The ever-shorter August days remind me that autumn is around the corner and that most of 2022 is over.
In 2022, the Government of Canada had proposed several significant changes to charity law, which we summarized in our special issue on the 2022 Federal Budget.
We highlight a few key dates and reminders for charities as they enter the homestretch for 2022 and look towards 2023.
June 23, 2022: Qualifying disbursements rules and anti-directed giving rule take effect
The Budget Implementation Act, 2022, No. 1 (the “BIA”) received Royal Assent on June 23, 2022.
As of June 23, 2022, registered charities can make qualifying disbursements to non-qualified donees. Qualifying disbursements count towards disbursement quota.
Additionally, effective June 23, 2022, registered charities wishing to make a grant that is a qualifying disbursement cannot act on a donor’s implied or express direction on who should receive the grant.
While charities can start making qualifying disbursements, many might wish to wait for the Canada Revenue Agency (CRA) to publish its administrative guidance on the subject.
We expect that the CRA’s guidance, which is forthcoming, will elaborate on the steps that charities are expected to take to ensure, and the documents they are required to maintain to show, that qualifying disbursements are exclusively applied to charitable activities that further a charity’s purpose.
One more thing: For charities whose registrations are revoked because they are listed terrorist entities, the BIA also makes a technical fix to the revocation tax rules, changing how the winding-up period for these charities is calculated. These changes are deemed to have come into force on June 29, 2021.
Charities with fiscal periods starting on or after January 1, 2023: Disbursement quota goes up to 5%
In April 2022, the Government of Canada proposed increasing the disbursement quota (DQ) rate from 3.5% to 5% for the portion of a registered charity’s property not used in charitable activities or administration that exceeds $1 million.
In a technical briefing after the 2022 Federal Budget presentation, the Department of Finance confirmed that the new DQ rate would be applied as a graduated rate, such that the current rate of 3.5% would apply to a charity’s property not used in charitable activities or administration up to $1 million, and the new rate of 5% would apply to any such property that exceeds the $1 million threshold.
The proposed change applies to charities in respect of their fiscal periods starting on or after January 1, 2023.
As of the date of this article, Parliament has not introduced legislation codifying the DQ increase or any of its other DQ rule changes proposed in the 2022 Federal Budget.
The increase in the DQ rate for investment assets over $1 million will not affect the many charities that already spend in excess of 5% of their assets on charitable activities and grant-making annually. However, the numerous charities that rely mostly on capital to fund their charitable spending might struggle to meet the new target. In anticipation of the changes taking effect January 1, 2023, these charities should consider reviewing their trust portfolios and endowment funds this year, with the help of a member of our Social Impact Group, and determine whether they might need to approach CRA for relief.
