CRA Comments on New Disbursement Quota Rules

30 novembre 2010 | Amanda J. Stacey

( Disponible en anglais seulement )

In a recent technical interpretation (document number 2010-0370841E5) the CRA was asked to provide comments on a proposed gift between two related charities.  As we reported in the March 2010 edition of this Newsletter, the 2010 Federal Budget proposed a significant reduction in the disbursement quota obligation applicable to charities.  As part of these changes, the proposed new rules strengthen the existing anti-avoidance rules related to gifts between related charities.  Where a registered charity receives a gift from a non-arm’s length charity, it is proposed that the recipient charity be required to spend the full amount of the gift on its own charitable activities, or to transfer the amount to another arm’s length qualified donee, within the current or subsequent year.  However, if the donor charity designates all or a portion of the gift as a “designated gift”, this designated portion will not be subject to the immediate disbursement requirement.  Where the recipient charity fails to meet this disbursement requirement, it can lose its charitable status and/or it will be subject to a penalty equal to 110% of the amount by which the fair market value of the gift exceeds the amount required to be expended.

In this recent technical interpretation, the CRA was asked to comment on a gift of real property that is used in charitable activities from a registered charity to a related charitable foundation.  The CRA was asked to comment specifically on the following two hypothetical scenarios:

  1. The full value of the gift will be designated as a “designated gift” by the donor charity.  The donor charity will meet its disbursement quota irrespective of the gift.
  2. The donor charity will have a $100,000 disbursement obligation without taking into account the proposed gift.  The donor charity intends to designate all but $100,000 of the value of the gift.  The donor charity will use the $100,000 “undesignated” portion of the gift to satisfy its disbursement quota obligation.

Under the first scenario, the CRA confirmed that since the donor charity intends to designate the full value of the gifted property, it would be precluded from using the designated gift to satisfy its disbursement quota.  Because of the designation, the recipient charity would not be subject to an immediate disbursement requirement.

Under the second scenario, the CRA confirmed that the portion of the gift that is not designated may be used to meet the donor charity’s disbursement quota.  The recipient charity would in turn have an obligation to spend $100,000 (in addition to its existing disbursement quota obligations) in carrying on its own charitable activities or by way of gifts to qualified donees with which it deals at arm’s length in the current or subsequent taxation year.

The CRA also noted that the proposed amendments can subject donor and recipient charities to revocation of their registration if it may reasonably be considered that a purpose of the transaction was to avoid or unduly delay the expenditure of amounts on charitable activities.  The CRA also notes that whether any purpose of a transaction is to avoid or unduly delay the expenditure of amounts on charitable activities is a question of fact and must be determined on case by case basis.

It remains to be seen how these new rules will be interpreted in practice.  In particular, the proposed rules regarding gifts between non-arm’s length charities do not provide guidance on the meaning of arm’s length in this context. Unfortunately, this was not one of the questions raised for CRA comment in this technical interpretation.  We will have to wait and see whether the Department of Finance provides guidance on this topic and how the proposed amendments are interpreted by the CRA.  Charities looking for guidance on these issues should feel free to contact us for advice.

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