From WE to DQ – Liberal’s charity disbursement quota reform misses the mark

Adam Parachin, associate professor, Osgoode Hall Law School

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Charities are not doing enough charity, or at least that seems to be the conclusion drawn by the Trudeau Liberals in the federal 2021 budget. The budget committed to holding public consultations with a view to increasing the annual expenditure requirement under income tax law (known as the “disbursement quota”) for registered charities. This is not a very inspired idea. Of course, in the wake of the WE Charity scandal, the end goal may be to recover political capital by being seen as getting tough with charities without actually improving anything.

Currently, federal income tax law requires that registered charities expend each year at least 3.5 per cent of their accumulated assets on their own charitable programming and/or gifts to “qualified donees” (essentially, other charities). If that seems low, especially in the midst of a global pandemic, that is because it is. But there are good reasons for this.

The disbursement quota was reduced to 3.5 per cent from 4.5 per cent in 2004. The concern at the time was that many charities were struggling to meet that quota because of low interest rates and thus low annual income yields from endowments. As interest rates have since declined further, it would be odd to decide that now is the time to increase the disbursement quota.

But what about those massive war chests that some charities seem to have? What difference should low interest rates make if charities can just spend their millions of accumulated investment capital? Well, not so fast – under provincial law, donors are able to permanently restrict charities to only expending the income generated by their donations and never the capital (including capital gains). We have no reliable data as to how much of accumulated capital within the charitable sector is subject to this kind of restraint.

So if the disbursement quota is increased, charities unable to meet their disbursement quota from interest income alone but also unable to encroach on capital will have to bring court applications to permit such encroachments. That will be great for lawyers, not so much the charities.

But why should charities be allowed to hold large endowments in the first place? Are charities guilty of tone-deaf hoarding in the face of present day hardships? Endowments are not about withholding help from present-day need so much as enabling help across multiple generations. Every generation believes that there is no time like the present to spend on current needs. But a defining feature of charity is that it has universal appeal across time, culture and circumstance. Many of today’s endowments were capitalized by prior generations. Would we rather they had just spent it on themselves? Through endowments we pay forward the generosity previous generations have shown us.

And then there is the impact on the Canada Revenue Agency’s scarce administrative resources. Increasing the disbursement quota will inevitably mean an increase in benign non-compliance since many charities will lack the annual interest income to meet a higher disbursement quota. The CRA’s resources are better allocated toward regulating the true bad apples in the charitable sector.

That said, the real issue here is not the proposal itself – returning to the former 4.5 per cent disbursement quota is hardly going to spell apocalyptic ruin – so much as the lost opportunity it represents. On this brief, the Trudeau Liberals are favouring low-hanging fruit over thoughtful change.

The idea that charities should be delivering more charitable goods and services is an odd position for the Trudeau Liberals to now take after having in their first mandate changed the tax laws so that charities can devote literally all of their resources to political lobbying.

If we want charities to do better at doing good, we should listen to their own accounts of living within the current tax rules. A sustained complaint of charities is that they face too much red tape when – as is increasingly common – they partner with other organizations.

The standard under current law is that charities must maintain “direction and control” over funds they disburse to non-charities. This sounds benign, if not entirely reasonable, until you apply it in practice. The message charities are required to send to grassroots partners is “we can fund you provided we can direct and control you.” Direction and control mechanisms do not come cheap, as both the charities and their lawyers can tell you.

But legal fees are hardly the only concern. Reducing this requirement to terms this government might understand, direction and control carries with it counterproductive colonial and white saviour overtones when charities aspire to partner with Indigenous, racialized or international organizations. Charities have long since asked for a more dynamic expenditure-responsibility requirement to no avail.

A modest adjustment to the disbursement quota is not going to ruin the sector. But that is hardly a ringing endorsement. The Trudeau Liberals rose to power with a promise of real change. This is not it.

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