The Charities Directorate of the Canada Revenue Agency does, indeed, have rules around accumulation of property. The particular rule that charities are probably thinking about if they’re worried about the size of their accumulated surplus is the disbursement quota (DQ). The purpose of the DQ is to establish a minimum requirement for spending on charitable activities, with reference to the wealth that a charity has accumulated. As long as you maintain an appropriate level of charitable activity – measured through your spending – you are compliant with this rule.
CRA provides guidance about its spending requirements here. Note that there are separate rules for charitable organizations, which exist to deliver charitable programs and services, and foundations, which exist to support charitable programs and services.
Young Associates works with many smaller charitable organizations. Most groups in this category are unlikely to have accumulated property at a level that would cause non-compliance with the CRA. However, this is an issue that may involve complex legal and financial concepts. If you have concerns, it is wise to discuss your situation with a professional.
CRA defines its requirement for charitable organizations as follows:
If the average value of a registered charity's property not used directly in charitable activities or administration during the 24 months before the beginning of the fiscal period exceeds $100,000, the charity's disbursement quota is:
3.5% of the average value of that property.
The interpretation of this hinges on what property is not used directly in charitable activities or administration. CRA lists real estate and investments as examples.
A charity, for instance, may hold long-term investments such as units in a mutual fund, and use the resulting interest revenue in its operations. However, the principal sits intact for multiple years, not directly used for charitable activity. (This is distinct from the case of a charity that places short-term investments to earn some interest revenue before the investment matures and the principal winds up in a chequing account, available for spending.)
A charity may also own a building that it doesn’t currently occupy; this may be the case for institutions such as hospitals, universities and churches, which may have considerable real estate holdings and needs that change over time.
Once you have identified property that meets CRA’s definition of “not used directly in charitable activities or administration,” you must calculate its average value over the two years before the start of the current fiscal year. CRA provides some latitude in how the average may be calculated. If your organization needs to make this calculation, the method for assessing value and calculating the average over time would be a good topic for discussion with your CPA.
Last step: calculate 3.5% of the average value. That yields the amount your organization is obliged to spend on its charitable activities or administration during the current year.
Let's say your charity owns an investment portfolio, and you determined that its average value over the last 24 months was $100,000. Your DQ for the current year would therefore be $3,500.
You can see that this is actually a pretty low bar to jump over! Most organizations with the capacity to build a $100,000 investment portfolio would have operations that demanded more than $3,500 in program and admin spending. CRA’s rule is set at a level that catches inactive charities, but that is unlikely to cause compliance issues for most charities that are actively carrying out their mandates.