Refresher and updates on latest regulatory changes

While the last federal budget glaringly left Canada’s non-profit and charitable sector out of the picture, there were several announcements in Budget 2022 affecting philanthropic organizations in Canada. Midway through 2023, all of them are at varying stages of action and completion by the government.

I am getting calls and emails each week from PFC members asking questions about them – and it’s no wonder. 2022 was extraordinary in terms of the volume and gravity of new federal regulations relevant to our work.

To provide context and clarity, this article outlines the status of key promises and legislation, as well as recommendations on what sector leaders might want to consider and pay attention to.

Disbursement quota

The DQ remains 3.5% on assets not used in charitable activities and administration up to $1 million, and increases to 5% on property exceeding $1 million. This new rate applies to charities’ financial periods starting on or after January 1, 2023.

The DQ calculations remain the same, including a two year window to meet the DQ rate of each year. This means charities have until the end of 2024 to meet their requirements for 2023 and 2024. If the threshold is not met in 2023, they can make up for it in 2024, or if it’s exceeded in 2023, that excess can be used to make up under-disbursements for 2024.

In Budget 2022, the government committed to a review of the DQ after five years. To date there have been no policy announcements on the timing and methodology of the review activities. PFC will continue to advocate that the government review the policy using a data-driven lens, balancing concerns of both capital accumulation and erosion.

Non-qualified donees

In 2022, the government introduced a new regime called “qualifying disbursements” which allows gifts to charities, as well as now grants to non-qualified donees, so long as certain criteria are met. This is now law.

Guidelines to support the sector in carrying out these types of relationships are still in draft. Public feedback on the draft guidelines they shared back in November closed January 31, so we are expecting final guidelines imminently.

Officials at the CRA have verbally told PFC staff that both types of disbursements may be included as part of a charity’s disbursement quota.

While the guidelines are not finalized, the regime itself is now legally in place. In these types of relationships, the legislation asks charities to conduct due diligence, ensure there’s a written agreement and an accountability mechanism of some kind is in place, and that the activities of the grant further their charitable missions.

Avenues for flowing capital to non-qualified donees

In essence, there are now three avenues to flow capital to non-qualified donees for foundations. Before the new legislation, there were two avenues: doing so as part of one’s own activities, and making grants to charities who partner with non-qualified donees. The third avenue is now granting to non-qualified donees directly.

In other words, charities may continue to allocate funding to non-qualified donees under the previously existing “direction and control rules” via trusteeship or agency agreements, where non-qualified donees are essentially contracted by the charities to work on their behalf. Many foundations have been doing so for years, and they can continue this practice. Charities can also continue to provide funding to non-qualified donees indirectly by working with intermediaries, like shared platforms. The new regime adds an additional pathway – it does not replace the old ones.

Charitable objects

If an organization’s charitable objects specify something to the effect of its purpose being allocating funding to qualified donees, an amendment may be necessary. We have been told verbally by the CRA that it expects charities to do so, if their objects are at odds with making grants to non-qualified donees, and making grants to non-qualified donees is something they wish to do.

To learn more about granting to non-qualified donees, see this post that answers many of the questions in writing that came our way as part of our webinar on the issue in January.

Reporting to government

The T3010 and the new T1441

To account for the regulatory changes, the government has updated the T3010 form, the annual return all charities are required to submit to the CRA. They also created a new form that requires more detailed information on grants to non-qualified donees – the T1441.

The T1441 form is quite straight forward. Not a lot of information is being asked, but it is being asked at the individual grant level: name of grantee, purpose of grant, amount of non-cash disbursements, and amount of cash disbursements.

The guidelines for completing the T3010 are currently being updated, and they will also include details on completing the T1441. See the Government of Canada’s May 15, 2023 update for more information.

Administration and management

As part of the implementation of Budget 2022, legislation was passed as part of Bill C-32 regarding expenditures on administration and management and how they are not considered qualifying expenditures toward a charity’s DQ. Budget 2022 frames this change as a clarification to what has always been the rules on this.

The government’s guidelines for completing the T3010 have said, and to date continue to say, that some expenditures can be considered partly charitable and partly management and administration, such as salaries and occupancy costs, and that expenditures must be allocated consistently and on a reasonable basis.

While this vagueness creates some confusion, it’s been made clear to PFC that the CRA understands that charities themselves are in the best position to determine what is A&M and what is not, and that they should make sure to do so consistently. A wise practice that has been recommended by both the CRA and charities lawyers to PFC is for foundations to consider adopting a policy on how they allocate A&M.

PFC has been told by officials at the CRA that the government will be releasing new direction or updating the guidelines soon on this, and the public will have some time to submit feedback (PFC will be reviewing and submitting feedback).

DAF reporting

CRA has verbally told PFC that they will be adding questions regarding DAF reporting to the T3010. Details on what they will ask and to what level of detail will be shared with our membership once more information becomes available.

Incomplete returns

CRA has verbally told PFC that they will begin to take a heavier hand on incomplete T3010 returns, with risk of starting process for revocation of charitable status after a charity being sent a notice of an incomplete filing

NEXT STEPS

Once guidelines on these new developments are finalized, PFC will be updated both its grantmaking and governance guides.

What else do you think the network should know about policy and regulations facing the sector? What resources do you think are needed? Complete our super-quick four-question survey here.