The Government of Canada has policies regarding official donation receipts and whether gifts out of inventory qualify as charitable donations. Generally speaking, a registered charity can issue official donation receipts for the market value of gifts made out of inventory.
It is the charity’s responsibility to determine it has received a gift and to calculate the value of that gift. The charity should then issue a receipt for the gift as long as it confirms the business didn’t receive any material benefits from the gift. The transfer of assets is not considered a gift. The Canada Revenue Agency regulates compliance with the Income Tax Act, not charities.
Assuming it’s determined a business made a gift out of inventory, calculating its effect on taxes is rather simple. The value of the gift is added to revenue, and then later deducted from net income to determine taxable income. For example, assume your client sells televisions. It sold $20,000 last year, made a donation of $1,000, and had production costs of $4,000.
Net income is calculated as $20,000 + $1,000 – $4,000 = $17,000. Next, the $1,000 donation is subtracted from the net income to arrive at a taxable income of $16,000.
Calculating taxable income for a business gift out of inventory to a registered charity is straightforward. It’s more for documentation purposes as the addition and then later subtraction of the same number has a net effect of $0. The rules of this topic and gift receipts from charities may change over time so it’s a wise idea to confirm the latest regulations regarding this topic before advising your clients.