The disbursement quota was introduced in 1976, with a view to control the amount of fundraising and administrative costs incurred, and the accumulation of capital, by a registered charity. A charity was required to disburse in any year: 80% of the prior year's tax-receipted gifts, plus 3.5% of assets not used in charitable activities.

CRA decided in 2010 that they could better deal with these issues by other regulations and the threat of sanctions, including the revocation of a charity's registered status. As a result, the rules have changed, effective for fiscal years ending on or after March 4, 2010. The 80% disbursement rule has been repealed, and the rule regarding assets not used in charitable activities has been modified, so that this does not apply to such assets below a threshold of $100,000 (the threshold was previously $25,000). For foundations, the threshold remains at $25,000.

What are "assets not used in charitable activities"? These are usually real estate or investments not used directly in charitable activities or administration, and can include cash, mutual funds, GIC's, land and buildings.

The calculation is 3.5% of the average balance of these assets (i.e. the full value, not just the portion above the threshold) during the 24 month period prior to the beginning of the charity's year-end.

Charities can continue to accumulate property, for example, for a building program, but must receive written permission from the Minister to do so. Once this permission has been received, the charity can exclude the amount accumulated (plus interest earned on it) from the average value used for the purpose of calculating the 3.5% disbursement requirement.

There are new anti-avoidance rules that are aimed at preventing charities from distributing amounts to a qualified donee (usually another registered charity) with a view to delay the spending of funds on charitable activities. If the receiving charity is not at arms length from the giving charity, the receiving charity must spend 100% of the amount in the following year, or face a 110% penalty and possible revocation of their charitable status. This penalty can be avoided by the donor "designating" the gift which entails specifying that the gift be spent on a specific, restricted purpose, rather than on day-to-day operations.   

Although not part of the Disbursement Quota calculation, CRA introduced guidelines in 2009 to help them evaluate whether amounts spent by charities on fundraising (i.e. solicitation of support, either directly or through third parties) are reasonable. CRA's approach is that fundraising costs that are under 35% of revenue are unlikely to generate questions or concerns. Where, however, the percentage is between 35% and 70%, they will monitor the situation and observe any trend. Where this is above 70%, the charity must be able to provide rationale and explanation, otherwise CRA could deem this level of fundraising expense to be unacceptably high.

If you have any questions please contact your RLB LLP representative.