Ottawa is overhauling the portions of the Income Tax Act that govern the regulation of registered charities.
It is setting new disbursement quotas that will lessen the burden on charitable foundations, and it is making charitable organizations subject to the same quotas. The new budget is also giving the Canada Revenue Agency, the official regulator of charities, a new compliance regime to crack down on errant charities.
Charities must fulfill annual disbursement quotas to ensure that a significant portion of the charities‚ resources are put to charitable work rather than management and fund-raising expenses. Charitable foundations must disburse 80% of the tax-receipted donations received in the previous year, as well as 4.5% of the value of its capital assets, such as investments, which are not directly used in charitable work.
Since this asset base is used to enable a charity‚s ability to do charitable work, Ottawa is proposing to help them build their assets by replacing the present 4.5% fixed rate with a 3.5% rate. Moreover, the rate “will be periodically reviewed to ensure that it continues to be representative of long-term rates of growth,” says Finance.
In recent years, financial advisors, particularly gift planners, have advocated that their clients make contributions to charitable organizations rather than charitable foundations because organizations were not subject to the disbursement quota on endowments. Ottawa is proposing in the 2004 budget to make charitable organizations subject to the same 3.5% disbursement quota. This measure is expected to apply in tax years that begin after 2008.
Ottawa also intends to soften the revocation regime. Under the current regime a charity that broke the rules had its charitable status revoked. Each year, about 2,000 of the country’s 80,000 charities have their status revoked, often for minor offences such as failing to file the annual information return. A small number, 15-20, are revoked due to serious violations, says the budget.
But because revocation is a harsh remedy, Finance says, “lesser forms of compliance may go unchecked, diminishing public confidence.” Therefore, Ottawa is proposing a regime of lesser penalties. For example, a charity may be suspended for one year from using funds for any purpose other than charity. Finance says this could include situations in which trustees are receiving undue benefits from the charity. The charity will also have to advise its donors of the suspension. The charity’s administrative and regulatory obligations will continue.
Other penalties include:
- $500 for late filing of the annual information return;
- 5% penalty on the eligible amount for issuing receipts with incomplete information;
- 5% tax on gross business revenue earned in a taxation year when a private foundation carries on any business.