Helping Clients’ Endownment Funds

The 2010 Federal Budget has made changes to the disbursement quotas for registered charities, a change well received and considered long overdue by the sector.

As of March 4th, 2010, clients who are considering a donor advised fund should be happy to learn that the disbursement rules requiring the gift be held for a minimum of 10 years no longer apply. Clients will now be able to disburse part of the assets to help their cause meet short-term goals or fund specific special projects.

In addition, direct gifts to charities can stay with the charity for longer and enable them to save for significant future projects. This enables charities to do more with donated assets rather than being subject to use 80% of donations (the disbursement quota) in the next tax year. For charities that are looking to make larger investments in facilities, research programs, equipment or broad awareness campaigns, this will have a substantial impact on their immediate and future effectiveness.

This is a good news story for both clients who are giving and the registered charities they support – - especially donors that are considering establishing donor advised funds. Provided that the gift deed or agreement between the charity and the donor is correctly worded, donors can meet their own short term charitable objectives and still set up a fund that can help their cherished cause beyond their lifetime. Importantly, these changes also provide the advisor with an additional opportunity to further conversations about planned giving with clients, as well as potentially retaining and increasing client assets under management.

Disbursement Quota Reform Details

Until recently, the key indicator of whether a registered charity has fulfilled its charitable mandate under the Income Tax Act was if it had fulfilled its disbursement quota (DQ). The DQ was the minimum calculated amount that a registered charity is required to spend each year on its own charitable programs, or on gifts to qualified donees, such as other registered charities.

The purpose of the DQ was:

• to ensure that most of a charity’s funds were used to further its charitable purposes and activities;
• to discourage charities from accumulating excessive funds;
• to keep other expenses at a reasonable level.

Prior to March 4, 2010, the annual disbursement quota was made up of a number
of components including:

1. 80% of donations received and transfers between charities in the previous fiscal year (the charitable expenditure rule or the “80%” rule);
2. 80% (100% for private foundations) of amounts received from other registered charities in the previous year;
3. 3.5% of all assets not currently used in charitable programs or administration; if these assets exceed $25,000 (the capital accumulation rule  or the “3.5%” rule used for endowments and other restricted assets).

The budget reforms of February 2010 eliminated points 1 and 2 above of the disbursement quota expenditure rule for all charities with fiscal periods after March 4, 2010; modified the capital accumulation rule in point 3 from $25,000 to $100,000; and provide for additional anti-avoidance rules for charities. For more information on the disbursement quota changes and donor advised funds contact Benefaction Foundation.