What Is a Disbursement Quota and How Can Charities Navigate Reductions in Canada?
Charities are essential to supporting vulnerable communities across Canada. However, meeting financial obligations—especially the charity disbursement quota—can be challenging during economic downturns, reduced donations, or operational disruptions. When a registered charity in Canada is unable to meet its annual disbursement quota, applying for a reduction may be a necessary step toward maintaining compliance and continuing its mission.
What Is the Charity Disbursement Quota?
The disbursement quota is the minimum amount a registered charity must spend each year on its charitable activities or as gifts to qualified donees. This requirement is set by the Canada Revenue Agency (CRA) and is designed to ensure that charitable resources are actively used to support charitable purposes rather than being accumulated indefinitely.
As of recent changes, charities must spend at least 3.5% of the average value of their property not used for charitable programs or administration if that property exceeds $100,000 (or $25,000 for charitable foundations), for charities with revenue under $1,000,000.00. For those voer that amount, the disbursement quota rises to 5%. This calculation is based on the average value of relevant assets over the past 24 months.
Failing to meet this CRA charity disbursement quota can lead to serious consequences, including penalties or revocation of charitable status.
When Can a Charity Apply for a Disbursement Quota Reduction?
Charities that cannot meet the Canada charity disbursement quota due to exceptional or unforeseen circumstances may request a disbursement quota reduction from the CRA. However, this is not a first resort.
Before applying, the charity must:
- Use any disbursement quota excesses carried forward from the previous five fiscal years.
- Consider creating an excess in the current year and carrying it back to offset the shortfall.
- Ensure that no other reasonable means of meeting the quota are available.
Only when these options are exhausted will the CRA consider granting a reduction.
Understanding the Approval Process
The CRA typically considers a disbursement quota charity reduction request after the charity has filed its T3010 Registered Charity Information Return for the fiscal year following the shortfall. This delay allows the CRA to assess whether the charity made all reasonable efforts to comply.
If approved, the CRA will inform the charity of the amount by which the disbursement quota has been reduced. This reduction applies specifically to the year in which the shortfall occurred.
How to Amend the Return
Once approval is granted, the charity must file Form T1240 – Registered Charity Adjustment Request to amend its T3010 return for the year with the shortfall. The approved reduction amount should be reported on line 5750 of the amended return.
Submission Options
Charities have several methods to submit the adjustment:
- Online via My Business Account (MyBA): Use the “Adjust a return” feature under the RR (Registered Charity) program account.
- By Mail or Fax: Send the completed Form T1240 and related documents to the Charities Directorate of the CRA.
It’s important to keep copies of all correspondence and approvals in case of future CRA audits or questions.
Managing a charity disbursement quota shortfall is a serious issue, but not an impossible one. By understanding CRA expectations and the disbursement quota rules, charities can make informed decisions about when and how to apply for a reduction. This process requires careful documentation, transparency, and compliance with specific CRA procedures.
Charities that act early, explore all options, and follow the proper steps can continue serving their communities, even in financially challenging times.
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