What is a Disbursement Quota?
A Disbursement Quota is the minimum amount a registered charity is required to spend each year on its own charitable activities or on gifts to qualified donees (for example, other registered charities). The disbursement quota calculation is based on the value of the property that a charity possesses that is not used for charitable activities or administration.
For more information, visit www.cra-arc.gc.ca/chrts-gvng/chrts/chcklsts/dqb-eng.html and
Canada Revenue Agency – Annual Spending Requirement (Disbursement Quota)
What is property that is not directly used in charitable activities or administration?
These types of assets include real estate, such as land and buildings (other than the building where the charity is located), or investments such as cash in bank accounts, stocks bonds, mutual funds and guaranteed investment certificates.
How much is a registered charity required to spend to meet its disbursement quota, and when is it required to spend it?
With the passing of the 2010 federal government budget, registered charities are now required to spend an amount equal to 3.5% of their investment assets each year if their total investment assets equal or exceed a threshold amount of $100,000. For charitable foundations, the threshold amount is $25,000. This is called the Capital Accumulation Rule. The Canada Revenue Agency has issued new guidelines to help registered charities calculate the DQ for fiscal years that end on or after March 4, 2010.
The expenditure obligation applies to assets held by registered charities that are not used directly in their charitable work or administration. These assets include, for example, endowments and other investments or capital accumulations. A registered charity must, subject to certain exceptions, spend at least 3.5% of the average value of such assets annually, if their total investment assets equal or exceed $100,000.
What about the accumulation of capital for a particular purpose such as a building project?
The Canada Revenue Agency has the discretion to exclude accumulated property for a particular purpose from the Capital Accumulation Rule calculation.
How does a charity go about accumulating property outside of its disbursement quota?
If a charity is saving for a particularly large expenditure for a particular purpose, it can request permission from the Canada Revenue Agency to temporarily accumulate funds. Your charity might be planning to buy a building or an expensive piece of equipment. With written permission from the Canada Revenue Agency, it can then postpone the disbursement of funds for this particular purpose, within a designated time frame.
Registered charities can apply funds toward meeting its disbursement quota even while it is accumulating them. However, it must receive permission from the Canada Revenue Agency to do so.
How does a charity obtain the required permission from the Canada Revenue Agency?
To apply to accumulate property, registered charities can visit the Canada Revenue Agency website and write a letter of request. The request must include the following information:
- the specific purpose for which the funds will be used;
- the amount required;
- the length of time needed to accumulate the funds (minimum 3 years and maximum 10 years);
- the signature of a director/trustee or other authorized representative of the charity;
- the name and the registration number of the charity;
- the effective (starting) date.
If the request is approved, the registered charity will receive a letter confirming the amount that it can accumulate, the specific purpose for which the approval is granted, and the number of years that the accumulation can continue.
What if something goes wrong and the registered charity can’t meet the conditions in the letter of permission?
The Charities Directorate advises that if a registered charity fails to meet the terms and conditions of the permission to accumulate or if circumstances change and the accumulation must be abandoned, the unused accumulated amount and any income earned on the accumulated amount must be included in the calculation of the charity’s disbursement quota for that year.
The unused accumulated amount must be included as property not currently used in charitable activities or administration, to calculate the amount to report. If the charity needs more time to accumulate funds or wants to change the approved amount, it must apply in writing to the Charities Directorate.
How should a registered charity calculate its disbursement quota?
The Charities Directorate advises that if the average value of a registered charity’s property not used directly in charitable activities or administration during the 24 months before the beginning of its fiscal period exceeds $100,000, the charity’s disbursement quota is 3.5% of the average value of that property.
For more information, visit www.cra-arc.gc.ca/chrts-gvng/chrts/prtng/spndng/clclb-eng.html
Is there any information available to help registered charities figure out their disbursement quotas?
Yes. There is valuable information about the disbursement quota in the Canada Revenue Agency’s Guide T4033-1-10e. It is available at https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4033.html .
See also a CRA document entitled Meeting the Disbursement Quota, which contains a helpful checklist. It can be found at www.cra-arc.gc.ca/chrts-gvng/chrts/chcklsts/dqb-eng.html. The checklist is for the charity’s use only and should not be filed with the charity’s return.
What happens if a registered charity spends less than the disbursement quota in its fiscal year?
The Charities Directorate advises that if a registered charity spends less than the disbursement quota for a year, this is known as a disbursement shortfall. A registered charity can draw on disbursement excesses from the five previous fiscal periods to help it meet a shortfall. If there are no excesses available to draw on, the charity can try to spend enough the following year to create an excess that it can carry back to cover the shortfall. It is important to note that continuous shortfalls can lead to the revocation of a charity’s registration.
Is there any other help available to a registered charity if it has a spending shortfall?
A disbursement quota reduction may be available to registered charities whose expenditures on charitable activities or on gifts to qualified donees were less than required in the year if the charity faced circumstances beyond its control.
See http://www.cra-arc.gc.ca/chrts-gvng/chrts/prtng/spndng/shrtxcss-eng.html for more information.
How does a registered charity obtain a disbursement quota reduction?
To ask for a reduction complete Form T2094 – Registered Charities: Application to Reduce Disbursement Quota. www.cra-arc.gc.ca/E/pbg/tf/t2094/README.html
The Charities Directorate will only consider the application once a registered charity has exhausted all other available means to cover the shortfall, such as:
- applying any available excesses from the previous five years to cover the shortfall; and/or
- creating a disbursement quota excess in the next year and carrying it back to cover the shortfall.
Generally, the earliest that a charity can receive approval for a disbursement quota reduction is after the Canada Revenue Agency has issued a Registered Charity Information Return Summary for the fiscal period following the period in which the shortfall occurred.
What happens next after a registered charity receives approval to reduce its disbursement quota?
After receiving approval to reduce its disbursement quota, a registered charity must amend its T3010 return for the fiscal period in which the shortfall occurred to include the new approved amount.
To amend the return, the charity must complete Form T1240: Registered Charity Adjustment Request www.cra-arc.gc.ca/E/pbg/tf/t1240/README.html. After the adjustment has been processed, the charity will receive a revised Registered Charity Information Return Summary for that fiscal period.
What if a charity spends more than the disbursement quota in its fiscal year?
If a registered charity spends more on its charitable activities or by way of gifts to qualified donees than the disbursement quota in its fiscal year, this is known as a disbursement excess. Disbursement excesses can be carried forward for five years or carried back one year.
How does CRA treat enduring property?
See information provided here.
CPA Not-for-Profit Director’s Alert – New rules for charities’ fundraising expenses and program expenses