Disbursement Quota Changes in Effect

While the initial disbursement quota remains at 3.5%, it has increased to 5% for the portion of property not used in charitable activities or administration that exceeds $1M.  

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.