The disbursement quota (DQ) is the minimum amount a registered charity is required to spend each year on its own charitable activities, on gifts to qualified donees (for example, other registered charities) or on grants to grantees. The disbursement quota calculation is based on the value of a charity’s property not used for charitable activities or administration such as bank accounts and investments. The DQ used to be 3.5% of this property not used in charitable and admin activities, but the 2022 Federal Budget made some changes that applied in 2023. Those changes were that the DQ was left at 3.5% for the first $1 million in assets not used directly in charitable activities or administration, but then the DQ increase to 5% for assets over $1 million.
The vast majority of charities have no impact from the DQ. Those charities are spending almost all their funds on charitable activities and have modest reserves. Many charities will satisfy their DQ requirement for the next 5 years in a few months.
However, there are other charities that have significant investments or assets that are not being used for charitable activities and the DQ only has an impact on their plans and activities if they were planning on spending less than 3.5% or 5%. The most common group affected by the DQ is foundations.
So, on the one hand, you have the assets of the charity, and on the other hand, you have expenditures. Charitable activities, gifts to qualified donees and grants to grantees count towards the 3.5%/5% amounts. Fundraising, admin and other expenses don’t count towards the expenditures of the DQ.
The grant to grantee rules only came in in 2022, so very small amounts were spent on grants to grantees, and more was spent in 2023 once some foundations were aware of the rules.
An example of a DQ situation would be a foundation with $1 million of investments that might have to spend $35,000 under both the old and new rules.
However, if a foundation has $2 million of investments, then it would have to spend $35,000 on the first million but $50,000 on the second million.
The changes announced in 2022 and brought in in 2023 have been discussed extensively on this blog. We were advocates for increasing the DQ to 5% or greater because of the tremendous tax subsidy being given for donations to foundations.
The 2023 data is not complete, but we have tentative numbers that are helpful. The bottom line is that private and public foundations with the higher DQ spent more. For public foundations, the amount extra that was spent was $785,226,870 (11.34% more than 2022). For private foundations, the amount spent extra was $828,500,199 (14.93% more than 2022). In total, public and private foundations spent an additional $1.6 billion. This is based on incomplete data, so the numbers may actually go up.
Just before you cry for the public and private foundations, despite the increased DQ and spending, the assets of public foundations increased from $49.8 Billion to $53.8 Billion. The assets of private foundations increased from $91.3 Billion to $107.3 Billion. So it appears that two things can be true at the same time – the DQ can be higher and the assets of foundations can grow.
Public Foundations
____________________________________________2022 2023 Difference
Charitable Activities $1,249,995,956 $1,341,243,678 $91,247,722 (7.30%)
Gifts to Qualified Donees $5,698,510,458 $6,335,206,927 $636,696,469 (11.17%)
Grant to Grantees (from 2023 on) $14,312,487 $76,750,245 $62,437,758 (436.25%)
Private Foundations
___________________________________________2022 2023 Difference
Charitable Activities $1,525,670,634 $1,787,794,692 $262,124,058 (17.18%)
Gifts to Qualified Donees $4,079,717,064 $4,414,266,652 $334,549,588 (8.20%)
Grant to Grantees (from 2023 on) $15,001,856 $244,104,991 $229,103,135 (1527.17%)
So it seems that the increase in DQ did have a major impact in expenditures but was not a big enough change to moderate the huge increases in assets of public and private foundations. There may have to be another increase in the DQ. The Conservative Party had a promise in its 2021 platform to increase the DQ to 7.5%, and perhaps that is what is needed. Or perhaps even a higher amount like 10%. Of course, if the needs in Canada were less (like poverty, education, health care, mental health, homelessness, etc) or more foundations gave more than the DQ, we probably would not be having this discussion.