A taxpayer who holds securities both acquired on the market and under s. 7(1) then acquires more of the same securities under a s. 7(1) exercise and, subsequently, donates the same number to a charity, without electing LIFO treatment under s. 7(1.31). The resulting application of s. 7(1.3) to particular shares may result in loss of the s. 110(1)(d.01) deduction for donated securities. Note that s. 7(1.3) presumes the FIFO method for capital gains computation purposes. S. 47(1) provides instead for the average cost method.
Does the application of subsection 47(1) take subsection 7(1.3) into account? CRA responded:
[W]here a taxpayer disposes of a security by making a charitable gift and the security has not been identified as provided in subsection 7(1.31), the taxpayer must determine what security the taxpayer has disposed of by virtue of subsection 7(1.3). Since subsection 7(1.3) applies for the purposes of subdivision c of Division B of Part I …, if the disposed of security is not a [s. 7(1.1)] deferred security, subsection 47(1) applies to determine the ACB subject to any applicable adjustments pursuant to paragraph 53(1)(j).