CharityVillage® Research: How to qualify potential gifts and how to close a deal

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How to qualify potential gifts and how to close a deal
June 19, 1996; Canadian FundRaiser

Should your charity accept a gift in kind? Before accepting any gift, review issues such as liquidity - can the charity use the gift itself or readily convert the gift into cash? Be satisfied with the valuation before signing a donation receipt. Know the risks, if any, attached to the gift. And be aware of valuation, legal, administrative and future sale costs that may be incurred. Use due diligence in investigations, seek appropriate legal advice, and ensure that the charity will obtain full ownership with no surprises.
Speaking at a planned giving symposium last month sponsored by the Southern Ontario arm of the Canadian Association of Gift Planners, David W. Howell, partner with the law firm Martin & Martin, described some of the legal and practical issues that arise in accepting non-cash donations. Gifts in kind, he pointed out, take may take many forms: real estate, securities, art-work, other tangible personal property (i.e. furniture, books), a leasehold interest or a residual interest in any of the above, or life insurance policies. "Make certain the donor has the capacity to make the gift, that the charity also has the capacity to accept and own the gift, and be aware of the issues and problems that relate to each type of gift," he said. Reviewing the legal and tax considerations at the beginning of the gift giving process is the best way to complete a gift while ensuring any unwanted surprises.
According to Revenue Canada's policy, a gift is a voluntary transfer of property without consideration, which is why a gift of services (not property) fails to qualify as a gift in kind. Charities should never issue a donation receipt to someone providing services who does not charge a fee. While there is nothing to stop a charity from paying for the services, and later accepting a voluntary return of a portion or all of the payment as a gift, Howell cautioned, "A gift in kind will not qualify for a donation receipt if the donor receives any right, privilege, material benefit or advantage in exchange for the donation."
Must be absolute and irrevocable
Gifts that won't qualify: a transfer of merchandise or supplies by a business as promotion or advertising for the business; a transfer of real estate if the charity assumes the mortgage on the property; or any other donation where the donor receives something of more than nominal value from the charity. Remember, Howell pointed out, "that Revenue Canada will not allow the issuance of a donation receipt for old clothes, furniture, home baking, hobby crafts, etc., unless they have unusually high value."
Remember too that a transfer of property will not qualify as a gift unless it is an absolute and irrevocable outright gift without conditions. For a transfer of a residual interest to qualify as a charitable gift, Revenue Canada has set out the following conditions: there must be a voluntary transfer of property given with no expectation of right, material benefit or advantage; the property must vest with the charity at the time of transfer; the transfer must be irrevocable; and it must be evident that the charity will receive full ownership and possession of the property. Said Howell, "A gift of a residual interest will not qualify for a donation receipt if the gift is subject to some future condition which could defeat the gift, such as the power to encroach against the property for the benefit of the donor or a member of his/her family. In these circumstances, Revenue Canada has stated that the value of the residual interest cannot be reasonably determined at the time of the gift."
Appraisals usually required
The amount of the gift is its fair market value as of the date of the gift. The fair market value of a donation of Canadian Cultural Property is determined by the Canadian Cultural Property Export Review Board. Required for most gifts in kind, appraisals of gifts of $1,000 or less may be done by a staff member of the charity, but a qualified appraiser with a designation and/or a member of a professional association (i.e. the Professional Art Dealer's Association of Canada) will be required for larger gifts.
Howell provided the following synopsis of gift in kind valuation:
Securities - the fair market value of publicly-traded securities is based on the closing market price as of the day of the gift.
Life Insurance Policies - value at the time of the assignment will be the cash surrender value, less any outstanding policy loans, plus any accumulated dividends and interest. Term insurance has no cash value and does not qualify for an immediate receipt, but future premium payments made by the donor may qualify if the charity is both the owner and the beneficiary of the policy.
Residual Interest - the value of a residual interest in property is notionally based on two separate components: the fair market value of the entire property as of the date of the gift; and the fair market value of the residual interest, based on an actuarial calculation taking into account current interest rates, life expectancy of any life interests, and any other relevant factors.