As expected, Budget 2022 brings a change to the rules around how much money registered charities are allowed to keep tucked away in their investment portfolios. There has long been a ‘disbursement quota’ that registered charities have to meet each year, a minimum spend calculated as part of the overall value of the charity’s assets. Since 2004, each charity has been required to spend in each year a minimum of 3.5% of the value of its property (averaged over the last 24 months) that was not being used on charitable activities or administrative costs. This property is typically investments and real estate. The intention of this rule is to manage the amount of tax-supported money that sits in investments rather than circulating in the charitable sector. The relatively low modern 3.5% rate was based on investment return expectations in 2004, which was rather a different world than today’s. We don’t disagree that it was time to revisit this.
The federal government undertook a series of consultations on the disbursement quota this past year, in keeping with the promise in Budget 2021 to look at raising the quota. The main concern had to do with foundations, a kind of registered charity that operates mainly to make grants. The worry was that the rate of grant-making isn’t keeping pace with the rate at which the foundations’ investments have been growing. In fact, the Department of Finance identified a gap in charitable expenditures of at least $1 billion.
As a result of these consultations, Budget 2022 is introducing a new graduated disbursement quota system. For smaller investment assets, the quota is staying the same, but for investments over $1 million the quota is rising significantly from 3.5% to 5%, effective as of 2023. The intended effect of this will be to inject spending into the charitable sector, in the form of money that comes from large investment funds already within the charitable sector rather than from government coffers. The CRA will also apparently increase the amount of information it collects from charities regarding their investments and donor-advised funds, as well as whether they are meeting their disbursement quotas. The Budget promises a review of these changes in five years.