Backgrounder for Disbursement Quota Consultation

The government provides significant tax support to registered charities. To ensure tax-supported donations are used effectively, registered charities must meet several requirements. One requirement is to spend a minimum amount each year on their own charitable programs or on gifts to qualified donees.Footnote 1 This is known as the "disbursement quota."

The disbursement quota is determined based upon the value, averaged over a 24-month period, of a charity's property (e.g., real estate or investments) not used for charitable activities or administration. Currently, the disbursement quota is set at 3.5%.Footnote 2 Footnote 3


The disbursement quota, introduced in 1976, was intended to ensure that a significant portion of a charity's resources were devoted to its charitable purposes. At the time, the disbursement quota included both an obligation for charities to expend a minimum amount for which the charity had issued official donation receipts in the immediately preceding year (80% for charitable organizations and 90% for foundations) and a minimum expenditure requirement of 5% for private foundations based upon the value of any property not used in charitable programs or administration (which was subsequently lowered to 4.5% and extended to public foundations in the 1980s).   

In 2004, as part of a broader reform of the Income Tax Act rules regarding charities, the disbursement quota was reduced from 4.5% to its current level of 3.5%. This lower rate was considered at the time to be more reflective of historical long-term real rates of return earned on a typical investment portfolio held by a registered charity.   

Budget 2010 saw another set of changes to the disbursement rules to make them more simple and equitable for all charities.  In particular, the rules were simplified by removing the majority of requirements, including the requirement that charities disburse amounts based on previous years' tax-receipted income.

Review of the Disbursement Quota Rate

Given that the 3.5% disbursement quota rate has been in place for a number of years, it is appropriate that it be evaluated to determine whether it is still reflective of expectations of long-term real rates of portfolio returns, and whether the disbursement quota strikes the appropriate balance between providing long-term, sustainable funding for the charitable sector and on ensuring that tax-assisted donations are deployed towards charitable activities on a timely basis. In particular:

Since 2010, there has also been a significant accumulation of investment assets by foundations in Canada. At the same time, some observers have noted that charities are facing heightened demand and strained revenue streams, particularly as a result of the Covid-19 pandemic. Several stakeholders in the sector have advocated that charitable foundations with significant investment assets should be required to draw upon their reserves in order to increase support for charitable organizations as they work to provide important services in our communities.

As announced in Budget 2021, the Government is examining whether the current disbursement quota rate continues to be appropriate and whether the Canada Revenue Agency (CRA) has the proper toolkit to enforce these rules.

International Comparison

Canada is not the only country that places a minimum expenditure obligation on charities.  For example, in the U.S., private foundations are required to spend a minimum annual amount towards their charitable purposes, including grants to other charitable organizations. Referred to as the distributable amount, private foundations are generally required to distribute a minimum of 5% of the combined fair market value of all their assets, other than those used or held for an exempt purpose.Footnote 4

Similarly, in Australia, deductible gift recipient organizations face differing rules depending on the type of organization. However, public ancillary funds are required to distribute at least 4% of the market value of their net assets based on the reported amount at the end of the previous financial year and private ancillary funds must distribute at least 5%. Exemptions are provided for public ancillary funds that have been established for less than 4 years. Penalties may be applied for not meeting the minimum requirements, but a fund can apply to reduce its minimum annual distribution rate if it is unable to meet it.Footnote 5

Relieving Provisions

In Canada, if a charity is unable to meet its disbursement quota, it is permitted to apply a disbursement excess from one year to offset a shortfall in the previous year and in the five immediately following tax years. These provisions effectively allow an organization to meet its disbursement on average over a particular timeframe, accounting for the fact that the funding it provides may be higher in some years and lower in others.

In addition, for organizations facing exceptional circumstances that prevent them from meeting their disbursement quota obligations, the Income Tax Act includes a special relief provision. Specifically, on application by a registered charity, and if the Minister of National Revenue believes the circumstances appropriate, the registered charity may be granted a specified amount which is considered to have been expended in a tax year on charitable activities (and reported on the charity's annual information return). Before relief is granted, generally a registered charity must use all disbursement excesses available from previous years.

Finally, a registered charity may obtain approval in writing from the Minister of National Revenue to accumulate property for a particular purpose, on terms and conditions and over any period of time that the Minister specifies. Once such permission is received, this property (and any income so earned) is excluded when calculating an organization's disbursement quota.

These legislative provisions were added to the Income Tax Act at various times to ensure the proper functioning of the disbursement quota.  However, with the significant changes to the disbursement quota over time, including the removal of most of its requirements, these rules may no longer be necessary or may not need to be as generous as they currently are.  

Canada Revenue Agency Administration

According to tax data, while the large majority of charitable organizations and foundations satisfy their disbursement quota, some charities are not meeting this obligation. Organizations that do not meet their disbursement quota face the risk of having their charitable status revoked. However, the CRA's toolkit for enforcing the disbursement quota is currently limited. The key legislative tool the CRA has at its disposal is the ability to revoke the status of any registered charity that fails to meet its disbursement quota.

The CRA seldom revokes the registration of charities solely based on failure to meet disbursement quota requirements as such an action is broadly considered disproportionate to the non-compliance involved. This is because under the Income Tax Act, a charity whose registration is revoked is required to transfer all of its assets to other registered charities within one year or pay a 100% revocation tax on any assets remaining.  

The Income Tax Act includes a number of monetary penalties for charities that are meant to assist the CRA in enforcing the rules without necessarily having to resort to revoking a charity's registration, often referred to as "intermediate sanctions". However, none of these intermediate sanctions directly apply to a charity that fails to meet its disbursement quota.

Launching Consultations

Budget 2021 announced the Government's intention to solicit views from the public on potentially increasing the disbursement quota and updating the tools at the Canada Revenue Agency's disposal, beginning in 2022. The Government is now soliciting the views of charities, practitioners, stakeholders and the public on these issues. In particular, it is interested in hearing views on the following:

The Government will also be consulting with the Advisory Committee on the Charitable Sector, an advisory body made up of representatives from the charitable sector that provides advice to the government on important and emerging issues facing registered charities.  

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