Ghost of Disbursement Quotas Past - Canada
September 20, 2010 By Drache Aptowitzer Professional Corporation
For the second time in six years the Federal government is changing the disbursement quota calculation for charities. Originally instituted in 1976 as a way to force charities to spend their funds on their charitable activities, the quota has turned into a cross between a math nightmare and an obstacle for the growth of small charities.
Part I - The Structure
For the second time in six years the Federal government is changing the disbursement quota calculation for charities. Originally instituted in 1976 as a way to force charities to spend their funds on their charitable activities, the quota has turned into a cross between a math nightmare and an obstacle for the growth of small charities. In 2004, the Liberal government of the day proposed ostensible improvements to the calculations ".to give charities greater flexibility to manage the gifts they receive, and to ensure that an appropriate proportion of charities' tax-assisted gifts and assets are devoted to charitable programs and services".
On the other hand, Budget 2010 recognizes that the disbursement quota is complex (it is, after all, part of the Income Tax Act), discriminatory and redundant. The discriminatory aspect of the disbursement quota is obvious as charities whose fundraising is dependent on donations face greater spending restrictions than charities which receive government grants or fees for service. However, it is on the ostensible redundancy that the government is basing its reasoning for significant amendments to the disbursement quota formula.
The Budget says that:
Recent legislative and administrative initiatives have strengthened the Canada Revenue Agency's ability to ensure that a charity's fundraising and other practices are appropriate. For example, the Canada Revenue Agency publication "Fundraising by Registered Charities" provides guidance for charities on acceptable fundraising practices.
This paragraph reflects a shocking misunderstanding of the fundamental basis upon which the CRA registers / regulates charities in the first place. What's even more surprising is that this misunderstanding could have been corrected by reading the CRA publication referred to in the budget!
Constitutionally, the Federal government cannot engage in charity regulation, it does however have the power to administer an income tax. Thus, because the Income Tax Act contains a donation tax credit the federal government has created a registration regime for charities and instituted, as a requirement for registration, a variety of different rules - including the disbursement quota. The Federal government (i.e. the CRA) has no jurisdiction to otherwise regulate charities as stated specifically in the CRA publication cited in the Budget. Thus, there is no Federal legislation controlling fundraising apart from the disbursement quota. Moreover, the CRA's ability to enforce its administrative fundraising policies is based in large part on the disbursement quota. So the Federal government has effectively eviscerated any fundraising regulation the sector had.
As a consequence, one is left with the distinct impression that there is now a huge gap in the regulation of charities that will be taken advantage of by either the CRA to extend its hegemony, or by elements of the sector, until such time as a future Parliament steps in to fill the hole.
Part II - The Technicalities
Budget 2010 breaks the disbursement quota into two parts. The charitable expenditure part deals with rules of enduring property (the ten year gift rule), the capital gains pool rules, the specified gifts rules, and the 80 / 20 rule. The capital accumulation part deals with the requirement that a charity disburse 3.5% of its assets not used directly in its charitable activities. The purpose of this second part is to ensure that charities spend their assets on charitable activities and not simply amass huge endowments.
Budget 2010 does away with the complicated provisions of the charitable expenditure part of the formula and amends the capital accumulation part in a way which simplifies the calculation and gives the government of the day some flexibility to help charities meet the requirements regardless of the prevailing macroeconomic situation.
The new capital accumulation formula is now A x B x 0.035 / 365. Where A is the number of days of the year in which the organization has been a registered charity. And B is the dollar amount of a charity's assets owned at any point in the previous 24 months not used directly in charitable activities or administration (i.e. endowments). The amount will be determined from time to time in a regulation to the Income Tax Act. The new provisions also allow that charitable organizations with qualifying assets less than $100,000, and foundations with qualifying assets less than $25,000, are not subject to the new formula.
Finally, the Budget also institutes an "anti-avoidance" provision which does not allow a registered charity to meet its disbursement quota by transferring assets to another qualified donee which may then transfer it to a third. The new provisions will require that the recipient charity use the proceeds on its own charitable activities or transfer it to an arm's length charity (apparently an exception to the 'anti-avoidance' rule). The penalty for not properly expending the gift would be 110% of the expenditure avoided or revocation.
Alternatively, the transferring charity will be able to elect that the amount transferred will not count towards satisfying its disbursement quota, in which case the recipient charity would not be subject to the immediate disbursement requirement under the anti-avoidance rules.
There is no doubt that these changes will have a significant impact on the way charities conduct their business. It will certainly simplify the calculations and provide significant relief for smaller charities which were stifled by the previous restrictions on administrative expenses. Nevertheless, the changes will create significant uncertainty about the enforcement of the CRA's administrative policy and charities will have to be very careful about abusing their new freedom until some sort of judicial precedent is set or Parliament steps back into the fray.
ABOUT THE AUTHOR: Adam Aptowitzer
Adam Aptowitzer, LL.B., has been speaking and writing on the topic of charity law for several years. He has been published in several publications including the Canadian Taxpayer, the Canadian Fundraiser and the Not-for-Profit News and has been cited as an expert in several publications including the national media. He has recently published a widely circulated paper on the regulation of charities in Canada with the C.D. Howe Institute.
As a speaker he has presented to the C.D. Howe Institute, the Association of Fundraising Professionals, the Canadian Association of Gift Planners, the Canadian Bar Association and has given expert opinion testimony at a Parliamentary Roundtable. He has also appeared at the Tax Court of Canada and the Federal Court of Appeal. Adam co-hosts the popular A to Z of charity law in Canada with CharityVillage.com and is an executive member of the Canadian Bar Association's Charity and Not-for-Profit Law section.
Copyright Drache Aptowitzer Professional Corporation
More information about Drache Aptowitzer Professional Corporation
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
For the second time in six years the Federal government is changing the disbursement quota calculation for charities. Originally instituted in 1976 as a way to force charities to spend their funds on their charitable activities, the quota has turned into a cross between a math nightmare and an obstacle for the growth of small charities. In 2004, the Liberal government of the day proposed ostensible improvements to the calculations ".to give charities greater flexibility to manage the gifts they receive, and to ensure that an appropriate proportion of charities' tax-assisted gifts and assets are devoted to charitable programs and services".
On the other hand, Budget 2010 recognizes that the disbursement quota is complex (it is, after all, part of the Income Tax Act), discriminatory and redundant. The discriminatory aspect of the disbursement quota is obvious as charities whose fundraising is dependent on donations face greater spending restrictions than charities which receive government grants or fees for service. However, it is on the ostensible redundancy that the government is basing its reasoning for significant amendments to the disbursement quota formula.
The Budget says that:
Recent legislative and administrative initiatives have strengthened the Canada Revenue Agency's ability to ensure that a charity's fundraising and other practices are appropriate. For example, the Canada Revenue Agency publication "Fundraising by Registered Charities" provides guidance for charities on acceptable fundraising practices.
This paragraph reflects a shocking misunderstanding of the fundamental basis upon which the CRA registers / regulates charities in the first place. What's even more surprising is that this misunderstanding could have been corrected by reading the CRA publication referred to in the budget!
Constitutionally, the Federal government cannot engage in charity regulation, it does however have the power to administer an income tax. Thus, because the Income Tax Act contains a donation tax credit the federal government has created a registration regime for charities and instituted, as a requirement for registration, a variety of different rules - including the disbursement quota. The Federal government (i.e. the CRA) has no jurisdiction to otherwise regulate charities as stated specifically in the CRA publication cited in the Budget. Thus, there is no Federal legislation controlling fundraising apart from the disbursement quota. Moreover, the CRA's ability to enforce its administrative fundraising policies is based in large part on the disbursement quota. So the Federal government has effectively eviscerated any fundraising regulation the sector had.
As a consequence, one is left with the distinct impression that there is now a huge gap in the regulation of charities that will be taken advantage of by either the CRA to extend its hegemony, or by elements of the sector, until such time as a future Parliament steps in to fill the hole.
Part II - The Technicalities
Budget 2010 breaks the disbursement quota into two parts. The charitable expenditure part deals with rules of enduring property (the ten year gift rule), the capital gains pool rules, the specified gifts rules, and the 80 / 20 rule. The capital accumulation part deals with the requirement that a charity disburse 3.5% of its assets not used directly in its charitable activities. The purpose of this second part is to ensure that charities spend their assets on charitable activities and not simply amass huge endowments.
Budget 2010 does away with the complicated provisions of the charitable expenditure part of the formula and amends the capital accumulation part in a way which simplifies the calculation and gives the government of the day some flexibility to help charities meet the requirements regardless of the prevailing macroeconomic situation.
The new capital accumulation formula is now A x B x 0.035 / 365. Where A is the number of days of the year in which the organization has been a registered charity. And B is the dollar amount of a charity's assets owned at any point in the previous 24 months not used directly in charitable activities or administration (i.e. endowments). The amount will be determined from time to time in a regulation to the Income Tax Act. The new provisions also allow that charitable organizations with qualifying assets less than $100,000, and foundations with qualifying assets less than $25,000, are not subject to the new formula.
Finally, the Budget also institutes an "anti-avoidance" provision which does not allow a registered charity to meet its disbursement quota by transferring assets to another qualified donee which may then transfer it to a third. The new provisions will require that the recipient charity use the proceeds on its own charitable activities or transfer it to an arm's length charity (apparently an exception to the 'anti-avoidance' rule). The penalty for not properly expending the gift would be 110% of the expenditure avoided or revocation.
Alternatively, the transferring charity will be able to elect that the amount transferred will not count towards satisfying its disbursement quota, in which case the recipient charity would not be subject to the immediate disbursement requirement under the anti-avoidance rules.
There is no doubt that these changes will have a significant impact on the way charities conduct their business. It will certainly simplify the calculations and provide significant relief for smaller charities which were stifled by the previous restrictions on administrative expenses. Nevertheless, the changes will create significant uncertainty about the enforcement of the CRA's administrative policy and charities will have to be very careful about abusing their new freedom until some sort of judicial precedent is set or Parliament steps back into the fray.
ABOUT THE AUTHOR: Adam Aptowitzer
Adam Aptowitzer, LL.B., has been speaking and writing on the topic of charity law for several years. He has been published in several publications including the Canadian Taxpayer, the Canadian Fundraiser and the Not-for-Profit News and has been cited as an expert in several publications including the national media. He has recently published a widely circulated paper on the regulation of charities in Canada with the C.D. Howe Institute.
As a speaker he has presented to the C.D. Howe Institute, the Association of Fundraising Professionals, the Canadian Association of Gift Planners, the Canadian Bar Association and has given expert opinion testimony at a Parliamentary Roundtable. He has also appeared at the Tax Court of Canada and the Federal Court of Appeal. Adam co-hosts the popular A to Z of charity law in Canada with CharityVillage.com and is an executive member of the Canadian Bar Association's Charity and Not-for-Profit Law section.
Copyright Drache Aptowitzer Professional Corporation
More information about Drache Aptowitzer Professional Corporation
View all articles published by Drache Aptowitzer Professional Corporation
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
