Changes in the Charitable Sector: The New “Qualifying Disbursements” Regime

qualifying disbursements

Bill C-19, Budget Implementation Act, 2022, No. 1 (“Bill C-19”) received royal assent on June 23, 2022, introducing a new “qualifying disbursements” regime for Canadian registered charities.1

Background: The “Own Activities” Requirement

Prior to Bill C-19 receiving royal assent, a Canadian registered charity was permitted to use its resources2 in only one of two ways:

  1. on its own charitable activities to further its charitable purposes; or
  2. to make gifts to other qualified donees (i.e., organizations that are permitted to issue official Canadian donation receipts for gifts they receive, such as other Canadian registered charities).

This requirement for a registered charity to use its resources on its own charitable activities, and not on the activities of a non-qualified donee (regardless of whether the activities of the non-qualified donee are charitable), is known as the “own activities” requirement.

Under the “own activities” regime, a registered charity may disburse resources to a non-qualified donee only if:

  1. the non-qualified donee is considered an intermediary of the registered charity through which the registered charity is carrying on the registered charity’s own activities; and
  2. the resources so disbursed are at all times subject to the registered charity’s direction and control.

As detailed in our previous article published on January 28, 2022, this regime has long been criticized as overly restrictive, costly, inefficient, and unrealistic.

The New “Qualifying Disbursements” Regime

The New Regime

Bill C-19 amends the Income Tax Act such that a registered charity is now required to devote all of its resources to:

  1. charitable activities carried on by the registered charity itself; or
  2. making “qualifying disbursements”.

The preservation of paragraph 1 above (i.e., “charitable activities carried on by the registered charity itself”) means the “own activities” requirement is still in place; a registered charity may continue to disburse its resources to non-qualified donees under the “own activities” regime as described above. However, the introduction of paragraph 2 above permits a registered charity to also make “qualifying disbursements”.

Qualifying Disbursements

A “qualifying disbursement” is a disbursement by a charity, by way of a gift or otherwise making resources available:

  1. to a qualified donee, subject to certain limitations; or
  2. to a “grantee organization”, provided certain requirements are met.

Qualifying Disbursements to Qualified Donees

Under the “qualifying disbursements” regime, registered charities are still permitted to give gifts to qualified donees, and are also permitted to make resources available to qualified donees other than by way of gift (e.g., by making funds available to qualified donees subject to certain terms and conditions).

Note qualifying disbursements to qualified donees are subject to limitations. In any taxation year, disbursements of income of a charitable organization by way of gifts to a qualified donee (other than disbursements of income to a registered charity that the Minister has designated in writing as a charity associated with the charitable organization) in excess of 50% of the charitable organization’s income for that year are not qualifying disbursements.3

Qualifying Disbursements to Grantee Organizations

A “grantee organization” includes a person, club, society, association or organization or prescribed entity, but does not include a qualified donee. In other words, a grantee organization is a non-qualified donee.

A disbursement by a charity to a grantee organization is a “qualifying disbursement” only if:

  1. the disbursement is in furtherance of a charitable purpose of the charity;
  2. the charity ensures that the disbursement is exclusively applied to charitable activities in furtherance of a charitable purpose of the charity; and
  3. the charity maintains documentation sufficient to demonstrate the purpose for which the disbursement is made and that the disbursement is exclusively applied by the grantee organization to charitable activities in furtherance of a charitable purpose of the charity.

It is unclear at this point exactly what steps a registered charity must take to ensure the above requirements are met and how those steps will differ from those under the current “own activities” regime as set out in this Canada Revenue Agency (“CRA”) guidance. We expect the CRA will publish a guidance on the new qualifying disbursements regime to clarify registered charities’ obligations when making qualifying disbursements to grantee organizations.

In the meantime, if you have any questions regarding Bill C-19 or the new qualifying disbursements regime, please contact one of the lawyers in our Charities + Non Profit Group.

[1] Bill C-19 effectively replaces Bill S-216, Effective and Accountable Charities Act (“Bill S-216”). Our previous article on Bill S-216 can be found here.

[2] A charity’s resources include all of its physical and financial resources as well as its staff and volunteers.

[3] Income Tax Act, section 149.1(6.001).

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