Valuing In-kind Donations

There is a saying among charitable gift planners: “beware of in-kind property donors who show up with valuations in hand.”  In other words, eager donors and their gifts may be too good to be true.  This is folk wisdom that points to a serious issue.  Donors, executors and charities often struggle with in-kind donation valuation.  Who commissions and pays for in-kind donation appraisals, the donor or charity?

Standard Practice

The standard practice, which is enshrined in gift acceptance policies, is that the charity is responsible for the appraisal of in-kind donations. The charity must be confident of the fair market value on the donation tax receipt it issues and of the valuation process and appraiser(s).  This means the charity selects and hires the valuator.  Some high-value donations require more than one appraisal.

The wrinkle is that most charities don’t have funds to pay for appraisals.  Hence, they ask the donor to make a cash donation to pay for the independent, third-party valuation.

Variations and nuance

Of course, different charities have different practices and knowledge level.  And to be frank, most of Canada’s 86,000 charities don’t have gift acceptance policies.  And if they do, the type and value of the property may produce variations.

Some charities place the onus of securing a valuation on the donor, but require that it be current, from a qualified appraiser, and appropriate for the value of the property to be donated.  There are rules, but it’s up to the donor to deliver.  This approach assumes a qualified appraiser has professional standards and will not be swayed by donor pressure for a higher-value receipt.

Even federal government programs have different rules.  The Ecological Gifts Program, which is administered by Environment Canada, prescribes that the donor must provide a single appraisal prepared by an appraiser from an approved list.  The final value is determined by the Minister of the Environment. A similar regime exists for cultural property donations.  The Canada Cultural Property Export and Review Board determine final value, an approach that periodically leads to headlines.

These Federal tax incentive programs leave the final say on valuation with the Government, but it’s more difficult for ordinary registered charities.  If a charity needs to rely on the donor to finance the valuation it can influence the choices the charity makes.  For example, the donor may recommend a cheaper real estate appraiser or lighter valuation report.  An “estimate valuation report” of a donation of private company shares will be less expensive and indepth than a “comprehensive valuation report”.

The appraised value of a piece of donated property often has a wide range.  Donors who are collectors – be it cars, art or ephemera – frequently know dealers, appraisers and have detailed market knowledge that leads to higher valuations.  Ditto, owners of real estate and private shares know their assets best. This can be used to help the charity or just benefit the donor.

Estate donations

The 2016 “estate donation” rules have changed the involvement of charities in the valuation process.  Pre-2016, the executor would value the property at death and that was used for the terminal T1 tax filing.  Post-2016, a piece of property bequeathed to a charity will be valued at date of death, but that value will likely be inapplicable when the property is transferred to the named charity 23 months later.

The charity is obliged to ascertain the current value of the estate donation at time of transfer in order to issue a tax receipt.  The charity may need to pay for the valuation.  Alternately, the estate could pay for an updated appraisal using criteria established by the receiving charity or negotiate the executor to use an agreed upon standards.

The estate donation rules are, in some ways, more complex and expensive to administer, at least from the executor’s perspective.  From the charity’s perspective, there is more opportunity to ensure the valuation is sound and current.  One way or another, we will see greater future need for valuing in-kind property donations.