Treatment of enduring property for purposes of the disbursement quota

As a result of Budget 2010, the information on this page applies only for fiscal periods ending before March 4, 2010.

Question 1:

Some fund agreements do not distinguish the earnings on the endowment portfolios between interest, dividends, and realized and unrealized capital gains. They are all considered current earnings, and the capital refers to the dollar value of the original gift.

Is there an issue with how these fund agreements define income to include capital gains?

Response:

Yes. Such gifts may not qualify as enduring property. To qualify as enduring property under paragraph (c) of the definition in subsection 149.1(1) of the Income Tax Act (the Act), the gift received by the registered charity must be subject to a trust or direction to the effect that the property given, or property substituted for the gift, is to be held by the charity or by another registered charity for at least ten years.

Realized and unrealized capital gains relating to the original property gifted to the charity, or to property substituted for the gift, form part of the gift that is subject to this holding period. Therefore, where the fund agreements allow the charity to expend these capital gains prior to the end of the ten-year period, the gift may not qualify as enduring property under paragraph (c), unless such expenditures do not exceed the amount determined for a taxation year by B.1 in the formula for the charity's disbursement quota (that is, 3.5% disbursement quota requirement).

Question 2:

Is it correct to say that the Income Tax Act and the CRA allow for the encroachment on capital within the minimum ten-year holding period to meet the disbursement quota when the terms of the gift permit encroachment?

Response:

The definition of enduring property in subsection 149.1(1) of the Act allows a charity to encroach on capital within the minimum ten-year holding period to the extent of the amount determined for a taxation year by B.1 in the formula of its disbursement quota (that is, 3.5% disbursement quota requirement).

Question 3:

If a charity does not track capital gains pools, will this inhibit its ability to encroach on capital?

Response:

No. A registered charity may encroach on capital where the trust or direction permits the charity to do so. The amount of the encroachment must be limited to the amount determined for a taxation year under element B.1 of the charity's disbursement quota (that is, 3.5% disbursement quota requirement).

Tracking the capital gains pool allows a charity to reduce its obligation under element A.1 of the disbursement quota (that is, enduring property spent or transferred to a qualified donee in a taxation year). If the charity does not track capital gains pools, it will be unable to determine the amount of the reduction that it is entitled to. For this reason, while the annual calculation of the capital gains pool is voluntary, we recommend that the charity declare its capital gains realized on the disposition of enduring property so that it is able to do the calculation and claim a reduction in the disbursement quota in a subsequent taxation year.

Question 4:

Does a charity need to track every single gift to be held for a minimum of ten years (that is, ten-year gift) to determine when the respective holding periods are over?

Response:

Yes. Registered charities are required to track every ten-year gift they receive separately. Ten-year gifts are one kind of enduring property. For a ten-year gift to meet the definition of an enduring property, and therefore be excluded from element A of the definition of disbursement quota (that is, total eligible amount of tax-receipted gifts), each ten-year gift must be subject to a trust or direction that it be held for a minimum of ten years, subject to the exception discussed in question 2 above, as the minimum ten-year holding period applies to each gift received by the charity.

Question 5:

If it is acceptable for a charity to encroach on capital to meet its disbursement quota, will the existence of any disbursement excesses have an impact on the amount a charity can encroach?

Response:

No. A disbursement excess may be used to offset a prior year or subsequent year shortfall. The fact that a charity has a disbursement excess does not preclude a charity from encroaching on capital to the extent of the amount determined for a taxation year by B.1 in the formula of its disbursement quota (that is, 3.5% disbursement quota requirement), provided that it is otherwise permitted to do so by the terms of the gift.

Question 6:

A charity's fund agreements may include the ability to encroach on capital to cover its administration fees and investment management fees. Is this a concern?

Response:

This may be a concern. Such gifts may not qualify as enduring property. As stated above, to qualify as enduring property under paragraph (c) of the definition in subsection 149.1(1) of the Act, the gift received by the registered charity must be subject to a trust or direction to the effect that the property given, or property substituted for the gift, is to be held by the charity or by another registered charity for at least ten years. The trust or direction may allow the charity to expend the property before the end of the period to the extent of the amount determined for a taxation year by B.1 in the formula for its disbursement quota (that is, 3.5% disbursement quota requirement). Therefore, where the fund agreements allow the charity to encroach on capital to cover administration and investment management fees and provided that such fees will not exceed the amount determined under B.1 (that is, 3.5% disbursement quota requirement), these gifts may qualify as enduring property. However, if the administration and investment management fees exceed the amount determined under B.1 (that is, 3.5% disbursement quota requirement), the gifts may not qualify as enduring property.

The charity should also keep in mind that any encroachment on capital will factor into the disbursement quota calculation. Furthermore, amounts spent on administration fees and investment management fees are not charitable expenditures and cannot be used to satisfy the disbursement quota.

Question 7:

Is it correct to say that in all cases where a charity is encroaching on capital it needs to recognize it on line 5710 as amounts of enduring property spent in the taxation year and that these amounts will create an 80% disbursement quota requirement in the following year?

Response:

No. Enduring property expended in the taxation year will impact the charity's disbursement quota requirement in the taxation year in which the property is expended. Enduring property spent in the taxation year should be reported on line 5710 of the T3010. The charity will have an 80% disbursement quota requirement under element A.1 of the definition of disbursement quota.

Enduring property transferred to a qualified donee in the taxation year should be reported on line 5060 of the T3010. The charity will have a 100% disbursement quota requirement under element A.1 of the definition of disbursement quota.

Question 8:

If a charity discovers that it will be unable to meet its disbursement quota in 2009 because of the financial crisis, should it apply for relief or just continue to file the T3010?

Response:

Whether or not a registered charity has met its disbursement quota, the Income Tax Act requires that an annual information return, Form T3010, be completed and filed within six months from the end of the charity's taxation year. If a charity does not file its annual return for a specific taxation year as and when required, it risks losing its registration.

Where a charity has failed to meet its disbursement quota due to unforeseen circumstances that are beyond its control, the charity may apply for relief under subsection 149.1(5) of the Act. This relief will be granted only under extraordinary circumstances. For more information, see Policy commentary CPC-029, Application for relief.

Question 9:

Where a charity encroaches on a ten-year gift, is the entire ten-year gift required to be included in A.1 of the formula for the charity's disbursement quota for the year, or is it only the portion of the gift that was expended in the year that must be included in the calculation?

Response:

If the terms of the fund agreements permit the charity to expend a portion of the property gifted in excess of the amount determined for element B.1 (that is, 3.5% disbursement quota requirement), the gift will not qualify as enduring property and 80% of the gift may be required to be included in component A of the formula for the charity's disbursement quota in the taxation year subsequent to the year in which the gift was made.

Where a portion of a gift that qualifies as "enduring property" is expended, generally 80% of the amount spent and 100% of amount transferred to qualified donees is required to be reflected in A.1 of the formula for the charity's disbursement quota in the taxation year that the amount was expended or transferred. The remainder of the gift will similarly be included in A.1 in the formula for the charity's disbursement quota in the taxation year(s) in which the amount is expended.