from this summary that the rules surrounding donations of depreciable property are reasonably complicated. It is important that corporate donors ensure that they account properly and in full for the donation. Charities must also ensure that any receipts issued comply with the Act. Miller Thomson’s Charities and Not-for-Profit Group lawyers are pleased to assist with the legal issues that apply in respect of such gifts.