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

The Department of Finance Canada (“Finance Canada”) ended its consultation on the disbursement quota (“DQ”) on September 30, 2021. Imagine Canada, a leading voice for Canada’s charitable sector, and the Pemsel Foundation, a leading Canadian think tank on legal issues involving charities, have recently released copies of their submissions to Finance Canada on the DQ consultation. The two submissions reflect a number of shared positions, as well as some differing views, concerning what should be done with the DQ in the future.

As explained in Charity & NFP Law Bulletin No. 498, the DQ, in general terms, 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. It is based on the value of a charity’s property that is not used for charitable activities or administration, and is currently set at a rate of 3.5% for charities, regardless of whether they are charitable organizations, public foundations or private foundations.

Imagine Canada published its submission on the DQ consultation on November 8, 2021, in which it advocates for “a scaled disbursement quota designed to infuse new funds and reflect the different realities of the foundation community.” By way of an example, Imagine Canada explains that a scaled disbursement quota could keep the minimum threshold at 3.5% for “smaller organizations” with less than $1 million in assets, which could then increase to “7% and beyond for larger organizations.” Imagine Canada envisions a system where there would be “a mandated review of the disbursement quota at five year intervals” and proposes, among other recommendations, that this periodic review be grounded “in the principle of ‘intergenerational justice’” so that the current generation may have decision-making authority over the timing of the release of funds for public benefit.” In addition to the current generation, Imagine Canada recommends that the sector be engaged with in reviewing DQ policy, including proactively seeking input from grantees, potential grantees and other organizations, but notably those having points of view coming from “outside the legal and foundation communities.”

Many of the DQ discussions to date have also considered how the T3010, Registered Charity Information Return can be improved. Imagine Canada makes several suggestions about improving the T3010, including identifying the causes of T3010 completion errors, implementing transparency and accountability measures through the T3010, and applying an “equity principle” to these measures through the T3010 process. It further recommends that the T3010 ask trustees and directors for more information about donor advised funds (also known as “DAFs”), including their link to the organization’s disbursement and accumulation strategy.

Imagine Canada’s comments on the need for improvement of the T3010 are shared by the Pemsel Foundation, which published its research series on the DQ consultation on October 18, 2021. The Pemsel Foundation’s analysis (focusing on available T3010 data) suggests that there are significant issues around data collection and enforcement, which should be addressed before, or in tandem with legislative changes, including in relation to the DQ. This approach will ensure that policy initiatives and the ensuing consultations are evidence driven.

The Pemsel Foundation also recommends that the CRA’s Charities Directorate undertake educational and compliance measures to ensure better data, including ensuring that T3010 data is complete and accurate. While the Pemsel Foundation does not recommend that information about DAFs be included in the T3010, it does recommend that information be obtained and consideration given to whether the disbursement quota should be applied to existing donor-advised funds within a charity.

However, the Pemsel Foundation’s approach to the DQ differs in some respects from Imagine Canada’s, most notably in that it recommends that no change to the disbursement quota be made “without better data.” The Foundation recommends the federal government’s DQ consultation be limited as much as possible to the disbursement quota rate and if the rate were to increase, that there be publicly available plans to later assess the impact of such a change. The Pemsel Foundation also recommends that an examination be made of how and the degree to which existing tools are used by the CRA for compliance and enforcement measures. Further, the Pemsel Foundation goes on to point out that having additional compliance tools without more enforcement by the CRA “would not be productive.”

Charities will want to carefully follow the discussion about the DQ in the coming months, particularly watching out for what is included in the 2022 Federal Budget about it. As is evident from both of these most recent submissions, the DQ continues to be a topic for which there is a wide variety of opinions, as well as differing recommendations within the charitable sector in Canada. In light of the DQ’s long history of complicated taxation provisions and earlier initiatives for reform and simplification of past DQ iterations, it remains to be seen how and in which direction the DQ will evolve in the future. Hopefully, the DQ will not revert to one of its earlier and more complicated versions which necessitated that charities regularly hire lawyers and/or accountants in order to ensure their ongoing DQ compliance.

Read the November 2021 Charity & NFP Law Update