The Department of Finance has released Explanatory Notes Relating to the Income Tax Act and Other Legislation. Here is the full version. Below are the sections dealing with registered charities and mainly the new qualifying disbursement rules dealing with non-qualified donees and some other changes.
Clause 16
Definitions
ITA 149.1(1)
Section 149.1 provides the rules that must be met for charities to obtain and keep registered status. Subsection 149.1(1) contains definitions that are relevant for the purposes of sections 149.1 and 149.2 and Part V of the Act.
Subsection 149.1(1) of the Act is amended to add the new definitions “grantee organization” and “qualifying disbursement”, with consequential amendments to the definitions “charitable organization” and “charitable purpose”.
“charitable organization”
The definition “charitable organization” sets out the conditions that must be met for an organization to be a charitable organization. Paragraph (a.1) of the definition requires that a charitable organization must devote all of its resources to charitable activities carried on by the organization itself. This paragraph is amended to permit a charitable organization to devote resources to the making of disbursements to grantee organizations (i.e. entities or natural persons other than qualified donees) in circumstances which satisfy the conditions outlined in subparagraphs (b)(i) to (iii) of the new definition “qualifying disbursement”. This amendment also continues to allow charitable organizations to make gifts to qualifying donees (subject to the limit outlined in subsection 149.1(6.001)), which was previously permitted due to subsection 149.1(6). See the commentary on the amendments to subsection 149.1(6).
“charitable purposes”
The definition “charitable purposes” provides that charitable purposes include the disbursement of funds to qualified donees. The definition is amended to provide that charitable purposes includes making qualifying disbursements. This amendment expands the list of charitable purposes to include disbursements to grantee organizations (i.e. entities and natural persons other than qualified donees) in circumstances which satisfy the conditions outlined in subparagraphs (b)(i) to (iii) of the new definition “qualifying disbursement”.
“grantee organization”
New definition “grantee organization” is a natural person or entity, other than a qualified donee. Registered charities are permitted to make disbursements to grantee organizations in circumstances which satisfy the conditions outlined in subparagraphs (b)(i) to (iii) of the new definition “qualifying disbursement”.
“qualifying disbursement”
Subject to certain restrictions, charities are generally permitted under the Act to make disbursements to qualified donees. New definition “qualifying disbursement” and related amendments permit charities to make disbursements to grantee organizations (i.e. entities and natural persons other than qualified donees) if certain conditions are satisfied.
For the purposes of this definition, any provision of resources of the charity is a disbursement, including by way of gift or otherwise making resources available. This allows charities to provide resources or support to grantee organizations through means other than solely making monetary gifts. For example, a charity may use its employees to support of a grantee organization or provide office space at no charge.
Paragraph (a) of the definition “qualifying disbursement” provides that disbursements to qualified donees are generally qualifying disbursements. Together with new subsection (6.001) (see commentary on that subsection), paragraph (a) of the definition continues the existing treatment of disbursements to qualified donees. Charitable organizations are generally restricted from disbursing more than 50% of their income to qualified donees.
Paragraph (b) of the definition provides that disbursements to a grantee organization are qualifying disbursements if they are in furtherance of a charitable purpose (determined without reference to the definition of charitable purposes in subsection (1)) of the charity, the charity ensures that the disbursements are exclusively used to advance charitable activities in furtherance of a charitable purpose of the charity and the disbursement meets prescribed conditions. (See commentary on new section 3703 of the Income Tax Regulations.)
These definitions come into force on Royal Assent.
Revocation of registration of charitable organization
ITA 149.1(2)
Subsection 149.1(2) describes reasons for which the Minister of National Revenue may revoke the registration of a charitable organization.
Paragraph (2)(b) provides that such registration may be revoked where the organization fails to expend in a year an amount equal to its disbursement quota on its charitable activities or gifts to qualified donees. Paragraph (2)(b) is amended, concurrently with the introduction of the definition “qualifying disbursement” in subsection (1) (see commentary in that subsection). When the circumstances outlined in subparagraphs (b)(i) to (iii) of that definition are met, gifts that are qualifying disbursements to grantee organizations (i.e. entities or natural persons other than qualified donees) are included in consideration of a charity’s status in meeting its disbursement quota for the year.
Paragraph (2)(c) provides for the revocation of a charitable organization’s registration if it makes gifts (other than gifts made in the course of its charitable activities) to persons or entities that are not qualified donees. Paragraph (2)(c) is amended to allow charitable organizations to make disbursements to grantee organizations in circumstances which satisfy the conditions outlined in subparagraphs (b)(i) to (iii) of the definition “qualifying disbursement” in subsection (1) (see commentary in that subsection).
These amendments come into force on Royal Assent.
Revocation of registration of public foundation
ITA 149.1(3)
Subsection 149.1(3) describes reasons for which the Minister of National Revenue may revoke the registration of a public foundation.
Paragraph (3)(b) provides that such registration may be revoked where the foundation fails to expend an amount equal to its disbursement quota on charitable activities or gifts to qualified donees. Paragraph (3)(b) is amended, concurrently with the introduction of the definition “qualifying disbursement” in subsection (1) (see commentary in that subsection). When the circumstances outlined in subparagraphs (b)(i) to (iii) of that definition are met, gifts that are qualifying disbursements to grantee organizations (i.e. entities or natural persons other than qualified donees) are included in consideration of a charity’s status in meeting its disbursement quota for the year.
Paragraph (3)(b.1) provides for the revocation of a public foundation’s registration if it makes gifts (other than gifts made in the course of its charitable activities) to persons or entities that are not qualified donees. Paragraph (3)(b.1) is amended to allow public foundations to make disbursements to grantee organizations in circumstances which satisfy the conditions outlined in subparagraphs (b)(i) to (iii) of the definition “qualifying disbursement” in subsection (1) (see commentary in that subsection).
These amendments come into force on Royal Assent.
Revocation of registration of private foundation
ITA 149.1(4)
Subsection 149.1(4) describes reasons for which the Minister of National Revenue may revoke the registration of a private foundation.
Paragraph (4)(b) provides that such registration may be revoked where the foundation fails to expend an amount equal to its disbursement quota on charitable activities or gifts to qualified donees. Paragraph (4)(b) is amended, concurrently with the introduction of the definition “qualifying disbursement” in subsection (1) (see commentary in that subsection). When the circumstances outlined in subparagraphs (b)(i) to (iii) of that definition are met, gifts that are qualifying disbursements to grantee organizations (i.e. entities or natural persons other than qualified donees) are included in consideration of a charity’s status in meeting its disbursement quota for the year.
Paragraph (4)(b.1) provides for the revocation of a private foundation’s registration if it makes gifts (other than gifts made in the course of its charitable activities) to persons or entities that are not qualified donees. Paragraph (4)(b.1) is amended to allow private foundations to make disbursements to grantee organizations in circumstances which satisfy the conditions outlined in subparagraphs (b)(i) to (iii) of the definition “qualifying disbursement” in subsection (1) (see commentary in that subsection).
These amendments come into force on Royal Assent.
Revocation of registration of registered charity
ITA 149.1(4.1)(d)
Subsection 149.1(4.1) allows the Minister of National Revenue to revoke the registration of a registered charity in certain circumstances.
Paragraph 149.1(4.1)(d) may apply where an amount is transferred by way of gift between registered charities who do not deal at arm’s length, unless the donor charity has indicated in its annual information return that the gift is a “designated gift”, as defined in subsection 149.1(1). Paragraph (d) provides that the Minister may revoke the recipient charity’s registration if it does not spend, in the taxation year in which the gift was received or in the subsequent taxation year, the full amount transferred. That amount must be expended, in addition to the recipient charity’s disbursement quota for those two years, on its own charitable activities or by way of gifts to qualified donees with which it deals at arm’s length.
Consequential on the introduction of the definition “qualifying disbursement” in subsection (1) and related amendments, paragraph 149.1(4.1)(d) is amended to provide that the amount that must be expended by the recipient charity may be satisfied by making gifts that are qualifying disbursements to recipients with which the charity deals at arm’s length. Qualifying disbursements include disbursements to grantee organizations (i.e. entities or natural persons other than qualified donees) that meet the conditions outlined in subparagraphs (b)(i) to (iii) of the definition “qualifying disbursement” in subsection (1).
This amendment comes into force on Royal Assent.
Devoting resources to charitable activity
ITA 149.1(6)
The definition “charitable organization” in subsection 149.1(1) requires a charitable organization to devote all of its resources to charitable activities carried on by the organization itself. Subsection 149.1(6) provides that to the extent that a charitable organization carries on a related business and, subject to restrictions, make gifts to qualified donees, the charitable organization is considered to be devoting its resources to charitable activities carried on by the organization itself.
Consequential on the introduction of the definition “qualifying disbursement” in subsection (1) and related amendments (including the amendment to the definition of “charitable organization”), subsection (6) is amended to remove reference to the making of gifts to qualified donees. The restriction in relation to gifts to qualified donees is maintained under new subsection (6.001). (See commentary in subsection (6.001).)
This amendment comes into force on Royal Assent.
Qualifying disbursement limit – charitable organizations
ITA 149.1(6.001)
Amendments to introduce the definition “qualifying disbursement” in subsection (1) (see commentary in that subsection) contemplate disbursements to qualified donees and grantee organizations made by a charitable organization, subject to certain restrictions. In conjunction with the introduction of this definition and amendments to subsection (6), new subsection (6.001) is introduced to maintain the existing restriction on gifts from charitable organizations to qualified donees. Disbursements by way of gift to qualified donees are not considered qualifying disbursements if in excess of 50% of a charitable organization’s income. This restriction does not apply to disbursements to associated charities designated by the Minister.
This subsection comes into force on Royal Assent.
Deemed charitable activity
ITA 149.1(10)
The definition “charitable organization” in subsection 149.1(1) requires an organization to devote all its resources to charitable activities carried on by the organization itself. Subsection 149.1(10) provides that when a charitable organization pays an amount that is not out of the organization’s income to a qualified donee, the charitable organization will be considered to be devoting its resources to charitable activities carried on by it.
Consequential to new definition “qualifying disbursement” and amendments to the definition “charitable organization”, subsection (10) is no longer necessary to permit a charitable organization to pay an amount that is not out of the organization’s income to a qualified donee and is repealed.
The repeal of subsection (10) comes into force on Royal Assent.
Rule regarding disbursement excess
ITA 149.1(20)
Subsection 149.1(20) allows a registered charity to expend a disbursement excess (as defined in subsection 149.1(21)) in a year and to include that excess in the computation of amounts expended on charitable activities and as gifts to qualified donees for the immediately preceding and up to five subsequent taxation years.
New definition “qualifying disbursement” in subsection 149.1(1), and related amendments, permit charities to make disbursements to both qualified donees and, if certain conditions are met, grantee organizations (i.e. entities or natural persons other than qualified donees). Consequential to these amendments, and in conjunction with the amendment to subsection (21), subsection (20) is amended to include gifts that are qualifying disbursements of a charity in the computation of amounts expended.
This amendment comes into force on Royal Assent.
Definition of disbursement excess
ITA 149.1(21)
Subsection 149.1(21) defines “disbursement excess” for the purposes of subsection 149.1(20). The disbursement excess is the amount by which a registered charity’s expenditures in the year exceeds its disbursement requirements for the year.
New definition “qualifying disbursement” in subsection 149.1(1) and related amendments permit charities to make disbursements to both qualified donees and, if certain conditions are met, grantee organizations (i.e. entities or natural persons other than qualified donees). Consequential to these amendments, and in conjunction with the amendment to subsection (20), subsection (21) is amended to include gifts that are qualifying disbursements in the computation of the disbursement excess.
This amendment comes into force on Royal Assent.
Notice of intention to revoke registration
ITA 168(1)(f)
Subsection 168(1) describes the circumstances under which the Minister of National Revenue may give notice of the Minister’s intention to revoke the registration of a registered charity, registered Canadian amateur athletic association or registered journalism organization.
To prevent organizations from acting as conduits in the making of a directed gift, paragraph (f) provides that the registration of a registered Canadian amateur athletic association or registered journalism organization may be revoked if it accepts a gift which was expressly or implicitly conditional on making a gift to another person, club, society, association or organization.
Paragraph (f) is amended to extend the application of paragraph (f) to registered charities. Paragraph (f) is also amended to exempt gifts accepted on condition of making a gift to a qualified donee, but not gifts that are accepted on condition of making disbursements to grantee organizations (i.e. entities or natural persons other than qualified donees).
These amendments come into force on Royal Assent.
Clause 22
Winding-up period
ITA 188(1.2)
Subsection 168(3.1) provides for the automatic revocation of the registration of a qualified donee (which includes registered charities) upon it becoming a “listed terrorist entity” (as defined in subsection 149.1(1)).
Subsection 188(1.1) imposes a tax payable in respect of the revocation of the charity’s registration.
Subsection 188(1.2) applies for the purpose of calculating the revocation tax under subsection 188(1.1), in respect of certificates issued under the Charities Registration (Security Information) Act and notices of intention to revoke the registration of a charity that are issued by the Minister of National Revenue.
Subsection 188(1.2) is amended to also apply in respect of an entity that becomes a “listed terrorist entity”. It is also restructured to improve readability.
This amendment comes into force on June 29, 2021.
Clause 23
Meaning of undue benefits
ITA 188.1(5)(c)
Subsection 188.1(5) provides that an undue benefit conferred on a person includes a disbursement by way of a gift (other than a gift to a qualified donee).
New definition “qualifying disbursement” in subsection 149.1(1), and related amendments, permit charities to make disbursements to both qualified donees and, if certain conditions are met, grantee organizations (i.e. entities or natural persons other than qualified donees). Paragraph 188.1(5)(c) is amended to provide that a gift or benefit that is a qualifying disbursement is not an undue benefit.
This amendment comes into force on Royal Assent.
Gifts not at arm’s length
ITA 188.1(12)
Subsection 188.1(12) applies in situations where an amount is transferred between non-arm’s length charities by way of a gift, other than a designated gift (as defined in subsection 149.1(1)). The recipient charity is liable to a penalty if it fails to spend, in the taxation year in which the gift was received or in the subsequent taxation year, the full amount transferred. That amount must be expended, in addition to the recipient charity’s disbursement quota for those two years, on its own charitable activities or by way of gifts to qualified donees with which it deals at arm’s length.
New definition “qualifying disbursement” in subsection 149.1(1) and related amendments permit charities to make disbursements to both qualified donees and, if certain conditions are met, grantee organizations (i.e. entities or natural persons other than qualified donees). Consequential to these amendments, paragraph 188.1(12) is amended to provide that the amount that must be expended by the recipient charity may be satisfied by making qualifying disbursements to both qualified donees and grantee organizations with which the charity deals at arm’s length.
This amendment comes into force on Royal Assent.
Clause 40
Qualifying disbursement – grantee organization
ITR 3703
New definition “qualifying disbursement” in subsection 149.1(1), and related amendments, permit charities to make disbursements to grantee organizations (i.e. entities and natural persons other than qualified donees) if certain conditions are satisfied.
Paragraph (b) of that definition provides that disbursements to a grantee organization are qualifying disbursements if the disbursements are in furtherance of a charitable purpose of the charity, the charity ensures that the disbursements are exclusively applied to charitable activities in furtherance of a charitable purpose of the charity and the disbursement meets prescribed conditions.
New section 3703 of the Regulations prescribes conditions that must be satisfied in order for a disbursement to a grantee organization to be a qualifying disbursement of a charity. These conditions include:
- The disbursement must be subject to an agreement in writing between the charity and the grantee organization that includes requirements related to the use of the disbursement, reporting requirements and record keeping requirements.
- The charity is also required to undertake measures to ensure that the agreement is complied with, and that the disbursement will be applied exclusively for the purposes for which it was disbursed. This must include conducting a pre-disbursement inquiry, ongoing monitoring of the grantee organization, and reviewing and approving the final report of the grantee organization.
- If the charity becomes aware that any part of the agreement is not being complied with, the charity must undertake adequate remedial action. Where appropriate, this could include withholding further disbursements and attempting to recover disbursements.
New section 3703 comes into force on Royal Assent.
Information returns
ITR 3704
Subsection 149.1(14) of the Act requires registered charities to annually file an information return, and a public information return, containing prescribed information, part of which the Minister of National Revenue may disclose to the public under subsection 149.1(15). The returns are required to be filed within six months from the end of the taxation year of the charity.
New definition “qualifying disbursement” in subsection 149.1(1) of the Act, and related amendments, permit charities to make disbursements to both qualified donees and grantee organizations (i.e. entities and natural persons other than qualified donees) if certain conditions are satisfied.
New section 3704 of the Regulations applies for purposes of subsection 149.1(14) of the Act to prescribe particular information in respect of certain qualifying disbursements to grantee organizations. If a charity makes qualifying disbursements of more than $5000 to a grantee organization in a taxation year, the charity must provide the name of the grantee organization, the purpose of each disbursement to the grantee organization and the total amount disbursed by the charity to the grantee organization in the taxation year.
New section 3704 comes into force on Royal Assent.