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Designate Proceeds on Donation of Capital Property

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Filing Your Return  ->  Stocks, Bonds etc.  ->  Donations tax credit -> Election to designate proceeds of donated capital property

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

bullet as the proceeds of disposition for calculation of the capital gain, and
bullet 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

bullet cannot be greater than the FMV, and
bullet cannot be less than the greater of
bullet any advantage in respect of the donation; and
bullet 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

bullet fair market value $50,000
bullet ACB $20,000
bullet UCC $6,000
bullet 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:

bullet capital gain of $8,000 ($28,000 - $20,000)
bullet taxable capital gain of $4,000 (50% of $8,000)
bullet recapture amount of $14,000 ($20,000 - $6,000)
bullet total included in taxable income is $18,000 ($4,000 + $14,000
bullet eligible amount of gift is $23,000 ($28,000 - $5,000)

If the designated proceeds had been equal to the ACB of $20,000:

bullet there would be no capital gain
bullet recapture would still be $14,000, and
bullet 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.

See also

    - Deferral of capital gains by utilizing the capital gain reserve

    - IT-288R2 Gifts of Capital Property to a Charity and Others from Canada Revenue Agency

Tax Tip:  This election can help reduce capital gains for which you cannot get a donation deduction or tax credit.

Revised: September 20, 2017

 

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