13 an actuary and an appraiser is critical to correctly valuing the policy. The charity may either cash the policy and use the funds immediately or pay the premiums on the policy and collect the larger death benefit when the insured dies. Of course, a very generous donor may not only donate the policy to the charity but also donate the yearly pre- miums to the charity. In this case, both the donation of the policy and the donated premiums would be receipt- able. ANNUITIES An annuity is a contract under which one person deposits a sum of money with another in exchange for a subse- quent income. It is basically the reverse concept of insurance. The income may be paid for either a specified period, for life, or for life with a minimum guaranteed period. Under the latter method, if the purchaser of the annuity dies during the guaranteed peri- od, the annuity will be paid to some other person whom the purchaser had designated to receive it. Although annuities are normally pur- chased from insurance companies or trust companies, life annuities are some- times purchased from charities. Essentially, a person gives the charity a sum of money irrevocably in exchange for a promise by the charity to pay the donor a monthly income for life. The funds received would then be invested by the charity at a higher rate than it would pay to the donor. For annuities issued after December 21, 2002, the donor would be eligible to receive a receipt for an amount equal to the excess of the amount contributed by the donor over the amount that would be paid at that time to an arm’s-length third party to acquire an annuity to fund the guaranteed payments. CANADIAN CULTURAL PROPERTY The Government of Canada has set up the Canadian Cultural Property Export Review Board to certify which artwork or other item has cultural significance to Canadians. This not only applies to works with a Canadian aspect, but it also applies to any cultural work that Canada may want to keep within its borders. If the donation is certified and made to a designated institution, there is no tax due on the disposition. Thus, if the charity is hoping to attract donations of property with a particular cultural significance, it is important to secure the designation. There are two categories of designation: • Category A is granted for an indefinite period to institutions that are well-es- tablished and meet all of the criteria related to certain legal, curatorial and environmental requirements. • Category B is granted in relation to an institution involved in the proposed acquisition of an object (or collection) that does not meet all of the criteria for designation, but which has demonstrated its capability to effec- tively preserve the type of property in question. The criteria by which the review board makes its decisions is beyond the scope of this article, but the board has pub- lished a guide on the subject available on their website. More information on the program is available from the Department of Canadian Heritage on its website at https://www.canada.ca/en/ser- vices/culture/history-heritage/mov- able-cultural-property.html: As a proper certification may involve many months of research, a request for certification should be made well before the donation is contemplated. If a taxpayer donates certified property to a designated institution, there will not be any tax owing on the gift. In addi- tion, the taxpayer is entitled to a tax receipt for 100% of the value of the gift (as determined by the review board). INVENTORY The determination of whether an item is inventory or capital is one of the most fundamental areas of our income tax system, but nevertheless is shrouded in vagueness and controversy. For example, to most people a house is a capital prop- erty. But if the owner of the home is engaged in the business of buying and selling homes, the property becomes inventory of a business. There is a differ- ent tax treatment on the disposition of inventory as 100% of the value is included in income (as opposed to capi- tal, of which only 50% or 66% is included). Nonetheless, the donation of inventory will result in tax credits that will at least offset the tax due on the disposition of the inventory. Example: Spock runs a bakery. His business is not incorporated, so all of the income of the business is taxed at his personal rates during the year. After Spock has deduct- ed all of his expenses, he is left with tax- able income in the year of $50,000. If Spock sells one more cake that is worth $100, he will pay tax at his bracket on that cake of, say, $31. However, upon donating the cake, he will be entitled to tax credits of approxi- mately $40 (assuming that he has already made at least $200 worth of donations). This is because the tax cred- it rate is higher than the tax payable rate. Spock can then offset the tax owed by disposing of the last cake and using the additional $9 against the tax owing on his other $50,000 of income. It’s all very logical! Of course, as income grows, so too does the tax rate, meaning that there are fewer leftover credits. In those provinces where the tax is equal to or greater than the credits generated by donation (which is all provinces except Alberta), there would be no additional tax credits left over for use. In Alberta however, the credits will always more than offset the tax on the disposition of the donated item, even at the highest brackets. Given the number of provinces, the multiplicity of tax rates and brackets, and the fre- quency with which they change, an accountant should be retained to cal- culate the results of any donation of inventory. PERSONAL USE PROPERTY Personal Use Property (PUP) is property that is owned by the taxpayer and that is primarily for the personal use and enjoyment of the taxpayer or persons related to the taxpayer.
