Increasing disbursement quota not the way to help charities

  • August 20, 2021

The Charities and Not-for-Profit Section of the Canadian Bar Association is concerned that raising the minimum amount registered charities must spend on their charitable activities will make it difficult for them to plan their investment strategies to ensure their financial sustainability over the long term.

In a letter to Deputy Prime Minister and Minister of Finance Chrystia Freeland, the Section says the proposal in the 2021 federal budget to launch public consultations on a potential increase of the disbursement quota, or DQ, and beef up Canada Revenue Agency’s enforcement tools will be challenging for many charities.

A disbursement quota is the portion of charitable donations that registered charities have to spend delivering charitable programs or services each year – including gifts to other charities. The amount is calculated from the value of an organization’s property not used for charitable activities or administration. It is currently set at 3.5% of the average value of that property.

Up until 2004, that rate was 4.5% and, as the Section notes, it was a difficult threshold for charities to meet. The federal budget that year lowered it to a rate better aligned with long-term real rates of return on the kind of conservative investment portfolio typically held by a registered charity.

In 2004, a DQ rate of 4.5% was considered high relative to investment returns at a time when the Bank Rate was 2.25%. Today, that Bank Rate is 0.5%. In such a low-interest environment, the Section says, it is not advisable to raise the DQ.

Spending capital

The Section notes that a higher DQ might require charities to spend capital as well as interest and dividends. This would pose a problem for funds within charities that are restricted to spending only interest and dividends. “Capital, including capital gains, cannot be encroached on and spent in those trust funds because there is a legal prohibition on encroachment of capital which, if violated, amounts to a breach of trust,” it says.

These trusts would be required to make court applications to vary their terms in order to spend capital or capital gains. And these are costly. “Even the streamlined process to avoid court applications in some provinces, such as Ontario, is challenging and the constraints on permitted variations are strict,” the CBA Section letter reads.

Planning for the future

Charities need to be able to maintain assets over time. This is necessary not only to continue providing charitable programs and services but to carry out the intentions of donors who give endowments to registered charitable organizations that are meant to endure over time.

“Charities cannot plan if they don’t know whether and to what extent annual funds are available to fund existing and future programs,” the letter reads. Charities need to be able to invest their funds prudently, which allows them to maintain enough assets to fund future charitable activities. Increasing the disbursement quota in today’s low-interest environment would not be beneficial to the charitable sector and the public interests it serves.