ARCHIVED – Charities: Disbursement quota reform

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1. Did the 2010 federal budget affect registered charities?
2. What did the disbursement quota require?
3. What is meant by "repeal the charitable expenditure rule"?
4. What concepts are repealed due to the repeal of the charitable expenditure rule?
5. Why did the federal government decide to repeal the charitable expenditure rule?
6. How is the capital accumulation rule modified?
7. How do these changes reduce the administrative burden on charities?
8. What is the existing anti-avoidance rule for registered charities?
9. How was the existing anti-avoidance rule strengthened?
10. Did the legislative changes as a result of the budget include any further anti-avoidance rules?
11. What are the implications for a registered charity's filing obligation?
12. Does this mean that registered charities can spend their money however they want?
13. Will the disbursement quota be replaced by another measure in the future?
14. Is a registered charity still allowed to accumulate property for a particular project?
15. Where can I get more information about the disbursement quota reform?

1. Did the 2010 federal budget affect registered charities?

Yes. The budget introduced disbursement quota changes for registered charities with fiscal periods that end on or after March 4, 2010. These changes have now become law.

The legislative changes that are a result of the budget:

• repeal the charitable expenditure rule (the 80% requirement);
• modify the capital accumulation rule (the 3.5% requirement); and
• strengthen the related anti-avoidance rules for charities.

2. What did the disbursement quota require?

The disbursement quota required that the amount a charity spent each year on charitable activities—including gifts to qualified donees—be at least the sum of:

• 80% of the previous year's tax-receipted donations, plus other amounts relating to enduring property and transfers between charities (charitable expenditure rule); and
• 3.5% of all assets not currently used in charitable activities or administration if these assets exceed a threshold of $25,000 (capital accumulation rule).

3. What is meant by "repeal the charitable expenditure rule"?

This means that the requirement for registered charities to spend 80% of the previous year's tax-receipted donations, plus other amounts relating to enduring property and transfers between charities, no longer exists.

4. What concepts are repealed due to the repeal of the charitable expenditure rule?

The concepts repealed include "enduring property," "capital gains reduction," "capital gains pool," and "specified gift."

5. Why did the federal government decide to repeal the charitable expenditure rule?

As stated in the budget announcement:

Some have observed that the impact of the charitable expenditure rule can vary considerably, for reasons unrelated to the manner in which a charity conducts its charitable activities... Stakeholders... have called for the elimination of the disbursement quota because it imposes 'an unduly complex and costly administrative burden on charities–particularly small and rural charities–and it constrains the flexibility of charities, without achieving its core purpose of limiting spending on fundraising and non-charitable activities.[Footnote 1]

6. How is the capital accumulation rule modified?

The capital accumulation rule is modified by:

• increasing the threshold at which it applies from $25,000 to $100,000 for charitable organizations (the threshold for private and public foundations remains at $25,000); and
• amendments to the Income Tax Regulations that will clarify that the calculation of the value of all properties not currently used in charitable activities or administration applies to both private and public foundations and charitable organizations.

7. How do these changes reduce the administrative burden on charities?

The previous rules were complex and difficult to understand. While charities still have to complete a Form T3010, Registered Charity Information Return, and ensure that their resources are devoted to charitable activities, the disbursement quota is now easier to calculate. For example, the concepts of capital gains reductions and capital gains pools are eliminated.

8. What is the existing anti-avoidance rule for registered charities?

Currently, the Canada Revenue Agency (CRA) can revoke the registration of a registered charity if the charity has made a gift to another registered charity, and it can be reasonably considered that one of the main purposes of making the gift was to unduly delay the expenditure of amounts on charitable activities.

9. How was the existing anti-avoidance rule strengthened?

The existing anti-avoidance rule was strengthened by extending its application to all transactions, including gifts, and broadening its application to all transactions where any purpose, as opposed to a main purpose, is to avoid or unduly delay the expenditure of amounts on charitable activities.

10. Did the legislative changes as a result of the budget include any further anti-avoidance rules?

Yes. A new provision ensures that:

• an amount transferred between non-arm's length charities will be used to satisfy the disbursement quota of the donor charity only; and
• the recipient charity will be required to spend the full amount it received on its own charitable activities, or to transfer the amount to an arm's-length qualified donee in the current or the following tax year. Alternatively, the donor charity can elect to designate the transfer which removes this new requirement.

11. What are the implications for a registered charity's filing obligation?

Registered charities are still required to file a complete Form T3010 within six months of their fiscal year-end. The implications for registered charities may vary, depending on their particular fiscal year-end.

• If a charity's fiscal year ended before March 4, 2010, and the charity has already filed its return, the changes will not affect the filed return.
• If a charity's fiscal year ended before March 4, 2010 but the charity has yet to file its return, the changes will not affect the return to be filed.
• If a charity's fiscal year ends after March 3, 2010 (for example: a registered charity with a fiscal year ending on March 31, 2010), the changes apply. Charities should use the new Form T3010-1 and refer to the new Guide T4033-1 to file their return. The CRA will continue to release information on the implications of the changes as it becomes available.

12. Does this mean that registered charities can spend their money however they want?

No. Registered charities have always had to devote their resources to charitable programs to maintain their charitable registration, and this is still the case. The disbursement quota requirement is just one part of the rule. Recent legislative and administrative initiatives have strengthened the CRA's ability to ensure that charities are spending their money on charitable programs, and have helped charities understand which expenditures are appropriate. For example, the CRA recently published Fundraising by Registered Charities, which provides guidance to charities on what are acceptable fundraising expenditures.

13. Will the disbursement quota be replaced by another measure in the future?

The budget did not include another measure. However, the budget did announce that the federal government will monitor the effectiveness of the CRA's guidance on fundraising by registered charities and will act as necessary to ensure the federal government's stated objectives are achieved.

In addition, the CRA will develop further guidance to assist registered charities in understanding and complying with the reformed disbursement quota and other income tax rules concerning expenditures. This development will include consultation with the charitable sector.

14. Is a registered charity still allowed to accumulate property for a particular project?

Yes, the CRA will still allow charities to accumulate property for a particular purpose, such as a building project, subject to written approval. Previously, any property accumulated further to such an approval and any income earned in a year for that property was deemed to have been spent on charitable activities in the tax year in which it was accumulated.

For tax years that end after March 3, 2010, this provision has been amended to no longer deem the property accumulated, plus any income earned in a year for that property, to have been spent on charitable activities. Instead, the property is excluded from the disbursement quota calculation, subject to written approval.

15. Where can I get more information about the disbursement quota reform?

The CRA encourages taxpayers to check its Web pages often. All new forms, policies, and guidelines will be posted as they become available.

In the meantime, please consult the Department of Finance Canada's Budget 2010 documents for details.

Registered charities with questions about the new measures can call the CRA's Client Services Section at 1-800-267-2384 between 8 a.m. and 8 p.m. Eastern Time, Monday to Friday.

If you are on our electronic mailing list, we will notify you by email when more information is posted on our Web pages.

Footnote

[Footnote 1]

Source: Budget 2010, Leading the Way on Jobs and Growth; Annex 5: Tax Measures: Supplementary Information and Notices of Ways and Means Motions

Date modified:

2015-07-15