Blog: Does My Charity Need to Worry about the Disbursement Quota?September 1st, 2015
Since 1976, the Canadian federal government has imposed a disbursement quota (DQ) on Canadian registered charities to ensure that a registered charity’s resources are devoted to its mandated purposes. Through a major system reform in 2010, the DQ has become much less complex for smaller charities, but it’s still something to be aware of for those with oversight responsibilities within these charities.
The DQ is the minimum amount that a registered charity must spend each year on its own charitable programs or on gifts to qualified donees (other charities). However, many charities may not need to worry about the quota at all.
A charity must only comply with the DQ if it has excess assets that are not being used for charitable activities or administration, which are normally in the form of investments. What’s key is that it is only charities with more than $100,000 of excess or unused assets (or $25,000 for charitable
foundations), who are subject to the DQ.
Here’s where it gets technical; – the DQ calculation is based on an average of the excess assets over the 24 months before the beginning of the year, and is calculated as 3.5% of that average value. For example, if on average a charity had $500,000 of excess assets in 2013; $700,000 in 2014; and $1,000,000 in 2015, the 2015 disbursement quota is 3.5% of the 2013 and 2014 average. As the 2013 and 2014 average is $600,000, the 2015 disbursement quota would be $21,000.
Luckily, the 3.5% quota is not generally a stringent test to meet (remember is it only 3.5% of any excess assets – not total assets). In our example, the charity would only have to spend $21,000 during the year on activities related to their purpose – likely not a stretch for most active charities.
There may be, however, many valid reasons why a charity accumulates excess assets, and could be in danger of not meeting their quota. They may be saving for a building or an expensive piece of equipment, or perhaps there are large endowments with restrictions on how the funds can be spent. If this is the case, then relief may also be available – the charity can request permission to accumulate assets or for a reduction in the quota if there were circumstances beyond their control which resulted in them not meeting their spending requirements.
Another stipulation that makes the DQ less worrisome is that if a charity’s spending exceeds their DQ, that excess can be carried forward for five years or carried back one year to cover a shortfall. In a year with 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 carryback. It’s only troublesome if there are continuous shortfalls as this could lead to revocation of a charity’s registration.
For more information on the DQ or other issues related to charities or non-profits, contact your local Crowe MacKay advisor.
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