Charitable Trusts & The Disbursement Quota Requirements


One of the difficulties that can arise in managing a charitable trust relates to the disbursement quota requirements that apply to registered charities. In general, these rules require a charitable trust to spend a minimum amount annually (currently 3.5% of the charity’s investment assets) on charitable activities, including gifts to other qualified donees. If the minimum amount is not disbursed, the trust’s charitable registration may be revoked.

These rules can create an issue for the trustee where the charitable trust does not have sufficient income to meet its disbursement requirements, and the terms of the trust do not allow the trustee to encroach on capital. This was the issue in a recent case called Fenton Estate, where the deceased established a charitable trust in his will, known as the “Tony And Mignon Fenton Trust” to support the infirm elderly in need of home care in Oak Bay, British Columbia. The terms of the will provided that the trustee was to hold the capital of the trust, in perpetuity, and to distribute the net annual income of the trust to organizations or individuals that supported the charitable purposes of the trust.

The problem was that due to historically low rates of return on investments, the annual income of the trust was not sufficient to meet the 3.5% disbursement quota requirement. The trustee was in a difficult position because the terms of the trust didn’t allow the trustee to encroach on capital in order to meet the disbursement quota, but if nothing was done, the charitable status of the trust could be jeopardized. Accordingly, the trustee applied to the Supreme Court of British Columbia for an order allowing the trustee to use a portion of the capital of the trust in order to meet the disbursement quota requirements.

The Court found that the objects and purposes of the charitable trust became impossible or impracticable to attain as a result of the combination of low returns on investment, the disbursement quota requirement and the terms of the trust which allowed distributions of income only. Accordingly, this fell within the Court’s discretionary power under its cy-pres jurisdiction, which allows the Court to create a scheme for a charitable trust if the purposes of the trust become impossible or impracticable to carry out. Applying this doctrine, the Court was able to authorize the trustee to encroach on capital gains in any year it was necessary to add some part of capital gains to income in order to meet the disbursement quota.

When setting up a charitable trust, in a will or otherwise, it is important to give the trustees some flexibility (such as a limited power to encroach on capital) so that they can ensure the trust is able to meet its disbursement quota requirements.