By Terrance S. Carter, Theresa L.M. Man and Jacqueline M. Demczur

Both the Canadian Bar Association Charities and Not-for-Profit Law Section (the “CBA Section”) and Canadian Association of Gift Planners (“CAGP”) have released written submissions in response to the Department of Finance Canada’s (“Finance Canada”) public consultation concerning the disbursement quota (“DQ”). The consultation (which was open for submissions between August 6, 2021 and September 30, 2021) arose from an initiative in Budget 2021 in relation to questions about a potential increase in the annual DQ. As explained in Charity & NFP Law Bulletin No. 498, the DQ is the minimum amount that a charity must spend on its charitable activities or gifts to qualified donees to ensure that charitable funds are used for charitable purposes and are not accumulated indefinitely.

The CBA Section’s submission indicates its belief that “raising the DQ in a low interest environment will be challenging for many charities,” and that doing so is not the only solution to addressing concerns about the DQ. Instead, given the lack of data available, the submission calls for a study to be conducted to determine the issues and the appropriate solution. The CBA Section also raises concerns about overcomplicated compliance, which can significantly increase administrative costs for charities. It further states that “[b]efore determining the appropriate ‘fix’, it is necessary to determine if in fact there is a problem.”

The submission also sets out the CBA Section’s two main concerns in more detail, being: (1) the low interest environment, which is an issue for charities with endowments subject to capital payment restrictions, and for whom raising the DQ “would require spending capital as well as interest and dividends to meet a higher DQ”; and (2) existing legal obligations concerning certain funds with restrictions on spending (e.g. endowment funds) that can be challenging to amend or vary. Further, the CBA Section submission highlights that a higher DQ expenditure can challenge prudent investment and incentivize riskier investments, and suggests that expanding the scope of charitable disbursements that meet the DQ (such as including program related investments) should be considered. It concludes that more data is needed to determine if a DQ problem even exists in Canada and that, rather than determining the DQ percentage, which “constitutes an arbitrary exercise at best and possibly causes damage at worst”, it should instead be determined how increasing the DQ will most effectively help charities manage their resources and serve the public good.

The CAGP’s submission states that increasing the DQ rate “will not cure the funding gap experienced by grassroot organizations and community organizations that themselves are not qualified donees,” and that raising the DQ rate as the sole mechanism to increase charitable spending and community investment “is unadvisable without due consideration of the unintended impacts” on charities, donors and beneficiaries. Some unintended consequences set out in the CAGP’s submission include: (1) depletion of financial assets; (2) forcing charities into spend-down mode; (3) unnecessary administrative burdens on charities; (4) a focus of resources on the “here and now” detracting from long-term sustainable planning; (5) concerns that raising the DQ is a quick “band-aid” solution to a complicated issue; (6) the fact that there are many other data-driven methods to increase spending and investment; as well as (7) potential impediments to charities’ autonomy and flexibility to plan for charitable programs, manage their asset bases, optimize resources to delivery charitable programs, and accumulate investable assets for substantial charitable projects.

Given these concerns, the CAGP submission indicates that the need for discussion about “the entire regulatory and policy framework that the charitable sector operates within and how a modernization (of more than the DQ rate) is needed to more efficiently direct charitable resources to the most vulnerable and marginalized persons in society.”

The CAGP provides four recommendations: (1) reframing the consultation “on a charitable model that promotes the broadening of social impact by registered charities to a more diverse group of donees, including non-qualified donees that nonetheless carry out programming deemed charitable at law; (2) the CRA assist registered charities with DQ obligation compliance, promote data quality for the sector, as well as transparency and accountability from charities through more complete asset reporting and more fulsome information on investments; (3) that the federal government both mandate and invest in robust, accurate data collection to more meaningfully assist with periodic reviews of the DQ rate; and (4) an expanded CRA policy and administrative position in support of registered charities doing charitable work, including social impact investments, program related investments and mission-related investments.

Read the October 2021 Charity & NFP Law Update