The Disbursement Quota

A registered charity must meet certain criteria to maintain its status. One requirement is that it must make a minimum amount of qualifying disbursements each year. This is known as the disbursement quota (DQ). This article discusses the DQ for various charitable entities and what qualifies as a disbursement.

What is it?

The DQ is the minimum amount that a registered charity must spend on its own charitable activities or on grants to other registered charities on an annual basis. The intention behind the DQ is to ensure that registered charities don't indefinitely hold the property they've been fortunate enough to grow or acquire from taxpayers with tax assistance (ability to issue donation receipts and the ability to earn tax-free income). The DQ guarantees that every year, a minimum of the property is used or distributed for charitable purposes, while still allowing for most of the property to remain invested and grow, thus ensuring the charity can continue to pursue its future charitable endeavours.

Once a year, the DQ is calculated based on the value of the registered charity's property not used in its charitable activities or administration. Property includes any real estate (e.g. land, buildings), investments and other assets. For example, consider a charity that provides housing to those in need. It may own the building its residents live in, but also have commercial rental space in this building. The value of the real estate attributable to the residential use (the charitable purpose of the organization) would be excluded from the DQ, whereas the commercial space would be included in the DQ.

Note: There are some exceptions to the DQ. For example, it's possible for a registered charity to apply to the CRA for a DQ reduction, where their disbursements were lower than expected due to circumstances beyond their control.

What qualifies as a disbursement?

A disbursement is an amount that's spent on the registered charity's own charitable activities, or qualifying disbursements made to qualified donees or grants to non-qualified donees. It's important to note that charitable expenditures (management, administration and fundraising cost) are not disbursements.

Calculating the DQ

The DQ is calculated based on a 24-month average. It's calculated slightly differently for foundations and operating charities.

Operating Charity DQ

If an operating charity has property not used in charitable activities or administration valued over $100,000 during the 24 months before the fiscal year, their disbursement quota is:

• 3.5% of the average value of the property up to $1M
• 5% on the amount that exceeds $1M

Public and Private Foundations DQ

If the average value of the foundation's property not used in charitable activities or administration during the 24 months before the beginning of the fiscal year exceeds $25,000, their disbursement quota is:

• 3.5% of the average value of the property up to $1M
• 5% on the amount that exceeds $1M

Example calculation:

A private foundation currently has a portfolio of investments of $1.5 million with a fiscal year-end of December 31. Due to market fluctuations, donations into the foundation, and grants out of the foundation, its value fluctuated over the 24 months prior to December 31 of year 2. On December 31, the private foundation was $1.5 million and dipped to $900,000 on December 31 of year 2. The average value over the 24-month period would be $1.2 million. The private foundation would have a DQ of $45,000 (calculated as 3.5% x $1 million plus 5% x $200,000).

Rolling average note: Under certain circumstances, if a foundation is not able to meet its DQ from its investment returns or donated funds in a given year, it can be required to apply excess amounts accumulated from its prior five year rolling average of disbursements. For example, if they disbursed 8% three years ago, and were only able to disburse 3% this year, they could apply some of the excess 4.5% from three years ago.

Conclusion

The disbursement quota is an important component of charitable giving planning in Canada. It's something to be mindful of for registered charities that are planning their charitable activities and grant disbursements.

This article may contain strategies, not all of which will apply to your particular financial circumstances. The information in this article is not intended to be legal, tax or insurance advice. To ensure that your own circumstances have been properly considered and that action is taken based on the latest information available, you should obtain professional advice from a qualified tax, legal and/or insurance advisor before acting on any of the information in this article.