Changes under the Income Tax Act could affect the way a charity carries out its operations and completes annual reporting for fiscal years ending in 2023 and beyond. There are fairly new requirements surrounding disbursement quotas, permission to accumulate property, and the ability to make grants to non-qualified donees, also known as grantees.
As many charities prepare to greet 2024 and file their T3010 Registered Charity Information Return (“Annual Return) next year, they should remember two fairly recent changes under the Income Tax Act. The first is a change, effective June 23, 2022, that allows charities to make grants to non-qualified donees, also known as grantees, to further the charity’s charitable purpose. Essentially, a qualified donee is a registered charity or other designated entity that is authorized to issue official donation receipts—a non-qualified donee is not authorized to issue donation receipts and could be a person or entity. The change gives charities additional flexibility in the way they achieve their charitable purposes and is an opportunity worth considering for 2024 and later years. This flexibility comes with internal control and reporting obligations, including new reporting requirements in the Annual Return. See Registered charities making grants to non-qualified donees (draft).
The second change was effective January 1, 2023, and relates to the calculation of the disbursement quota for average property values over $1M. The disbursement quota is now 5%, not 3.5%, for average property values over $1M. The disbursement quota is still 3.5% for average property values up to and including $1M. A charity has to calculate its disbursement quota to determine the minimum that it must spend each year on eligible activities. Eligible expenditures are the amounts spent on the organization’s own charitable activities, plus its gifts to qualified donees, and its grants to non-qualified donees. A charity can draw on disbursement excesses from the previous five fiscal periods to cover a disbursement quota shortfall for 2023. Another alternative is to create a disbursement excess in 2024, which may be carried back for one year. In the past, a charity could request permission to accumulate money or other property, for example, for special capital projects. That permission to accumulate property as opposed to spending it, meant that the charity had approval for a lower disbursement quota than it otherwise would have had. Since December 31, 2022, the Canada Revenue Agency (CRA) is no longer granting approvals to accumulate property and will not consider any requests that it receives after December 31, 2022. See Accumulation of property.
On a related matter, two different Annual Return forms will be available from the CRA as of January 2024 (including a new form described as version 24). One version of the form will apply to charities with fiscal year-ends on or before December 30, 2023 (these charities will use version 23). A different version applies to charities with year-ends on or after December 31, 2023 (these charities use version 24). If you are filing your Annual Return for a December 2023 year-end, ensure that you use the right form. See A new version of Form T3010 is coming in January 2024 – version 24.
Meeting your duty of care
Maintain your preferred status as a registered charity by complying with mandatory operating and reporting requirements. See SPP NP 1.06 – Taxes and Charitable Returns for guidance.
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