On April 7, 2022, the Honourable Chrystia Freeland tabled a new federal budget (the \u201c2022 Budget<\/strong>\u201d). This is only the second federal budget since the beginning of the COVID-19 pandemic and a lot has happened since the 2021 federal budget. Canadians have witnessed new waves of COVID-19 with the Delta and Omicron variants, record-breaking inflation, discoveries of mass unmarked graves at residential schools, a snap federal election, the fall of Afghanistan, the first ever invocation of the Emergencies Act<\/em>, the Russian invasion of Ukraine, surging energy prices and a Liberal-NDP confidence deal.<\/p>\n\n\n\n The 2022 Budget reflects the government\u2019s spending priorities in response to both this past year\u2019s events and the last federal election. It focuses on affordability, growing the economy and includes targeted spending. The government is attempting to rein in its spending during the pandemic, while also laying the ground work for continued recovery and resiliency for Canadians. For the charitable sector, this means new measures designed to increase flexibility to encourage charitable spending (increasing the disbursement quota) and to carry out their charitable activities (permitting qualifying disbursements to non-qualified donees). There is also significant proposed spending and investments in new funding opportunities for charities and non-profit organizations working in almost every sector.<\/p>\n\n\n\n Below, we provide our highlights of the 2022 Budget affecting the charitable and non-profit sector:<\/p>\n\n\n\n The 2022 Budget proposes a number of changes to the Disbursement Quota (\u201cDQ<\/strong>\u201d) rules for registered charities. While draft legislation has not yet been released, the proposed changes are described as follows:<\/p>\n\n\n\n In a technical briefing following the 2022 Budget presentation, the Department of Finance confirmed that the new DQ rate would be applied as a graduated rate, with the current rate of 3.5% applying to a charity\u2019s property not used in charitable activities or administration up to $1 million, and the rate of 5% applying to any such property exceeding the $1 million threshold. The proposed changes will apply to charities in respect of their fiscal periods starting on or after January 1, 2023<\/strong>.<\/p>\n\n\n\n The DQ is the minimum calculated amount that a registered charity must spend or devote in a year to furthering its charitable purposes or on making grants to qualified donees. Currently, the DQ rate is equal to 3.5% of a registered charity\u2019s property not used directly in charitable activities or administration. The DQ is intended to ensure that registered charities deploy their tax-assisted investment assets for charitable purposes in a timely manner while allowing these charities to continue to grow those assets at reasonable rates to support future charitable activities.<\/p>\n\n\n\n It should be noted that administrative and management expenditures have never been considered qualifying expenditures for the purposes of calculating the DQ. However, this has often been a point of confusion as there may be administrative-like expenses that are properly categorized as expenditures on charitable activities (e.g. occupancy costs for buildings, or portions thereof, used to carry out charitable activities). Budget 2022 indicates that the Income Tax Act<\/em> (the \u201cAct<\/strong>\u201d) will be amended to make it clear that expenditures categorized as \u201cmanagement and administration\u201d do not count towards the DQ.<\/p>\n\n\n\n An increase to the DQ rate was widely expected by sector observers, particularly after the government held a public consultation on the DQ at the end of last year. Proponents of an increase suggested that the investment assets of many foundations have grown at a rate that has outpaced their charitable spending over the past few years, while many charities have struggled with heightened demand and strained revenue streams arising from the COVID-19 pandemic. Opponents of an increase have noted that not all foundations are alike in assets holdings and capital accumulation rates, and many are hampered from spending more on charitable activities due to donor restrictions.<\/p>\n\n\n\n The government\u2019s proposals with the 2022 Budget reflect concerns and wishes from all sides. Raising the DQ rate to 5% for investment assets exceeding $1 million would increase spending by charities overall, while accommodating smaller grant-making charities that do not have the same investment returns as larger charities.<\/p>\n\n\n\n The proposed DQ rate of 5% for investment assets over $1 million exceeds the previous pre-2004 level, when the DQ rate was 4.5%. However, the new DQ rate is comparable with the current 5% distributable amount requirement in the United States and the current 4% and 5% distribution requirements for public and private foundations in Australia, respectively.<\/p>\n\n\n\n Going forward, 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 many charities that rely mostly on capital to fund their charitable spending might struggle to meet the new target. In anticipation of the changes effective 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.<\/p>\n\n\n\n In response to the government\u2019s consultation on the DQ, many stakeholders expressed that more should be done to enforce compliance with the current DQ regime. They also called for improved data collection and reporting standards. Budget 2022 indicates that CRA will improve its collection of information from charities, including information about whether charities are meeting their DQ obligations, and information related to investments and donor-advised funds held by charities.<\/p>\n\n\n\n Charities that are unable to meet their DQs may continue to apply to the CRA and request relief. The government is also proposing to amend the existing rules so CRA will have the discretion to grant a reduction in a charity\u2019s DQ obligation for any particular tax year, to better reflect actual expenditures on charitable activities. For transparency, CRA will be permitted to publicly disclose information about charities that have been granted a reduction to their DQ.<\/p>\n\n\n\n Currently, the Act allows charities to apply to CRA for permission to accumulate property for a particular purpose. If granted, any property accumulated in accordance with that permission, including any income earned, would not be included in the calculation of the charity\u2019s DQ. This process has served as an alternative to excusing a charity from meeting the DQ.<\/p>\n\n\n\n Given the proposed provisions that provide relief from the DQ obligation, the government suggests that the accumulation of property rule is no longer necessary. Budget 2022 proposes to remove the accumulation of property rule from the Act. The government has indicated that removing this rule will not affect any approved property accumulations resulting from applications that were submitted by charities before January 1, 2023.<\/p>\n\n\n\n The 2022 Budget includes new measures intended to facilitate disbursements by registered charities to organizations that are not qualified donees under the Act. This proposal follows longstanding advocacy efforts by the charitable sector for changes to enable more effective and practical means of providing funding to non-qualified donees. The 2022 Budget also states that the proposal is intended to implement the spirit of Bill S-216, the Effective and Accountable Charities Act<\/em>, which was championed by Senator Omidvar and supported widely by the sector. Bill S-216 is currently before Parliament and has a similar objective. Read our article on Bill S-216<\/a> for more details.<\/p>\n\n\n\n Currently, registered charities can only make gifts to entities that are \u201cqualified donees\u201d (a category that is largely limited to other Canadian registered charities and a few other limited categories of organizations). Funding to other organizations, including many grassroots and BIPOC organizations as well as most international organizations, can only be provided under structures that meet a highly artificial \u201cown activities\u201d test, and under which the charity maintains \u201cdirection and control\u201d. The rules are structured so any non-qualified donee that receives funding from a registered charity must understand that it is working on behalf of the charity, carrying out activities that are viewed as the charity\u2019s own.<\/p>\n\n\n\n These rules have been criticized as artificial, impractical and highly paternalistic, making it difficult for registered charities to effectively achieve their charitable purposes when working with non-qualified donees.<\/p>\n\n\n\n The 2022 Budget proposes new measures intended to enable registered charities to fund non-qualified donees while ensuring accountability over the use of the funds. The new framework would allow registered charities to make \u201cqualifying disbursements\u201d to non-qualified donees (grantees) provided certain requirements are met. The disbursement must be in furtherance of the charity\u2019s charitable purposes and the charity must ensure that the funds are applied to charitable activities by the grantee.<\/p>\n\n\n\n The 2022 Budget also proposes certain mandatory accountability requirements in order for a grant to be considered a \u201cqualifying disbursement\u201d. The charity must:<\/p>\n\n\n\n Charities will be required to disclose on their T3010 annual information return information relating to grants above $5,000. The 2022 Budget did not provide details on the information that will have to be disclosed.<\/p>\n\n\n\n The 2022 Budget also proposes that, in order to enable CRA to verify that charitable resources have been applied to the purposes for which they were granted, charities will be required, upon request by CRA, to take all reasonable steps to obtain receipts, invoices, or other documentary evidence from grantees to demonstrate amounts were spent appropriately.<\/p>\n\n\n\n The 2022 Budget does not include draft legislative language for these new measures. As such, the actual specifics of the proposals are unknown and it is unclear when these proposals will come into force.<\/p>\n\n\n\n The 2022 Budget proposals are a positive step in that they recognize the need to address the difficulties that charities have in working with non-qualified donees within the existing rules.<\/p>\n\n\n\n The 2022 Budget, however, does raise a number of difficult questions. These can only be touched upon briefly at this early stage, but include the following:<\/p>\n\n\n\n These questions and others will likely continue to be discussed as these proposals are translated into legislative language. It must be acknowledged that there is a contrast between the approach proposed in the Budget and that proposed in Bill S-216, with the latter being endorsed widely by charity law experts. It is hoped that the sector will be given the opportunity to provide comment before any legislative language is finalized.<\/p>\n\n\n\n Recognition of the issue represents a significant step forward for the sector. As proposed, it is possible that the changes could better enable charities to financially support non-qualified donees, and do so in a less artificial and more effective manner. The question is whether the legislation will be drafted to do so or whether the regime will be less flexible than today. We will keep our readers apprised as this proposal moves forward.<\/p>\n\n\n\n The government is concerned that the new framework for allowing disbursements to non-qualified donees may increase the risk that charities will be used as conduits (i.e. as a flow through for raising funds for other organizations that are non-charitable). Consequently, the 2022 Budget proposes to create a new anti-avoidance rule designed to address this concern. The Act already contains a prohibition on registered Canadian amateur athletic association and registered journalism organizations accepting gifts that are expressly or implicitly conditional on the association or organization making a gift to another person. The government intends to extend this rule to registered charities, by prohibiting registered charities from accepting similar gifts, unless the condition is to make a gift to another qualified donee.<\/p>\n\n\n\n This proposed anti-avoidance rule will make things very difficult for registered charities fundraising to do work outside of Canada. Most development fundraising is done pursuant to appeals seeking gifts to be used to fund charitable work in a specific country. The directed donation rules could prevent a charity from accepting a gift intended to be used by the Canadian charity to fund the activity of a specific foreign charity (including when the funding is made as a qualifying disbursement).<\/p>\n\n\n\n The government confirmed its intention to proceed with recently announced tax measures, including a technical fix to the revocation tax rules. The fix clarifies how the winding-up period is calculated for charities whose registration is revoked because they are listed terrorist entities. The winding-up period is the period that a charity has to wind-up its affairs and pay the revocation tax.<\/p>\n\n\n\n In the 2022 Budget, the government announced a number of multi-year funding proposals, which will be welcomed news to Canada\u2019s diverse communities and its robust social impact sector. In many cases, funding has been proposed for allocation to organizations and government departments and agencies that in-turn provide funding within their respective sectors. As such, where applicable, we have provided links to all funded organizations and initiatives and encourage you to review the relevant websites for more specified funding opportunities.<\/p>\n\n\n\n All relevant funding proposals are organized by sector below. In some cases certain funding can fit within a number of the listed sector subheadings. We encourage you to review the entire list in detail.<\/p>\n\n\n\nBoosting charitable spending in our communities: the Disbursement Quota<\/h2>\n\n\n\n
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Increase to DQ<\/h3>\n\n\n\n
Enforcement of DQ rules<\/h3>\n\n\n\n
Removal of the accumulation of property rule<\/h3>\n\n\n\n
Stronger partnerships in the charitable sector: Facilitating disbursements to non-qualified donees<\/h2>\n\n\n\n
Proposed measures<\/h3>\n\n\n\n
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Commentary<\/h3>\n\n\n\n
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Directed donations: anti-avoidance<\/h3>\n\n\n\n
Revocation tax technical fix<\/h2>\n\n\n\n
New funding opportunities<\/h2>\n\n\n\n
Accessibility<\/h3>\n\n\n\n
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Affordable housing and homelessness<\/h3>\n\n\n\n
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Arts<\/h3>\n\n\n\n
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People with intellectual disabilities<\/h3>\n\n\n\n
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Education and research<\/h3>\n\n\n\n
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Environment<\/h3>\n\n\n\n
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Gender equality<\/h3>\n\n\n\n
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Health<\/h3>\n\n\n\n
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Immigration and settlement<\/h3>\n\n\n\n
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Journalism<\/h3>\n\n\n\n
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Legal aid<\/h3>\n\n\n\n
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Marginalized communities<\/h3>\n\n\n\n
Indigenous<\/h4>\n\n\n\n
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LGBTQ2<\/h4>\n\n\n\n
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Black<\/h4>\n\n\n\n
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Muslim<\/h4>\n\n\n\n
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Combatting systemic racism, discrimination and hate<\/h4>\n\n\n\n
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Diversity & inclusion<\/h4>\n\n\n\n