Enduring property. Specified gifts. Capital gains pool.
Poof. These are history.
Gone too are the complicated calculations required to determine the disbursement quota for charitable organizations.
The federal government finally acknowledged in the 2010 budget that the quota burdened many charities — especially smaller ones — with heavy compliance and costs. Moreover, the existing rules limited the ability of these organizations to build contingency reserves and did not achieve the government's goal of limiting spending on fundraising and non-charitable activities.
The federal government introduced the disbursement quota more than 30 years ago. The intent was to ensure that registered charities devoted appropriate resources to their own charitable purposes, limited their spending on fundraising and other non-core activities, and did not accumulate assets. Over the past three decades, however, the government ushered in other legislation that essentially achieved these goals. Ultimately, the disbursement quota simply compounded compliance issues.
The amendments announced in the spring budget, which are effective for charitable organizations with fiscal years ending on or after March 4, 2010 should become law by the end of this year. They will help to reduce compliance costs, make it easier for donors to endow a charity and give charities greater flexibility to build contingency reserves.
Following are the specific changes that have been introduced.
Charitable expenditure rule eliminated; capital accumulation rule simplified
Under current law, the disbursement quota requires that a charity must spend at least the following amounts annually on charitable activities:
- 80 per cent of the previous year's receipted donations (plus any amounts related to enduring property and transfers between charities); plus
- 3.5 per cent of all assets not currently used in charitable activities or administration if these assets exceed $25,000 (the fair market value of property owned by the charity over the previous 24 months).
The first requirement is the charitable expenditure rule; this 80% requirement has been eliminated. The second requirement, the capital accumulation rule, has been modified — the $25,000 threshold has been increased to $100,000 for charitable organizations. This enables smaller charities to maintain appropriate reserves to address contingencies. The threshold for charitable foundations stays at $25,000.
The disbursement quota is 3.5% of these amounts. With these modifications to the capital accumulation rule, there are no longer any requirements related to enduring property, capital gains pool and specified gifts.
As well, to enable a charity to accumulate property for a special purpose, such as a building project, the Canada Revenue Agency (CRA) will now have the discretion to allow charities to accumulate property above these thresholds.
Anti-avoidance rules strengthened
In order to maintain the public's confidence in charities, the government also broadened and simplified the anti-avoidance rules. Currently, the CRA can revoke the registration of a registered charity "if the charity has made a gift to another registered charity, and it can be reasonably considered that one of the main purposes of making the gift was to unduly delay the expenditure of amounts on charitable activities."
The new rule now applies not only to gifts but to all transactions, and not only to the main purpose of these transactions, but to any purpose to avoid or delay expenditures on charitable activities with the intent of delaying or avoiding the application of the disbursement quota.
Following are a couple of examples where the government could apply penalties or even revoke an organization's charitable status under these new rules.
- If a charity receives a gift from another 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, in addition to the disbursement quota. Unless the donor charity designates the gift, 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.
- If a charity enters into a transaction, including a gift to another charity, and the purpose of the transaction is determined to be avoiding or delaying spending funds on charitable activities, the government can impose a penalty of 110% of the amount.
Since these proposals have not yet been passed into law, Form T3010B, Registered Charity Information Return, has not yet been changed. For the time being, the CRA has posted a page of instructions to adapt the old returns for the new rules. Keep checking the site because new forms and guidelines will be posted as they are updated. If you have any questions or concerns about these proposed changes, be sure to contact your charitable organization's accountant.
Overall, though, these changes should make it a little easier for charities to manage disbursements and file tax returns. Every little bit helps!
Bob McMahon, CA, is a partner of BDO Canada LLP. He provides auditing, accounting and advisory services to nonprofits, charities and businesses. You can reach Bob in the Mississauga office at (905) 270-7700 or firstname.lastname@example.org.