Charities - Disbursement Quota Reform
 |
These changes should help to reduce the compliance burden on charities. |
Canadian taxpayers annually donate a significant amount to charities. According to Statistics Canada, donations by individuals in 2008 were over $8 billion. Not only are donations in aggregate a significant amount, but taxpayers increasingly want to ensure that funds donated to charities are used to carry out their stated programs. Stakeholders have also suggested that the current rules have created an unduly complex and costly administrative system that affects small and rural charities in particular.
In light of these facts, charities’ administration has become a recent focus of the CRA. The 2010 federal budget proposes some changes that should simplify the required administration and reporting by charities, and also introduces an anti-avoidance measure to prevent abuse of an organization’s charitable status. The proposals are effective for fiscal years that end on or after March 4, 2010. They have not yet been passed into law.
With the budget changes, the disbursement quota calculation will be simplified, and new limits will be imposed on the amount that can be accumulated within the charity.
In general terms, the disbursement quota is a guide that was supposed to ensure that a charity is spending its funds on charitable activities, and not accumulating significant assets. Stakeholders, however, pointed out that the current rules were not achieving this goal despite the complication the rules create.
Under current law, the disbursement quota calculation is based upon receipted donations received in the previous years — 80% of such receipts must be spent on charitable activities. In addition, the charity is required to expend 3.5% of all assets not currently used in charitable activities or administration if these assets exceed a threshold of $25,000.
The new disbursement quota rule drops the 80% rule and is now a function of the extent to which the fair market value of property owned by the charity over the previous 24 months exceeds $100,000 (for charitable organizations), or $25,000 (if a charitable foundation). The disbursement quota is 3.5% of this amount. With this simplification, the definitions of enduring property, capital gains pool, and specified gifts are also repealed.
The reference to a $100,000 threshold above is also a change. The current rule provides that charities can have $25,000 or less in assets not used in charitable programs or administration. This amount will be increased to $100,000, except for charitable foundations where the limit remains at $25,000. Charities will be allowed to accumulate property in excess of the threshold for a particular purpose, such as a building project, upon receipt of written approval from the Minister of Revenue.
As of August 15th, Form T3010B, Registered Charity Information Return, had not been changed to reflect these proposals and the CRA has instead posted a page of instructions to adapt the old returns for the new rules. This page can be accessed at the following link: http://www.cra-arc.gc.ca/chrts-gvng/chrts/bdgt2010/t3010_nsrt-eng.html.
In keeping with a simplified approach, broader anti-avoidance rules were introduced, especially for transactions between related charities. For example:
-
Where a charity receives a gift from a charity with which it does not deal at arm’s length, the receiving charity must spend an amount at least equal to the amount of the gift, over and above the disbursement quota. Unless the donor charity designates the gift, the failure to meet this rule creates a liability for the receiving charity of 110% of the amount by which the fair market value of the gift exceeds expenditures.
-
Where a charity enters into a transaction, including a gift to another charity, and it may reasonably be concluded that a purpose of the transaction is to avoid or unduly delay the expenditure of amounts on charitable activities, there is a penalty of 110% of the amount avoided or delayed. Note that this rule previously referred to a “main purpose”.
In either of these situations, the charity’s charitable status could be revoked.
These changes should help to reduce the compliance burden on charities while maintaining public confidence in charities’ administration of their charitable activities. Should you have questions about these proposed changes, please contact your BDO advisor.
Next section: CRA Access to Working Papers
Download this issue of the Tax Factor
