Charities
Annual Disbursement Quota Changes for Registered Charities
Registered charities are generally required to expend a minimum amount each year, referred to as the disbursement quota (DQ). Currently, the DQ is equal to 3.5% of the registered charity’s property not used directly in charitable activities or administration.
The Budget proposes to make a number of changes to increase expenditures by larger charities and improve the enforcement and operation of the DQ rules.
Modifying the Rate of the DQ
Proposed in the Budget is the increase of the DQ rate from 3.5% to 5% for the portion of property not used in charitable activities or administration exceeding $1 million. Additionally, the Budget proposes to amend the Income Tax Act to clarify that expenditures for administration and management are not considered qualifying expenditures for the purposes of satisfying a charity’s DQ.
Relief for Certain Circumstances
Charities unable to meet their DQ may apply to the CRA and request relief from the DQ requirement. If charities are granted relief they are deemed to have a charitable expenditure for the tax year.
The Budget proposes to amend the existing rules such that the CRA will have the discretion to grant a reduction in a charity’s DQ obligation for any particular year. For transparency purposes, the Budget proposes to allow CRA to publicly disclose information related to the decision of granting a charity’s DQ reduction.
In the Income Tax Act, a charity may also apply to CRA for permission to accumulate property for a specific purpose, and any property accumulated by a charity under such approval, including any income earned, is not included in a charity’s DQ calculation. Given the simplification of the DQ, which provides relief to charities, the accumulation of property rule is no longer necessary and the Budget proposes to remove the accumulation of property rule.
Applying New Measures
New DQ measures would apply to charities in respect of their fiscal periods beginning on or after January 1, 2023, and would not apply to approved property accumulations resulting from applications submitted by a charity prior to January 1, 2023.
Charitable Partnerships
The Budget proposes changes to allow charities to make qualified disbursements to organizations that are not qualified donees, provided they meet certain accountability requirements. With these new rules, additional measures designed to ensure compliance by charities are forthcoming.
Accountability Requirements
The Budget proposes to allow charities to make qualifying disbursements to organizations that are not qualified donees, provided that disbursements are in furtherance of the charity’s charitable purposes and the charity ensures that the funds are applied to charitable activities by the grantee.
To be considered a qualifying disbursement, charities would also be required to meet certain mandatory accountability requirements defined in the Income Tax Act. These requirements are designed to ensure that their resources will be used for charitable purposes.
Books and Records
The Budget proposes that charities are required to, upon the request of CRA, take all reasonable steps to obtain receipts, invoices, or other documentary evidence from the grantee to demonstrate amounts were spent appropriately. These new measures are to ensure that the CRA can verify that charitable resources have been applied for the purposes which they were granted.
Direct Donations
To avoid the risk of a charity acting as a conduit for donations to other organization, the Budget proposes to extend an existing provision in the Income Tax Act, which currently applies to registered Canadian amateur athletic associations and registered journalism organizations, to registered charities. The rule would prohibit registered charities from accepting gifts, the granting of which was expressly or implicitly conditional on making a gift to a person other than a qualified donee.
Applying New Measures
These changes would apply as of royal assent of the enacting legislation.