All registered charities in Canada have a “disbursement quota.” This is a term defined in the Income Tax Act, that generally refers to the minimum amount that registered charities are required to spend on their charitable activities on an annual basis.
This amount is calculated by taking the amount of property/assets such as buildings, shares, etc. of a charity not used directly in their charitable activities or administration and applying a prescribed formula under the Income Tax Act and its regulations.
Effective for taxation years that begin on or after January 1, 2023, the disbursement quota amount was increased from 3.5% to 5% on the portion of property exceeding $1 million by amendments to the Income Tax Act. These amendments were made in the Fall Economic Statement Implementation Act, 2022 that received Royal Assent on December 15, 2022.
The spirit and intent of the higher disbursement quota is to have more funds flood the charitable sector from registered charities that have excess funds building up.
If your organization relies on funding from a public or private foundation, for example, it is important to be aware that the foundation now has to disburse more and that this might present an opportunity for additional funding.
Note: Thanks to another amendment to the Income Tax Act a registered charity can make an application to the Minister of National Revenue to have their disbursement quota reduced for any taxation year. At this time, it is unknown how this will be implemented. Any reduction may be publicly disclosed.
What does this mean for a charity?
Although the disbursement quota has increased from 3.5% to 5% on the portion of property exceeding $1 million for all registered charities, the impact of this increase may affect certain registered charities differently depending on the “designation” of the organization.
The designation is determined by the Canada Revenue Agency (CRA) when an application for charitable status is approved (or upon a successful application for a changed designation.) See this website to find out how CRA has designated your registered charity: as a charitable organization or as a private or public foundation.
Note: The name of a foundation or charitable organization is not a conclusive indicator of whether it is designated as a charitable organization or as a public or private foundation.
Generally, a charitable organization is one that uses their resources on their own activities and that does not give most of their money to other organizations.
Most registered charities that do the charitable work on the front lines are charitable organizations, and as such, spend most of their resources on a yearly basis doing charitable activities.
So, this increase from 3.5 to 5% on the portion of property exceeding $1 million on the disbursement quota rate won’t have much of an impact on these kinds of registered charities because many of them are probably already spending well in excess of their disbursement quota on their charitable activities.
However, there will be exceptions and in that case the increase from 3.5% to 5% on the portion of property exceeding $1 million may necessitate some thoughtful planning.
Generally, private foundations and public foundations are the designation for registered charities that, unlike charitable organizations, gift funds to other registered charities rather than doing the charitable work themselves.
However, unlike charitable organizations that likely spend enough on their activities to easily exceed the increased disbursement quota, public and private foundations might have a challenge.
Some foundations have restricted the amount of funds they disburse every year in accordance with either internally or externally imposed policies on how they preserve the capital of their foundation. Now, however, public and private foundations must disburse more and accordingly, these foundations might have additional funds to give out.
Yvonne Chenier, KC, is a lawyer and philanthropy consultant –Yvonne brings more than 35 years of experience helping those in the philanthropic, nonprofit, and social enterprise sectors as general legal counsel and as an advisor on planning, organizational, regulatory and governance matters.