Understanding the Disbursement Quota Rules

Navigating the complexities of Canadian charity laws and regulations can be a daunting task for staff and boards of small to medium-sized charities. It is critical, however, that charities understand the Disbursement Quota (DQ) rules, which dictate how much of a charity’s resources must be allocated to its charitable activities each year. With recent changes coming into effect, it’s more important than ever to stay informed.

What is the Disbursement Quota?

For most of us, DQ means we’re heading out for a delicious frozen treat!

But for those of us who work in the charitable sector, the Disbursement Quota is a minimum amount that charities are required to spend each year on their charitable activities or gifts to qualified donees. This ensures that charitable donations are actively used to further the organization’s mission, rather than being accumulated indefinitely.

Recent Changes to the Disbursement Quota

As of January 1, 2023, significant changes to the DQ rules were implemented:

  1. Increased Rate for Large Assets: The DQ has increased from 3.5% to 5% for the portion of property not used directly in charitable activities or administration that exceeds $1 million. For property valued up to $1 million, the rate remains at 3.5%​ 
  2. Calculation Period: Charities have a two-year window to meet their DQ obligations. For instance, the disbursement requirements for 2023 and 2024 must be met by the end of 2024​ 
  3. Clarification on Administrative Expenditures: Bill C-32 specifies that administrative and management expenses are not considered part of the DQ. However, certain expenditures, such as salaries and occupancy costs, may be partially allocated to charitable activities. Further guidance from the CRA is anticipated to provide more clarity on this issue​.
  4. Removal of the Accumulation of Property Rule: This rule previously allowed charities to exclude certain properties from the DQ calculation. Now, the CRA has the discretion to reduce a charity’s DQ obligation for a particular year upon request​
  5. Granting to Non-Qualified Donees: New regulations make it significantly easier for charities to grant funds to non-qualified donees, expanding the potential impact of charitable funds​ 

These rules can be nuanced and complex, and it’s important that charities seek the advice of legal counsel when making decisions with respect to the DQ.

Implications for Small and Medium-Sized Charities

These changes are designed to ensure that a greater proportion of charitable assets are actively used for charitable purposes. For smaller charities, this means careful planning and possibly revisiting financial strategies to meet the new requirements. Here are some steps to consider:

  • Review Legal and Financial Documents: Ensure that your articles of incorporation, gift agreements, and investment policies are updated to reflect the new DQ rules.
  • Adjust Investment Strategies: Align your investment policies with the new spending requirements to ensure compliance and optimize the use of funds.
  • Plan for Flexibility: Utilize the two-year window to strategically plan your disbursements, smoothing out any large expenditures over the allowable period.
  • Engage in Sector Guidance: Organizations like Philanthropic Foundations Canada (PFC) and Imagine Canada provide valuable resources and updates to help charities navigate these changes​ 

Conclusion

Staying compliant with the Disbursement Quota rules is critical for maintaining your charity’s good standing and maximizing its impact. By understanding and adapting to these recent changes, your organization can ensure it continues to fulfill its mission effectively and sustainably.

Feel free to reach out to us at Beacon Endowment Solutions for further guidance on navigating these changes and optimizing your charity’s financial strategies.

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