How Do I Determine the Fair Market Value for an In-Kind Donation Charity Receipt?
Determining the Fair Value of Gifts
In order to issue a tax receipt for a gift, it is necessary to first determine the fair market value of the gift as well as any benefits the donor received in exchange for making the gift. If the fair market value of the gift or benefit cannot be determined, a tax receipt cannot be issued.
This post also covers the process of valuing benefits, which are items provided to donors in exchange for their contributions.
What is fair market value?
According to the Canada Revenue Agency (CRA), fair market value typically refers to the highest possible value that a property can fetch in an open and unrestricted market, where the buyer and seller are both willing, knowledgeable, informed, and not dependent on each other.
- The term “highest dollar value” refers to the fair market value of a property, even if the property being valued lacks an apparent “price”. This implies that the fair market value is established based on the retail price of the item, regardless of whether it is a distinctive and personal assortment contributed by the owner.
- The term “open and unrestricted market” used to define fair market value refers to a market where numerous buyers and sellers exist, all competing to purchase and sell goods. In this scenario, fair market value refers to the highest amount that a buyer who is willing to purchase and a seller who is willing to sell would agree upon for the item. In certain situations, it might be necessary to enlist the expertise of a professional appraiser or valuator to ascertain fair market value.
- The term “willing buyer and a willing seller” used to determine fair market value implies that the assessment should be made without taking into account any external pressures that may influence either party to buy or sell. For example, a seller who is compelled to sell may have to reduce the price of their property below market value to expedite the sale, whereas a buyer who is forced to buy may end up paying more than the fair market value.
- The phrase “acting independently,” which is also referred to as acting at arm’s length, implies that neither the buyer nor seller has any control or influence over the other and that they have no relationship that could lead one to treat the other in a preferential manner, such as a familial or marital connection.
Tip: Assessing fair market value can be an intricate process. It is strongly advised to seek help from a professional appraiser or valuator if the gift is complex or expensive.
Fundamentals of calculating fair market value
There exist multiple approaches to determine fair market value.
- Open market. Numerous kinds of property can be easily appraised as they can be bought on an open market at publicly listed rates. Often, the listed price of such items can serve as the fair market value for the purpose of issuing tax receipts.
- Comparable items in an open market. Occasionally, a particular item may not be readily accessible on the open market, but there might be other comparable items available. If a similar item is available, its price can be used as the fair market value for tax receipt purposes in such cases. Alternatively, you can calculate the average value of multiple comparable items.
- Appraiser or valuator. If other methods fail to provide an accurate fair market value for an item, the services of a professional appraiser or valuator may be required.
Maintaining records for fair market value
It is important to maintain documentation that demonstrates how the fair market value of any gifts in kind received by your charity was determined. Such records may comprise:
- Invoices for the item or comparable items that display their retail value
- Publicly available price catalogs, flyers, or online advertisement
- Newspaper or online records of stock market prices
- Copies of appraiser or valuator assessments
- Particulars of any computations performed to derive the ultimate value applied to a tax receipt
Bear in mind that prices may vary over time. What might appear to be an acceptable fair price at present could be challenging to validate in the future without proper documentation generated at the moment the gift was received.
Determining the combined value of multiple items
On occasion, multiple items are consolidated into a single gift or benefit received in exchange for a gift. In such situations, the fair market value of the gift or benefit is determined by attributing a distinct value to each identifiable item, and then summing up the values to obtain a total.
However, in some circumstances, using averages for comparable items or generating an accurate estimate without valuing each item separately may be feasible. Regardless of the method used, the valuation must be justifiable with evidence.
Deemed fair market value rule
The CRA occasionally mandates that the valuation of gifts for tax receipt purposes be based on the donor’s original cost instead of the current fair market value. This “deemed fair market value” rule is applicable to in-kind gifts when the donor acquired the property:
- within a tax shelter arrangement;
- less than three years prior to making the donation; or
- less than ten years before the donation, if one of the primary objectives for obtaining the property was to donate it.
In these instances, the deemed fair market value rule dictates that the tax receipt amount should be the lesser of:
- the gift’s fair market value; and
- the donor’s cost of the property (or, for capital property, its adjusted cost base directly before the donation).
However, this rule has many exceptions. The following gifts should be assessed at fair market value, even if one of the aforementioned conditions is met:
- property resulting from a taxpayer’s demise;
- inventory from a business;
- real property situated in Canada;
- certified cultural property (distinct valuation procedures are applicable); and
- specific publicly traded securities.
Considerations for various property types
The CRA has established specific guidelines or policies to determine fair market value in various unique scenarios. These situations comprise real estate, capital assets, listed personal property, artworks contributed by artists, property usage, and non-qualified securities.
Disclaimer: The information contained in this article is provided for general information purposes only and does not constitute legal or other professional advice. Readers should seek tailored legal advice in relation to their personal circumstances.
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