In the 2021 Federal Budget, it was announced that the Department of Finance will be doing a consultation on the disbursement quota and whether it should be raised.  Interesting that the title used by Finance is “Consultation: Boosting charitable spending in our communities”.  Does that not presuppose an increase in DQ or is there another scheme being thought of by finance?  I also laughed when I read the first sentence that says “Supporting Canada’s charities, non-profits, social enterprises, and other organizations to provide vital services to our communities, including to the most vulnerable members of society, is a key priority of the federal government. ”  I am not sure what key priorities are anymore but if it was remotely important this could have been done many years ago. Perhaps it would be easier if someone sent me a list of what are not key priorities of this government.

 

After having suffered through 1.5 years of COVID we are only discussing an increase – it has not been made.   In fact, the Department is only considering this potentially for 2022. ie next year.  I have been calling for an increase for about 10 years and many foundations have been obtaining returns on their investments that are far greater than the amounts they are distributing.   As well some foundations have gotten sweetheart deals with CRA such that they can grant far less than 3.5%.  Perfectly legal, questionable whether the public would consider this acceptable, especially in light of the large tax subsidies received by some foundations.

 

People have until September 30, 2021 to put in their thoughts to Finance.   The types of questions they are wondering about include:

  • Should the disbursement quota be raised to produce additional funding for charities, and to what extent?
  • Would it be desirable to increase the disbursement quota to a level that caused foundations to gradually encroach on investment capital, and would it be sustainable in the long-term for the sector?
  • What additional tools (e.g., monetary penalties or other intermediate sanctions) should be available to the CRA to enforce the disbursement quota rules? 
  • Do the relieving and accumulation of property provisions continue to be useful for charities?
  • Do the existing carry-forward provisions strike the appropriate balance between ensuring the timely disbursement of funds and allowing foundations to make large gifts on a more infrequent basis?  
  • Are there any temporary changes to the disbursement quota that should be considered in the context of the Covid-19 recovery?

 

Here is the announcement from the Department of Finance:

 

https://www.canada.ca/en/department-finance/programs/consultations/2021/boosting-charitable-spending-communities.html

 

Consultation: Boosting charitable spending in our communities

Join in: Open until September 30, 2021

Supporting Canada’s charities, non-profits, social enterprises, and other organizations to provide vital services to our communities, including to the most vulnerable members of society, is a key priority of the federal government. Charitable organizations work constantly to address hunger, improve socioeconomic outcomes for diverse Canadians, and keep communities connected and informed, while facing immense financial pressures.

Every year, charities are required to spend a minimum amount on their charitable programs or on gifts to qualified donees. This is known as the “disbursement quota” and it ensures that charitable donations are being invested into our communities. Budget 2021 announced the government’s intention to potentially increase the disbursement quota, which could boost support for the charitable sector, benefitting those that rely on its services.

Our objective

Through this consultation process, the Department of Finance is seeking feedback on potentially increasing the disbursement quota and updating the tools at the Canada Revenue Agency (CRA)’s disposal in order to enforce the disbursement quota rules, beginning in 2022.

Key considerations

To inform discussions, the government is issuing a background paper that outlines the existing approach and raises points for consideration on whether it continues to be appropriate. Specifically, feedback is being sought on the following:

  • Should the disbursement quota be raised to produce additional funding for charities, and to what extent?
  • Would it be desirable to increase the disbursement quota to a level that causes foundations to gradually encroach on investment capital, and would it be sustainable in the long-term for the sector?
  • What additional tools (e.g., monetary penalties or other intermediate sanctions) should be available to the CRA to enforce the disbursement quota rules?
  • Do the relieving and accumulation of property provisions continue to be useful for charities?
  • Do the existing carry-forward provisions strike the appropriate balance between ensuring the timely disbursement of funds and allowing foundations to make large gifts on a more infrequent basis?
  • Are there any temporary changes to the disbursement quota that should be considered in the context of the COVID-19 recovery?

Who is the focus of this consultation?

The department is seeking the views of stakeholders in the charitable sector. Tax practitioners, legal experts, researchers/academics and interested members of the public are also invited to provide input.

In submitting your comments, please include:

  • full name and title of official;
  • name of the organization;
  • type of charity (if applicable);
  • organization size;
  • telephone number, including area code; and
  • reply email address.

Concurrently, the department will engage with the Advisory Committee on the Charitable Sector, an advisory body made up of representatives from the charitable sector that provides advice to the government on important and emerging issues facing registered charities.

Participate through email

Due to COVID-19 public health considerations, email submissions are preferred. Send us your comments at charity-bienfaisance@fin.gc.ca with “Charities Consultation” as the subject line.

Should you wish to provide comments by mail, please direct your submission to the attention of the Tax Policy Branch.

Treatment of confidential information

Information received through this comment process is subject to the Access to Information Act and the Privacy Act. Those providing comments are asked to indicate clearly the name of the individual or the organization that should be identified as having made the submission. In order to respect privacy and confidentiality, please advise when providing your comments whether you:

  • consent to the disclosure of your comments in whole or in part;
  • request that your identity and any personal identifiers be removed prior to release; or
  • wish that any portions of your comments be kept confidential (if so, clearly identify the confidential portions).

Should you indicate that your comments, or any portions thereof, be considered confidential, the department will make all reasonable efforts to protect this information.

What’s next?

Feedback received through this consultation will be considered alongside input from the Advisory Committee on the Charitable Sector to help inform decisions on potentially increasing the disbursement quota and updating enforcement tools.

Related links

Get in touch

charity-bienfaisance@fin.gc.ca

 

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Here is the news release:

Government launches consultations on boosting charitable spending in our communities

News release

August 6, 2021 – Ottawa, Ontario – Department of Finance Canada

Canada’s charities, non-profits, social enterprises, and other organizations work constantly to address hunger, improve socioeconomic outcomes for diverse Canadians, and keep communities connected and informed.

To make this work possible, every year, charities are required to spend a minimum amount on their charitable programs or on gifts to qualified donees. This is known as the “disbursement quota” and it ensures that charitable donations are being invested into our communities.

While most charities meet or exceed their disbursement quotas, a gap of at least $1 billion in charitable expenditures in our communities exists today. Despite significant growth in investment assets of foundations in recent years, grant-making and other charitable activities of many foundations have not kept pace.

As announced in the recent budget, an increase to the disbursement quota could significantly boost support for the charitable sector, benefitting those that rely on its services, including the most vulnerable members of Canadian society.

To this end, today, the Government of Canada, through the Department of Finance, is launching consultations with stakeholders on potentially increasing the disbursement quota and updating the tools at the Canada Revenue Agency’s disposal to enforce the disbursement quota rules, beginning in 2022.

Full details can be found in the related background paper. Stakeholders are invited to provide their comments by September 30, 2021. Details on how to participate can be found in the consultation notice linked in the related products below.

The government will also be consulting with representatives from the charitable sector through the Advisory Committee on the Charitable Sector, which provides advice to the government on important and emerging issues facing registered charities.

Quick facts

  • There are more than 86,000 registered charities in Canada, each carrying out activities in support of one or more of the four recognized categories of charity—the relief of poverty, advancement of education, advancement of religion, and other purposes beneficial to the community.
  • The Government of Canada understands that registered charities are an important part of Canadian society, and it encourages Canadians to donate generously through the Charitable Donation Tax Credit for individuals and deduction for charitable donations for corporations.
  • In 2019, Canadians claimed charitable donation tax receipts for more than $11 billion, and corporations claimed gifts of approximately $4 billion.

Related products

Contacts

Media may contact:

Media Relations
Department of Finance Canada
mediare@fin.gc.ca
613-369-4000

General enquiries

Phone: 1-833-712-2292
TTY: 613-369-3230
E-mail: financepublic-financepublique@fin.gc.ca

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Here is a background paper from the Department of Finance:

 

Backgrounder for Disbursement Quota Consultation

The government provides significant tax support to registered charities. To ensure tax-supported donations are used effectively, registered charities must meet several requirements. One requirement is to spend a minimum amount each year on their own charitable programs or on gifts to qualified donees.Footnote1 This is known as the “disbursement quota.”

The disbursement quota is determined based upon the value, averaged over a 24-month period, of a charity’s property (e.g., real estate or investments) not used for charitable activities or administration. Currently, the disbursement quota is set at 3.5%.Footnote2 Footnote3

History

The disbursement quota, introduced in 1976, was intended to ensure that a significant portion of a charity’s resources were devoted to its charitable purposes. At the time, the disbursement quota included both an obligation for charities to expend a minimum amount for which the charity had issued official donation receipts in the immediately preceding year (80% for charitable organizations and 90% for foundations) and a minimum expenditure requirement of 5% for private foundations based upon the value of any property not used in charitable programs or administration (which was subsequently lowered to 4.5% and extended to public foundations in the 1980s).

In 2004, as part of a broader reform of the Income Tax Act rules regarding charities, the disbursement quota was reduced from 4.5% to its current level of 3.5%. This lower rate was considered at the time to be more reflective of historical long-term real rates of return earned on a typical investment portfolio held by a registered charity.

Budget 2010 saw another set of changes to the disbursement rules to make them more simple and equitable for all charities.  In particular, the rules were simplified by removing the majority of requirements, including the requirement that charities disburse amounts based on previous years’ tax-receipted income.

Review of the Disbursement Quota Rate

Given that the 3.5% disbursement quota rate has been in place for a number of years, it is appropriate that it be evaluated to determine whether it is still reflective of expectations of long-term real rates of portfolio returns, and whether the disbursement quota strikes the appropriate balance between providing long-term, sustainable funding for the charitable sector and on ensuring that tax-assisted donations are deployed towards charitable activities on a timely basis. In particular:

  • Allowing some capital growth within foundations is critical to ensuring the sustainability of grant-making within the charitable sector, and will generally increase overall funding available to the charities over the longer-term.
  • While recognizing longer-term goals, an effective disbursement quota should also ensure that adequate funding is available to support the current needs of the charitable sector, even if it limits some growth. Some argue that tax-assisted donations, which benefit from immediate tax assistance, take too long to deploy towards charitable programs and the current disbursement quota (whose rules have been significantly relaxed over time) is unduly allowing the accumulation of capital.

Since 2010, there has also been a significant accumulation of investment assets by foundations in Canada. At the same time, some observers have noted that charities are facing heightened demand and strained revenue streams, particularly as a result of the Covid-19 pandemic. Several stakeholders in the sector have advocated that charitable foundations with significant investment assets should be required to draw upon their reserves in order to increase support for charitable organizations as they work to provide important services in our communities.

As announced in Budget 2021, the Government is examining whether the current disbursement quota rate continues to be appropriate and whether the Canada Revenue Agency (CRA) has the proper toolkit to enforce these rules.

International Comparison

Canada is not the only country that places a minimum expenditure obligation on charities.  For example, in the U.S., private foundations are required to spend a minimum annual amount towards their charitable purposes, including grants to other charitable organizations. Referred to as the distributable amount, private foundations are generally required to distribute a minimum of 5% of the combined fair market value of all their assets, other than those used or held for an exempt purpose.Footnote4

Similarly, in Australia, deductible gift recipient organizations face differing rules depending on the type of organization. However, public ancillary funds are required to distribute at least 4% of the market value of their net assets based on the reported amount at the end of the previous financial year and private ancillary funds must distribute at least 5%. Exemptions are provided for public ancillary funds that have been established for less than 4 years. Penalties may be applied for not meeting the minimum requirements, but a fund can apply to reduce its minimum annual distribution rate if it is unable to meet it.Footnote5

Relieving Provisions

In Canada, if a charity is unable to meet its disbursement quota, it is permitted to apply a disbursement excess from one year to offset a shortfall in the previous year and in the five immediately following tax years. These provisions effectively allow an organization to meet its disbursement on average over a particular timeframe, accounting for the fact that the funding it provides may be higher in some years and lower in others.

In addition, for organizations facing exceptional circumstances that prevent them from meeting their disbursement quota obligations, the Income Tax Act includes a special relief provision. Specifically, on application by a registered charity, and if the Minister of National Revenue believes the circumstances appropriate, the registered charity may be granted a specified amount which is considered to have been expended in a tax year on charitable activities (and reported on the charity’s annual information return). Before relief is granted, generally a registered charity must use all disbursement excesses available from previous years.

Finally, a registered charity may obtain approval in writing from the Minister of National Revenue to accumulate property for a particular purpose, on terms and conditions and over any period of time that the Minister specifies. Once such permission is received, this property (and any income so earned) is excluded when calculating an organization’s disbursement quota.

These legislative provisions were added to the Income Tax Act at various times to ensure the proper functioning of the disbursement quota.  However, with the significant changes to the disbursement quota over time, including the removal of most of its requirements, these rules may no longer be necessary or may not need to be as generous as they currently are.

Canada Revenue Agency Administration

According to tax data, while the large majority of charitable organizations and foundations satisfy their disbursement quota, some charities are not meeting this obligation. Organizations that do not meet their disbursement quota face the risk of having their charitable status revoked. However, the CRA’s toolkit for enforcing the disbursement quota is currently limited. The key legislative tool the CRA has at its disposal is the ability to revoke the status of any registered charity that fails to meet its disbursement quota.

The CRA seldom revokes the registration of charities solely based on failure to meet disbursement quota requirements as such an action is broadly considered disproportionate to the non-compliance involved. This is because under the Income Tax Act, a charity whose registration is revoked is required to transfer all of its assets to other registered charities within one year or pay a 100% revocation tax on any assets remaining.

The Income Tax Act includes a number of monetary penalties for charities that are meant to assist the CRA in enforcing the rules without necessarily having to resort to revoking a charity’s registration, often referred to as “intermediate sanctions”. However, none of these intermediate sanctions directly apply to a charity that fails to meet its disbursement quota.

Launching Consultations

Budget 2021 announced the Government’s intention to solicit views from the public on potentially increasing the disbursement quota and updating the tools at the Canada Revenue Agency’s disposal, beginning in 2022. The Government is now soliciting the views of charities, practitioners, stakeholders and the public on these issues. In particular, it is interested in hearing views on the following:

  • Should the disbursement quota be raised to produce additional funding for charities, and to what extent?
  • Would it be desirable to increase the disbursement quota to a level that caused foundations to gradually encroach on investment capital, and would it be sustainable in the long-term for the sector?
  • What additional tools (e.g., monetary penalties or other intermediate sanctions) should be available to the CRA to enforce the disbursement quota rules? 
  • Do the relieving and accumulation of property provisions continue to be useful for charities?
  • Do the existing carry-forward provisions strike the appropriate balance between ensuring the timely disbursement of funds and allowing foundations to make large gifts on a more infrequent basis?  
  • Are there any temporary changes to the disbursement quota that should be considered in the context of the Covid-19 recovery?

The Government will also be consulting with the Advisory Committee on the Charitable Sector, an advisory body made up of representatives from the charitable sector that provides advice to the government on important and emerging issues facing registered charities.