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Receipted gifts quota controls non-charitable expenditures
by Don Stephenson
October 31, 1994; Canadian FundRaiser
Every registered charity has a disbursement quota which is an amount it must annually spend for charitable purposes. Failure to meet this quota can result in revocation of a charity's charitable status. In any given year, depending upon the makeup of gifts received --- receipted, unreceipted, exempt, unreceipted income --- the rules may allow a charity to be financially creative.
The disbursement rules are slightly different, depending upon the type of charity --- charitable organization, public foundation or private foundation. Section 149.1 of the Income Tax Act (ITA) defines these various types of charities and the applicable disbursement rules.
In general, 80 per cent of receipted gifts must be disbursed in the following year, leaving 20 per cent of the receipted gifts for non-charitable expenses like fundraising.
Example 1: All receipted gifts
In 1994, ABC Charity raises $200,000, all of which is receipted. It must disburse $160,000 (80 per cent X $200,000) for charitable purposes in 1995. ABC Charity is left with $40,000 to meet non-charitable and fundraising expenses.
Example 2: Mix of receipted and unreceipted revenue
Now let's look at how the addition of unreceipted gifts or unreceipted income can add flexibility for ABC Charity.
In 1994, it raises $200,000, of which one half is receipted. It must disburse $80,000 ($100,000 X 80 per cent) for charitable purposes in the following year. It is left with $120,000 which it can spend on charitable activities, or on other expenses, or on building a capital base.
If ABC Charity has very little non-charitable expenses, and it elects to spend the entire $200,000 for charitable purposes, it will create a "disbursement excess" of $120,000. ITA Sections 149(20) and 149(21) discuss disbursement excesses and indicate that excesses may be carried back one year or carried forward five years and used to satisfy the 80 per cent rule.
Example 3: Disbursement excess
The assumptions are identical to those in Example 2, except that ABC Charity has a disbursement excess of $120,000 at the end of 1994. Since it raised $100,000 in receipted income in 1994, ABC Charity's disbursement requirement for 1995 is $80,000. Therefore, a portion of the excess can be applied against the disbursement requirement, thereby freeing up the $80,000 of receipted income.
A general understanding of the disbursement rule is usually enough for fundraisers, as it is the responsibility of their financial officer or accountant to annually complete Revenue Canada's form T3010, "Registered Charity Information Return and Public Information Return", and associated Schedules 1 through 5. However, as illustrated above, there are times when a more thorough understanding can allow for more creative, organizational financial planning opportunities.
Documents mentioned in this article can be obtained from your local taxation office.
Don Stephenson is manager of bequests and planned giving at the University of Guelph.