1 August 2012 External T.I. 2012-0446631E5 - Donation of depreciable property

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: What are the tax consequences to a corporation that donates its depreciable property?

Position: Provided general comments.

XXXXXXXXXX
2012-044663
Long Ip
(613)948-5273

August 1, 2012

Dear XXXXXXXXXX:

Re: Donation of depreciable property

This is in response to your letter of April 23, 2012, wherein you inquired about the tax implications for a corporation that makes a gift of depreciable property to a charity.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This and other Canada Revenue Agency publications can be accessed on our website at http://www.cra-arc.gc.ca/formspubs/menu-eng.html. However, we can offer the following general comments that may be of assistance.

Section 110.1 of the Income Tax Act allows a corporation to claim a deduction, within limits, in computing its taxable income for charitable gifts made to a qualified donee, which includes a registered charity. For gifts made after December 20, 2002, under the proposed split-receipting rules, it is the “eligible amount of the gift” that is relevant in determining the corporation’s charitable gifts. The eligible amount of a gift is generally the amount by which the fair market value (“FMV”) of the property that is the subject of the gift exceeds the amount of the advantage, if any, in respect of the gift. In addition, the proposed amendments provide that the amount of the advantage in respect of a gift is generally equal to the FMV of any property, service, compensation or other benefits received, or expected to be received in the future, by the donor, or a person or partnership who does not deal at arm's length with the donor, that is consideration or in gratitude for, or in any other way related to the gift.

Where a taxpayer disposes of a property by way of gift inter vivos, the taxpayer is deemed by subparagraph 69(1)(b)(ii) to have received proceeds of disposition (“POD”) equal to the property’s FMV. As explained in Interpretation Bulletin IT-297R2, Gifts in Kind to Charity and Others, the taxpayer may have to account for

(a) income under section 9 if the property was inventory of a business, or
(b) capital gain or capital loss under section 39 if the property was a capital property, and
(c) recapture of capital cost allowance under section 13 if the property was depreciable property.

Your question relates specifically to the donation of depreciable property. In this regard, you have described a number of hypothetical scenarios. In each scenario, you advised that the donated depreciable property was the only property in its class and there was no addition to the class after the donation. We note that the calculations of recapture and terminal loss from the disposition of depreciable property are summarized in Interpretation Bulletin IT-478R2, Capital Cost Allowance –Recapture and Terminal Loss. Generally, if the total of all the decreases exceeds the total of all the increases to the undepreciated capital cost (“UCC”) of a particular class as of the end of a taxation year, a recapture of that excess is included in income. If the total of all the increases exceeds the total of all decreases to the UCC of the class as of the end of the year and there is no property remaining in the class, a terminal loss can be deducted in computing income.

In the first scenario described, where the FMV of the donated property is nil, the eligible amount of the gift will be nil. Also, since the POD is nil, the amount of the decrease to the UCC of the class will be nil.

In the other scenarios described, the FMV of the donated property is a positive amount. Generally, the eligible amount of the gift will be equal to the FMV of the donated property assuming that there is no advantage in respect of the gift. As noted in paragraph 3 of IT-478R2, the decrease to the taxpayer’s UCC of the class in respect of the disposition is the lesser of the POD minus any disposition costs to the taxpayer and the taxpayer’s capital cost of the property. There may be a recapture of capital cost allowance or a terminal loss depending on whether the decreases exceed the increases to the UCC of the class or vice versa at the end of the year.

Where the POD of the donated depreciable property exceed the total of its adjusted cost base (“ACB”) (i.e. the capital cost) and the expenses and outlays incurred to sell the property, the taxpayer will have a capital gain. We note that under proposed subsections 110.1(2.1) and 110.1(3), where the FMV of a donated depreciable property exceeds the lesser of the UCC of the class and its ACB, the corporation may designate an amount that is less than its FMV to be treated as the FMV of the gift and the POD of the property. The amount that can be designated in respect of the property cannot be greater than the FMV of the property and not less than the greater of:

• any advantage in respect of the gift; and
• the lesser of the property’s ACB and the UCC of the class of the property.

Finally, we note that the scenarios described may be affected by proposed subsections 248(35) to (37). Under proposed subsection 248(35), the FMV of the property cannot exceed its cost to the taxpayer for the purposes of proposed subsections 110.1(2.1) and (3) and 118.1(5.4) and (6), proposed subsection 248(31), and paragraph 69(1)(b), where certain conditions apply. Specifically, proposed paragraph 248(35)(b) provides that the FMV of the gifted property is deemed to be the lesser of its FMV otherwise determined and its cost, or in the case of capital property, its ACB, or in the case of a life insurance policy in respect of which the taxpayer is a policyholder, its adjusted cost basis, immediately before the gift is made, if one of two conditions are met:

(i) The taxpayer acquired the property that is the subject of the gift less than three years before the day that the gift is made (except if the gift is made as a consequence of death), or
(ii) The taxpayer acquired the property that is the subject of the gift less than ten years before the day that the gift is made (except if the gift is made as a consequence of death) and it is reasonable to conclude that, at the time the taxpayer acquired the gifted property, one of the main reasons for its acquisition was to make the gift.

Proposed subsection 248(37) excludes several types of gifts from the application of proposed subsection 248(35).

We trust that our comments will be of assistance.

Yours truly,

Jenie Leigh
Section Manager
for Division Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch