Finance Minister Flaherty tabled the 2010 Federal Budget on March 4, 2010. In response to proposals from Imagine Canada, the Canadian Bar Association and others in the voluntary sector, Budget 2010 proposes to eliminate significant portions of the current disbursement quota regime. This change is sure to be welcomed by the charitable sector, as the disbursement quota has long been criticized as an administratively onerous and inefficient way of ensuring accountability by registered charities.
Budget 2010 proposes to repeal the 80/20 rule, which in substance means most aspects of the charitable expenditure requirements in the disbursement quota. Charities will no longer be subject to a requirement to disburse 80% of receipted donations received in the previous taxation year. The only expenditure requirement that will remain is that relating to property held by a charity that is not used directly in charitable activities or for administration. Charities will still be required to disburse a minimum of 3.5% of such accumulated property on their charitable activities or by granting to qualified donees.
As a consequence of these changes, several concepts which have been fundamental to the calculation of the disbursement quota will be eliminated. These will include enduring property, the capital gains reduction and capital gains pool. The concept of “specified gift” will be replaced by a new concept of “designated gift”, which affects the calculation of the disbursement requirement on transfers between related charities (described below).
Budget 2010 will modify the capital accumulation exemption in the Income Tax Act so as to allow small charities greater flexibility to accumulate capital without being subject to the 3.5% rule. Under the current disbursement quota rules, charities are exempt from the 3.5% rule if the charity holds $25,000 or less in assets that are not used directly in charitable activities or administration. Budget 2010 proposes to increase this threshold to $100,000 for charitable organizations (the exemption will remain at $25,000 for charitable foundations). Budget 2010 also proposes to strengthen the existing anti-avoidance rules related to gifts between related charities. Where a registered charity receives a gift from a non-arm’s length charity, it is proposed that the recipient charity be required to spend the full amount of the gift on its own charitable activities, or to transfer the amount to another arm’s length qualified donee, within the current or subsequent year. However, if the donor charity designates all or a portion of the gift as a “designated gift”, this designated portion will not be subject to the immediate disbursement requirement. Where the recipient charity fails to meet this disbursement requirement, it can lose its charitable status and/or it will be subject to a penalty equal to 110% of the amount by which the fair market value of the gift exceeds the amount required to be expended.
Finally, Budget 2010 proposes technical amendments to the existing rules that provide the Canada Revenue Agency with discretion to allow charities to accumulate property for a particular purpose (such as capital building projects). Whereas the current rules provide that CRA has discretion to deem accumulated amounts as having been spent on charitable activities, as a consequence of the elimination of the charitable expenditure rule, CRA will now be provided with discretion to exclude accumulated property from the 3.5% rule calculation.
These amendments will take effect for taxation years ending on or after March 4, 2010. Charities will benefit from the elimination of many of the more challenging and arguably unworkable aspects of the current disbursement quota rules, such as those surrounding enduring property. Finance indicates that it will monitor the effectiveness of CRA’s Guidance on Fundraising by Registered Charities and take action if needed to ensure the objectives in that Guidance are met. The elimination of the disbursement quota is a welcome step and we applaud the Department of Finance for responding to requests from the sector in this regard