On August 9th, 2022, the Department of Finance Canada announced that it has published
draft legislation (and explanatory notes) to implement Budget 2022 tax measures and amendments for comment. These proposed changes will likely be included in a second
Budget Implementation Act (“BIA”) later on in the year.
We covered the first BIA here, which dealt with an additional system for Canadian charities dealing with non-qualified donees that don’t wish to use the “direction and control” rules.
Among the proposed amendments to the Income Tax Act (“ITA”) are changes to the disbursement quota for registered charities (sometimes referred to as “DQ”) and measures to increase transparency regarding the filing status of T3010s.
Changes to the disbursement quota
The proposed changes increase the DQ for charities that have assets over $1 million such that the normal rate of 3.5% applies to assets below $1 million and any assets above the $1 million are subject to a 5% disbursement quota.
Therefore, if the proposed changes are accepted, a charity with property over $1 million not used for charitable or administrative purposes in the last 24 months must disburse a minimum amount of funds equal to $35,000 (ie. 3.5% of $1 million) plus 5% for the portion of the property not used for charitable or administrative purposes in the last 24 months that is over $1 million.
The proposed changes do not fundamentally change the way the disbursement quota is calculated, they only make it a little more complicated.
Furthermore, this change is not immediate as we have noted in our blog here. It only applies to the first fiscal year starting in 2023.
This slight increase to the disbursement quota may satisfy some in the philanthropy community but we worry that it still falls short of generating a significant impact on funding to qualified donees. We would have preferred to see an increase to 7-10% in the disbursement quota and that the increase was immediate as we advocated for in our submission to Finance last September.
Furthermore, through the proposed changes, Finance has clarified (although it was probably not necessary), that “expenditures on administration and management of the charity” are excluded from the calculation to satisfy the charity’s disbursement quota. The proposed language excludes any mention of fundraising expenditures; however, the explanatory notes do state that “this provision excludes expenditures for management, administration and fundraising from satisfying the disbursement quota requirements.” It is not clear why the proposed changes don’t reference fundraising also being excluded.
The explanatory note further states that determining whether a particular expenditure relates to management, administration and fundraising will be “a factual determination based on the activities and practices of the organization.”
Registered charities should plan for the changes to come into effect on January 1,2023. Although this change may only have a real impact on less than 5% of Canadian charities, some of these charities will need to assess their current legal documents (such as articles, gift agreements, gifts acceptance policies, restricted gifts, etc.), adjust their investment policy statement, change their grantmaking budgets and, in some cases, enhance their grantmaking systems and capacity.
Reduction of disbursement quota and increased transparency on charity’s that request such reduction
Under 241(3.2) Provisions of Information – certain qualified donees, Finance has proposed a new paragraph (i) which permits CRA to release information that a registered charity has filed under subsection 149.1(5) dealing with a reduction in the disbursement quota as well as any response to such an application.
This change will provide a tiny increase in the transparency of charities such that, if a charity requests a reduction in their disbursement quota at least CRA will be able to release such information to the public.
Increased transparency about failure to file T3010 on time
Section 149.1(15) allows the Minister of National Revenue to communicate certain information about charities to the public.
The proposed amendments to 149.1(15)(a) will allow the Minster to disclose the filing status or non-filing status of the T3010 by Canadian registered charities. This amendment provides a bit of increased transparency in the charity sector. At the moment, CRA cannot disclose that a charity has failed to file its T3010 except to authorized representatives of the charity. About 600-800 charities lose their status every
year because of failure to file and many try to re-apply for charity status which is time consuming.
The information CRA sometimes has in its records as to who is authorized and their contact information is not always up-to-date. Many charities through omission or staff turnover omit to file their T3010 and lose their charitable status. Often the charity receiving the notice has changed addresses or the treasurer is no longer involved, etc.
By having the ability to disclose the failure to file it is more likely that a donor or someone else will notice this failure to file and will remind the charity to file their return if for example, it is added to the Charities Listing. Also, board or staff are more likely to be aware of the omission if it is added to the Charities Listing.
Furthermore, for donors it will be will good to know if the charity they support is up to date in its filing.
Note that if this amendment is accepted, the amendment will apply to charity information returns (T3010s) that are required to be filed for taxation years that end after the announcement date.
Legislative proposals:
The full legislative proposals relating to the Income Tax Act and Income Tax Regulations
can be found here:
Explanatory notes:
The full Explanatory Notes can be found here:
For ease of reference, we have reproduced the relevant proposed changes to the ITA below under Schedule “A”. All proposed changes are indicated in red or in black strikethrough. The current wording of these sections in the ITA can be found in Schedule “B” at the end of this document.
Important note: You can access the schedules outlining the legislative changes in the original article here.
Written by Mark Blumberg and Jessie Lang, lawyers at Blumberg Segal LLP in Toronto, Canada.
To find out more about legal services that Blumbergs provides to Canadian charities and non-profits as well as foreign charities please visit www.CanadianCharityLaw.ca, www.SmartGiving.ca,or www.CharityData.ca You can contact Blumberg Segal LLP at https://www.canadiancharitylaw.ca/contact_us or by telephone at 416-361-1982 or TollFree: 1-866-961-1982 or [email protected].
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