Charities alert: Federal budget 2022

On April 7, the minister of finance provided the 2022 federal budget, including proposed amendments to the Income Tax Act (Canada) (the ITA).

Among the amendments are two very significant changes affecting Canada’s charitable sector.

Changes to disbursement quota

Since 2010, the disbursement quota applicable to registered charities has been set at 3.5% of the value (calculated on a rolling basis) of the charity’s property that is not used directly in charitable activities or administration. In practice, this has included investment property, including investment portfolios and real estate investments not used for charitable purposes or administration.

Budget 2022 proposed to increase the rate from 3.5% to 5% for the portion of such property that exceeds $1 million. The proposal reasons that this change will increase expenditures by charities overall, while accommodating smaller grant-making charities that may not be able to realize the same investment returns as larger charities. In effect, it suggests that charities with investments with a value of over $1 million should be able to realize annual income from such investment of at least 5% of the invested value.

The budget also proposes to amend the ITA:

• to clarify that expenditures for administration and management are not qualifying expenditures that will be counted toward a charity’s disbursement quota obligation;
• to provide Canada Revenue Agency with discretion to grant a reduction in a charity’s DQ obligation for a particular tax year; and
• to eliminate the provisions regarding permission to accumulate property for a specific purpose, as these are considered unnecessary in light of the other amendments.

Specific details of these proposals are not yet available. It is proposed that these measures would apply to charities in respect of their fiscal periods beginning on or after January 1, 2023.

Charitable partnerships

Under the current ITA, registered charities are limited to devoting their resources to carry out their own charitable activities or to provide gifts or grants to qualified donees. Charities that wish to operate certain activities through an intermediary organization (other than a qualified donee), are required to maintain ongoing control and direction over the activity in order to demonstrate that it remains the charity’s “own activity.”

Budget 2022 proposes a number of changes to allow charities to make qualified disbursements to organizations that are not qualified donees, provided that these disbursements are in furtherance of the charity’s charitable purposes and the charity ensures that the funds are applied to charitable activities by the grantee.

In order to be considered a qualified disbursement, certain accountability requirements must be met, such as:

• Conducting a pre-grant inquiry sufficient to provide reasonable assurance that the charity’s resources will be used for the purposes set out in the written agreement. This will include a review of the identity, past history, practices, activities and areas of expertise of the grantee.
• Having a written agreement between the charity and the grantee, including:
  • the terms and conditions of the funding provided;
  • a description of the charitable activities that the recipient will undertake;
  • a requirement that any funds not used for the purposes for which they were granted be returned to the charity; and
  • a requirement that records relating to the use of the charity’s resources be maintained and accessible for a minimum of six years following the end of the relevant taxation year.
• Monitoring the grantee, which would include receiving periodic reports on the use of the charity’s resources, at least annually (e.g., details on the use of the funds, compliance with the terms of the grant, and progress made toward the purposes of the grant) and taking remedial action as required.
• Receiving full and detailed final reports from the grantee, including outlining the results achieved with the charity’s resources, detailing how the funds were spent, and providing sufficient documentary evidence to demonstrate that funds were used for the purposes for which they were granted, including obtaining receipts and invoices where applicable. The charity would also be required to demonstrate that these final reports and supporting documentation were reviewed and approved by the charity.
• Publicly disclosing on its annual information return information relating to grants above $5,000.

Lastly, to reduce the risk of charities being used as a conduit for improper distributions, a rule will be extended to registered charities that will prohibit them from accepting gifts, the granting of which was expressly or implicitly conditional upon making a gift to a person other than a qualified donee. Put simply, a charity will not be able to accept a gift where the gift is conditional upon it being transferred to a person or organization other than a qualified donee.

Further details on these rules will follow, and these changes are proposed to take effect on royal assent to the enacting legislation.

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