handing a folded heart from one hand to another

The federal government is raising the disbursement quota (DQ) — the minimum amount charitable foundations must grant annually to causes — and enhancing the DQ rules overall.

These changes, if passed, would apply to charities in respect of their fiscal periods beginning
on or after Jan. 1, 2023.

In the 2022 federal budget, tabled Thursday, the Liberals proposed increasing the DQ rate to 5% from 3.5% for the portion of property registered charities do not use in charitable activities or administration that exceeds $1 million. The 3.5% rate would continue to apply to property not used in charitable activities or administration under $1 million, Miller Thomson LLP indicated in a blog post.

“By increasing the minimum amount that large foundations must spend, the government is ensuring that there is no disproportionate accumulation that could instead benefit causes such as poverty alleviation, educational advancement [and] religion,” wrote David Truong, chief advisor, Expertise Center with National Bank Private Banking 1859, in sister publication Finance et Investissement.

In last year’s budget, the government announced it intended to increase the DQ and launched a public consultation on both increasing the DQ and updating how the Canada Revenue Agency (CRA) would enforce the DQ. The consultation closed in December.

Some stakeholders in the charitable-giving sector have long advocated for raising the DQ to as high as 10% to ensure that donations, which provide a tax benefit immediately, are not held in the foundation for too long. Others argue that raising the DQ could force some foundations to draw on capital to meet the requirement, endangering their ability to meet charitable goals in future years.

“The approach adopted by the federal government in the budget was a reasonable answer to the differing voices they heard around the DQ,” said Susan Manwaring, partner with Miller Thomson in Toronto. “The changes to the rate for larger charities and the related proposals introduced fit well within the current regulatory framework.”

“The DQ is designed to ensure the timely disbursement of tax-assisted funds towards charitable purposes,” the budget said, and the proposed increase would “increase expenditures by charities overall, while accommodating smaller grant-making charities that may not be able to realize the same investment returns as larger charities.”

Currently, if a charity is unable to meet its DQ, it can request relief from the CRA. If granted, a charity is deemed to have a charitable expenditure for that tax year.

In the budget, the government proposed amending the existing relief rules so the CRA would be able to grant a reduction in a charity’s DQ obligation for any tax year. To improve transparency, the government also proposed allowing the CRA to publish information relating to such a decision.

“The increase in the DQ rate for investment assets over $1 million will not affect the many charities that already spend in excess of 5% of their assets on charitable activities and grant-making annually,” Miller Thomson wrote in its post. “However, the many charities that rely mostly on capital to fund their charitable spending might struggle to meet the new target.”

Charities should consider reviewing their trust portfolios and endowment funds this year to determine whether they might need to approach the CRA for relief, the firm advised.

The government also proposed removing the “accumulation of property” rule that allows charities to apply to the CRA for permission to accumulate property for a specific purpose and to exclude the accumulated property, plus income earned on it, from the DQ calculation.

The budget suggested the rule is no longer necessary “given prior changes that simplified the DQ by removing a number of spending requirements, as well as existing provisions, which provide relief to charities.” The amendment removing the rule would not apply to approved property accumulations submitted by a charity prior to Jan. 1, 2023.

The government also proposed amending the Income Tax Act to clarify that expenditures for administration and management would not satisfy a charity’s DQ.

Finally, the government proposed allowing charities to make qualifying disbursements to organizations that are not qualified donees, provided that these disbursements help further the charity’s charitable purposes and the charity ensures the funds are applied to charitable activities.