Capital gains reduction and capital gains pool

Notice to the reader

As a result of Budget 2010, the information below applies only for fiscal periods ending before March 4, 2010.

The capital gains reduction is a calculation that allows a registered charity to encroach on capital gains from the disposition of enduring property to help the charity meet its 3.5% disbursement quota obligation. A capital gain is realized when capital property (such as stocks, units of mutual funds, land buildings and equipment) is sold or considered to have been sold for more than the total of its adjusted cost base and the outlays and expenses incurred to sell the property. (Capital losses can be ignored for the purpose of the capital gains reduction calculation.)

The encroachment, however, will not increase the charity's disbursement quota with respect to the disposition of enduring property.

The capital gains reduction available to the charity is the lesser of the capital gains pool and 3.5% of the amount on line 5900 (average value of property not used directly in charitable activities or administration) on the registered charity information return. If the amount on line 5900 is $25,000 or less, the 3.5% DQ obligation is deemed to be nil and the capital gains reduction is also deemed to be nil.

While the annual calculation of the capital gains pool is voluntary, the charity should declare capital gains realized on the disposition of enduring property on line 5720. This will allow the charity to claim a reduction in the disbursement quota in a subsequent fiscal period. The charity can choose the amount of capital gains reduction if any that it wishes to claim. Unused capital gains reductions establish a capital gains pool. For instructions on how to calculate a capital gains reduction, see "Calculating the disbursement quota" in the guide for completing the Registered Charity Information Return.

The Capital Gains and Disbursement Quota Worksheet can be used to help the charity to:

  • calculate its capital gains pool and capital gains reduction (if applicable);
  • calculate its disbursement quota for the fiscal period covered by the return;
  • calculate whether the charity has met its disbursement quota;
  • estimate its disbursement quota for the next fiscal period; and
  • track its disbursement quota excesses and shortfalls.

The worksheet is for the charity's use only and should not be returned to the Canada Revenue Agency.

References

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