On heels of report questioning charities' cash levels during pandemic, government seeks comments on disbursement quotas
As the pandemic continues to heighten the need for charitable activities, the federal government is seeking public comments to determine whether the amount Canadian charities are required to spend on their advocacies should be increased.
On Friday, the Department of Finance referred to the 2021 budget in which the government had signalled plans to potentially raise the “disbursement quota,” which is the minimum required amount for charities to spend on their charitable programs or gifts to qualified donees.
“[T]he Department of Finance is seeking feedback on potentially increasing the disbursement quota and updating the tools at the Canada Revenue Agency (CRA)'s disposal in order to enforce the disbursement quota rules, beginning in 2022,” it said via a news release posted on the Government of Canada website.
In a background paper accompanying the consultation, the finance department noted that the current disbursement quota rate of 3.5% has been in place since 2004, when it was lowered from 4.5% in consideration of the long-term real rates of return that registered charities had historically earned on a typical investment portfolio.
“While recognizing longer-term goals, an effective disbursement quota should also ensure that adequate funding is available to support the current needs of the charitable sector, even if it limits some growth,” the paper said.
Aside from a significant accumulation of investment assets within Canadian foundations, the paper said outside observers have noticed charities are facing heightened demand and strained revenue streams due to the COVID-19 pandemic. Some stakeholders in the space, it said, have called for charitable foundations with substantial investment assets to draw upon their reserves to boost support for charitable work and services in communities.
In a recent report, the Veritas Foundation said charities “across all groups” saw their cash positions increase post-COVID. Even as they received subsidies from the government to sustain them, the report said all charities, except for those dedicated to alleviating poverty, lowered spending on their activities.
“While it is to be expected that management would respond to a crisis of this scale defensively by increasing cash reserves, one has to ask if that is the mandate of a charity over the long term,” the report said.
Minimum expenditure obligations is not a uniquely Canadian policy, the Department of Finance said in its background paper. In one example, it said private foundations in the U.S. are generally required to distribute at least 5% of the fair market value of all their assets.
The federal government is asking stakeholders in the charitable sector – including tax practitioners, legal experts, researchers, and interested members of the public – to provide input on a number of questions including:
- Whether the disbursement quota should be raised to generate added funding for charities;
- Whether it would be desirable to increase the disbursement quota to a point where foundations will gradually “encroach on investment capital”;
- Whether existing carry-forward provisions appropriately balance the need for timely disbursement of funds and letting foundations make occasional large gifts; and
- Whether there are any temporary changes to the quota that should be considered in the context of the COVID-19 recovery.
Comments will be accepted until September 30, 2021.
