INTRODUCTION

As we mentioned in a previous blog post, Bill C-32 implemented a number of changes from the 2022 Federal Budget. This included a change to the disbursement quota (DQ). Bill C-32 received Royal Assent on December 15, 2022, and the DQ changes discussed below are effective for tax years beginning on or after January 1, 2023.

WHAT IS THE DISBURSEMENT QUOTA?

Disbursement quota is the minimum amount that a registered charity must spend each year on charitable activities carried on by it, or on making qualifying disbursements.

A qualifying disbursement is when a charity makes a gift to a qualified donee (basically, another charity) or makes resources available to a grantee organization. For more on qualifying disbursements, see our member resource, Qualifying Disbursements, and our blog post, Bill C-19 Has Passed.

WHAT HAS CHANGED?

Increase to 5% for Property Exceeding $1M

The definition and calculation of disbursement quota in the Income Tax Act(ITA) have changed.  The DQ has increased from 3.5% to 5% for the portion of property not used in charitable activities or administration that exceeds $1M.

This change is effective for tax years beginning on or after January 1, 2023.

See section 34(1) of Bill C-32; section 149.1(1) ITA.

If a charity’s property not used in charitable activities or administration does not exceed $1M, the DQ stays at the same rate of 3.5%.

Management & Administration Not Included (Clarification)

The ITA has been amended to clarify that “expenditures on administration and management of the charity” are not deemed to be an amount spent on charitable activities or a gift to a qualified donee (basically, another charity). In other words, these costs don’t count toward a charity’s obligation to meet its disbursement quota.

CRA’s T3010 guidance explains that expenditures can be partly charitable and partly management and administration. It is unclear whether the ITA amendments will impact CRA’s approach.

This change is effective for tax years beginning on or after January 1, 2023.

See section 24(2) of Bill C-32; *new* section 149.1(1.1)(d) of ITA

Discretionary Reduction in DQ

There are some changes to the wording around the Minister’s discretionary reduction of the disbursement quota.

In its previous form, when the Minister agreed to reduce the disbursement quota for a charity’s tax year, the amount was “deemed to be an amount expended by the charity.” In the amended version, the Minister will “specify an amount” and the “disbursement quota shall be deemed to be reduced by that amount.”

Charities must still apply for the reduction and the Minister still has discretion to grant or not grant it. It’s simply that the prescribed amount is now deemed a reduction rather than an amount expended.

This change is effective for tax years beginning on or after January 1, 2023.

See section 34(4) of Bill C-32; section 149.1(5) ITA

Disclosing Applications for Reduction in DQ

The government can disclose “to any person” the application, information filed in support of a charity’s application, and a partial or full copy of any letter or notice from the Minister to the charity about its application to reduce its DQ. 

This change is effective for tax years beginning on or after January 1, 2023.

See section 55(1) Bill C-32; s 241(3.2) ITA.

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What is Bill C-32?

The full name of the Bill is a mouthful: “An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 3, 2022 and certain provisions of the budget tabled in Parliament on April 7, 2022.”

In other words, it’s an act to implement budget and fall economic statement spending promises.

What’s Relevant for Charities?

As with most budget bills, this is a long one. This post is not an exhaustive overview. Instead, we’ve picked out a few items that will be of interest for charities.

DISBURSEMENT QUOTA

Increase to 5% for Property Exceeding $1M

Bill C-32 changes the definition and calculation of disbursement quota (DQ) in the Income Tax Act (ITA).  As promised in the 2022 Federal Budget, the DQ increases from 3.5% to 5% for the portion of property not used in charitable activities or administration that exceeds $1M.

This change is effective for tax years beginning on or after January 1, 2023.

See section 34(1) of Bill C-32; section 149.1(1) ITA.

Management & Administration Not Included

Bill C-32 clarifies that “expenditures on administration and management of the charity” are not deemed to be an amount spent on charitable activities or a gift to a qualified donee (basically, another charity). In other words, these costs don’t count toward a charity’s obligation to meet its DQ.

This change is effective for tax years beginning on or after January 1, 2023.

See section 24(2) of Bill C-32; *new* section 149.1(1.1)(d) of ITA

Discretionary Reduction in DQ

Bill C-32 amends the wording around the Minister’s discretionary reduction of the DQ.

In its current form, when the Minister agrees to reduce the disbursement quota for a charity’s tax year, the amount is “deemed to be an amount expended by the charity.” The new version will have the Minister “specify an amount” and the “disbursement quota shall be deemed to be reduced by that amount.”

Charities must still apply and the Minister still has discretion to grant or not grant the reduction. It’s simply that the prescribed amount is now deemed a reduction rather than an amount expended.

See section 34(4) of Bill C-32; section 149.1(5) ITA

Disclosing Applications for Reduction in DQ

The government can disclose “to any person” the application, information filed in support of a charity’s application, and a partial or full copy of any letter or notice from the Minister to the charity about its application to reduce its DQ.  This change is effective January 1, 2023.

This change is effective for tax years beginning on or after January 1, 2023.

See section 55(1) Bill C-32; s 241(3.2) ITA.

ACCUMULTATION OF PROPERTY

The section allowing charities, with the Minister’s approval, to accumulate property for a specific purpose, on specific terms and conditions, for a specific time, has been repealed.

This change is effective for applications made on or after January 1, 2023.

See section 34(5) of Bill C-32; former section 149.1(8) ITA

TRUST REPORTING

New Trust Reporting Requirements

In section 150(1.1) of the ITA, there is an exemption (s 150(1.1)) to filing required information returns. Bill C-32 changes that section so that there are more kinds of trusts that have to file T3 returns, unless the trust fits into a list of exceptions.

Content of Trust Reporting

Required information for trust reporting is listed in the Income Tax Regulations (ITA Regs). It includes:

• Name, address, date of birth, jurisdiction of residence, taxpayer identification number for each person who is a trustee, beneficiary, or has the ability to exert influence over trustee decisions (re: appointment of income or capital of the trust)

The required information about beneficiaries includes those “whose identity is known or ascertainable with reasonable effort by the person making the return at the time of filing” (s 204.2(2)(a) ITA Regs).

See section 72(1) Bill C-32; section 204.2 ITA Regs

Exceptions to Trust Reporting Requirements

What are those exceptions? There are a lot of them. If the trust:

• Has existed for less than 3 months
• Holds assets of less than $50K through the year and if the assets are one or more of:
  • Money
  • Debt obligation (see (a) of “fully exempt interest” in 212(3))
  • Share, debt obligation or right listed on a designated stock exchange
  • Share of capital stock of a mutual fund corporation
  • Unity of a mutual fund trust
  • An interest in a related segregated fund trust
  • An interest as a beneficiary under a trust with all units listed on a designated stock exchange
• Is required by law (federal, provincial, or rules of professional conduct) for the purpose of the activity regulated by those laws
• Is a registered charity
• Is a club, society or association
• Is a mutual fund trust
• Is a related segregated fund trust
• Is a trust with all units listed on a designated stock exchange
• Is prescribed to be a master trust
• Is a graduated rate estate
• Is a qualified disability trust
• Is an employee life and health trust
• Is a trust under/governed by a deferred profit-sharing plan, pooled registered pension plan, registered disability savings plan, registered education savings plan, registered pension plan, registered retirement income fund, registered retirement savings plan, tax-free savings account, employee profit sharing plan, registered supplementary unemployment benefit plan, first home savings account
• Is a cemetery care trust or trust governed by an eligible funeral arrangement

See section 35(1) Bill C-32; *new* section 150(1.1) ITA

Clarifications

A trust includes bare trusts and arrangements. What is a bare trust? A bare trust is one where the trustee’s “only function is to hold legal title to the property,” where that title is subject to the control and instructions of the beneficiary.

See section 35(2) Bill C-32; *new* section 150(1.3) ITA

The reporting does not require disclosure of information subject to solicitor-client privilege.

See section 35(2) Bill C-32; *new* section 150(1.4) ITA

Consequences for False Information or Omission

A person or partnership that fails to file a required trust return or makes a false statement (knowingly or due to gross negligence) is subject to a penalty equal to the greater of:

• $2,500 or 5% of the highest amount of the total fair market value of all property held by the trust.

See section 41(2) Bill C-32; *new* section 164(5), (6) ITA

Effective Date

This change is effective for tax years that end after December 30, 2023, one year later than in previously-released draft legislation.

CRA INFORMATION-GATHERING AUTHORITY

Earlier this year, during the Federal Finance Consultations on draft tax proposals, we fully explained the background of the changes to CRA’s information-gathering authority. In short, these changes respond to a 2019 Federal Court of Appeal decision (Cameco) that ruled the Minister of National Revenue exceeded its authority when CRA auditors compelled a corporation’s employees to give answers in an oral interview.

According to the Charter statement about Bill C-32, the amendments are to “modernize the information-gathering power” in s 231.1 and to clarify that, during an audit, people may be required “to attend at a place designated by the [government] authorized person or by video-conference and to answer the questions orally” [emphasis added].

See section 54(1) of Bill C-32; section 231.1(1) ITA

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There is big budget news in the Federal Budget, 2022! Two key pieces relate to direction and control and the disbursement quota. We’ve summarized these two items along with other information relevant to charities from both the Budget and the Supplementary Information.

Below each summary is a link to the source documents. Note that the Budget links are as close to the topic as possible, but aren’t pinpoints, so you might have to scroll just a bit to find the precise section.

Direction & Control

Proposed changes are made to implement “the spirit of Bill S-216, the Effective and Accountable Charities Act” which is currently scheduled for second reading on May 13 in the House of Commons. A total of $165M from 2022-2027 has been allocated to fund stronger partnerships in the charitable sector.

Budget 2022 would allow charities to transfer resources (“make qualifying disbursements”) to non-qualified donees if they further the charity’s purposes and the charity ensures the funds are used for charitable activities.

Resource Accountability

How would a charity show accountability for its resources? Budget 2022 proposes these requirements:

• A pre-grant inquiry that provides reasonable assurances the resources will be used for purposes set out in a written agreement; it would include the following information about the recipient:
  • Identity
  • History
  • Practices
  • Activities
  • Areas of expertise
• A written agreement
  • Terms and conditions of funding
  • Description of charitable activities by recipient
  • Requirement that funds not be used for any other purpose
  • Requirement that records relating to the use of the funds be maintained and accessible for at least 6 years after the relevant tax year
• Monitoring
  • Periodic reports (at least annual)
  • Details of how funds spent
  • Sufficient evidence to show funds used for intended purposes
  • Show review and approval by granting charity of the reports
• Full and final reports
  • Outline results achieved
  • Details of how funds spent
  • Sufficient evidence to show funds used for intended purposes
  • Show review and approval by granting charity of the final reports
• Disclosure
  • Public disclosure on information returns of information relating to grants over $5,000

Additional Changes for Direction & Control

There are a couple additional changes to support the move away from direction and control:

• Books and records – Budget 2022 would require charities, when asked by Canada Revenue Agency (CRA), to take all reasonable steps to obtain receipts, invoices or other documentary evidence to show grantees spent the funds appropriately
• Directed donations – Budget 2022 would address concerns about charities acting as conduits by prohibiting registered charities from accepting gifts that are expressly or implicitly conditional on making a gift to a person other than a qualified donee

Budget: Stronger Partnerships in the Charitable Sector (PDF p 195)

Supplementary Information: Charitable Partnerships (PDF p 15-16)

For background on S-216: Update: Bill S-216 on Direction and Control

Disbursement Quota (DQ)

The DQ would increase from 3.5% to 5% for the portion of property not used in charitable activities or administration that exceeds $1M. The Income Tax Act will be amended to clarify that management and administration expenditures do not count toward satisfying the DQ.

CRA would have discretion to reduce a charity’s DQ for a particular tax year. The Budget proposes to publicly disclose information related to these decisions.

It also proposes to remove the accumulation of property rule.

These measures would be effective on or after January 1, 2023 and would be reviewed after five years.

Additionally, CRA will improve its collection of information as to whether charities are meeting their DQ and information about donor-advised funds.

Budget: Boosting Charitable Spending in our Communities (PDF p 196)

Supplementary Information: Annual Disbursement Quota for Registered Charities (PDF p 14-15)

For background on DQ: Disbursement Quota Consultation

CRA Funding

The Budget would give $1.2B more funding to CRA over five years, beginning 2022-23 to:

• Expand audits of large entities that engage in aggressive tax planning
• Increase investigation and prosecution of suspected tax evasion
• Expand education outreach programs

Revenue recovered through these efforts is projected to be $3.4B over five years.

Budget: A Fair Tax System (Reinforcing the Canada Revenue Agency) (PDF p 211)

Anti-Racism Strategy & National Action Plan on Combatting Hate

The Budget would provide $85M over four years, starting in 2022-23 to Canadian Heritage to launch a new Anti-Racism Strategy and National Action Plan on Combatting Hate.

The intent is to support community projects that ensure Black and racialized Canadians, and religious minorities have access to resources to raise awareness of issues related to racism and to support full participation in the Canadian economy.

It would also provide $11.2M over five years to Canadian Heritage and Global Affairs Canada in response to religious discrimination. The funds would be allocated to:

• Special Envoy on Preserving Holocaust Remembrance and Combatting Antisemitism ($5.6M)
• Special Representative on Combatting Islamophobia ($5.6M)

Budget: A Diverse and Inclusive Canada (Fighting Systemic Racism, Discrimination and Hate) (PDF p 184-185)

Supporting Black Canadian Communities

Employment and Social Development Canada would receive $50M over two years for the Supporting Black Canadian Communities Initiative (see, for example Federal Black-Led Philanthropic Endowment Fund). The Minister of Families, Children and Social Development is responsible for exploring more options to continue its support of capacity building within Black-led and Black serving community organizations.

Budget: A Diverse and Inclusive Canada (Supporting Black Canadian Communities) (PDF p 185)

GST/HST Health Care Rebate

Charities and not-for-profits that provide health care services like those available in hospitals are eligible for an 83% GST/HST rebate if the health care service is being delivered with the active involvement of a physician or in a remote community, a nurse practitioner.

Budget 2022 would expand eligibility for charities and not-for-profits by removing the “remote community” restriction to include those with active involvement of a nurse practitioner regardless of location.

It would apply to rebate claim periods ending after Budget Day.

Budget: Tax Fairness and Effective Government (Table, Additional Actions) (PDF p 217)

Supplementary Information: GST/HST Health Care Rebate (PDF p 53-54)

For All the Details…

Budget 2022

Tax Measures: Supplementary Information

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What is Disbursement Quota?

Before we go too far, let’s define our terms. What is the DQ? CRA explains it as

“…the minimum amount a registered charity must spend on its own charitable activities, or on gifts to qualified donees. The disbursement quota calculation is based on the value of the charity’s property not used for charitable activities or administration.”

Property includes real estate, investments, and other assets such as cash, inventory, stocks, bonds, mutual funds, GICs, land, and buildings. Remember this is property not used in normal charitable activities. These amounts are reported on your charity’s annual T3010: line 5900 (for use in the current year) and line 5910 (for use in the following year).

It is currently set at 3.5% (see s.149.1(1) of the Income Tax Act).

There are differences in how the DQ is applied to charitable organizations and foundations. If the average value of a charitable organizations’ property not used for activities or administration during the 24 months before the start of the fiscal year is more than $100,000, the 3.5% applies to the value of that property. For foundations, the threshold is $25,000.

For more details on calculating the DQ, see Disbursement Quota in CCCC’s Knowledge Base and CRA’s Disbursement Quota Calculation.

Why is it Being Reviewed?

In Budget 2021, the federal government suggested that there is a $1B gap in charitable expenditures, pointing to $85B in long-term investments held by charitable foundations in 2019. Increasing the DQ is seen as a means to compel foundations to spend more.

How Can I Participate?

You can provide your feedback by email (preferred) to charity-bienfaisance@fin.gc.ca with the subject line “Charities Consultation” or snail mail, directed to the attention of the Tax Policy Branch.

Feedback on these specific questions is sought:

• 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?

Remember, you have until September 30, 2021 to share your input with Finance.

We welcome your thoughts as well! Members can log in to The Green to share perspectives and connect with fellow ministry team members.

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