(February 17, 2021) Canada’s most organized and vocal campaign to increase the disbursement quota (DQ) for public and private foundations is gathering steam.
Well-known names in the sector are among the initiative’s most passionate advocates. The effort, dubbed the Increasing the Grants campaign, is calling on the Finance Minister to “significantly increase” the disbursement quota. Foundations are currently required by the Income Tax Act to spend 3.5% of their assets.
After researching original budget documents, the Ministry of Finance told The Charity Report the decision was made in Budget 2004 “to replace the fixed 4.5 per cent disbursement quota rate with a new rate that is more representative of historical long-term real rates of return earned on the typical investment portfolio held by a registered charity … This is consistent with the long-term intentions of donors who provide gifts in the form of endowments…Accordingly, the budget … reduce[d] the 4.5-per-cent disbursement quota rate on capital assets to 3.5 per cent.
“This rate will be reviewed periodically to ensure that it continues to be representative of long-term rates of return.”
According to historical records, the average annual return since the inception of the S&P Index in 1926 through 2018 was approximately 10%–11%. The Index is the most widely watched gauge for investment returns,
The disbursement quota includes the expenditures a foundation makes on its own charitable activities and grants to qualified donees.
In the face of the wealth and racial inequity gaps exacerbated by the global pandemic, more people are feeling a sense of urgency about loosening up the billions of dollars held by private foundations and calls to increase the disbursement quota are growing.
Several campaigns have been underway for months in the US, where the current DQ is set at 5%.
“I look at this as an economist,” says Kate Bahen, managing director of Charity Intelligence, an organization that’s become well-known over the past decade for measuring the effectiveness of individual charities. “The government had levers to pull when the COVID crisis began, and it pulled them right away, saving our country from a lot more harm, but the government can’t go on at this level of spending. Philanthropy must contribute in a much bigger way.”
Bahen says reducing the DQ in 2004 was an error.
“It was a mistake to lower it because of a couple of bad years in the market. And because it was a mistake that was made 16 years ago, foundations got years of windfall. Now it’s time to redress the mistake, to fix it.”
CEO of Community Foundations of Canada (CFC) Andrew Chunilall compares current foundation spending practice to trickle-down economics when wealth amasses at the top of society, it trickles down to the benefit of all. In reality, trickle-down economics—largely manifest through tax policy—has led to a society’s wealth amassing into the hands of fewer people.
“Trickle-down philanthropy is not working,” he says.
Bill Young earned his wealth from his years in the private sector, primarily as CEO of Hamilton Computers and Optel Communications Corp (later Axxent). For the past 20 years, as the founder of Social Capital Partners (SCP), he has been focused on social impact investing.
“Pandemic or not, the DQ is bad public policy,” he says. “And it’s an issue that should have been fixed a long time ago. When you break it down, Canadian taxpayers give up to 50 cents on the dollar for every dollar that goes into a foundation. What we get back for that is the 3.5% spent annually by a foundation, plus the foundation pays no tax on the earnings it makes off its investments, investments which don’t have to be used for any beneficial social impact, whatsoever. That doesn’t sound like a good deal for taxpayers to me.”
“This is our hour of need. All citizens and sectors of society need to row together,” says The Honourable Ratna Omidvar, an Ontario-based senator who co-chaired the Special Senate Committee on the Charitable Sector in 2018/19 and is urging other lawmakers to take up the cause.
“Charities in particular have been challenged in the face of declining donations and increased service demands,” she says. “The assets of private foundations which derive from tax exempt dollars have grown [significantly]. Whilst some private foundations disburse more than the minimum, it is time for all of them to open their bank vaults to help Canadians survive this crisis and thrive when it is hopefully behind us.”
“I know many foundations are granting well above the disbursement quota floor of 3.5% but this is a conversation we need to have at a setor level,” says Chunilall. “We should be using all of the tools at our disposal to support a just recovery.”
John Hallward is at the helm of the Increasing the Grants campaign. Chairman and founder of GIV3, a charity which works to encourage Canadians to be more generous in their giving, he is a founding partner of GivingTuesday in Canada. Hallward has written about philanthropy, including his 2016 article, The Joy of Giving, Life Lessons of an Entrepreneur, and he was the director of global product development at Ipsos Connect for more than 20 years.
“When we brought Giving Tuesday to Canada, I thought it was a really great way to generate money for good causes, and 2020 saw the largest amount of money raised in one day ever,” he said. Canada Helps, Canada’s primary online giving platform for charities, saw an increase of 44% over 2019.
“But when I looked at how much money was tied up in foundation assets, doing absolutely nothing for anyone except the investment managers, I thought GivingTuesday was pennies in comparison, and changed my focus as a result. Foundation earnings have been more than 10%—way more than 10% in some instances for years—and foundations are only required to spend 3.5% of that.
“They are amassing huge amounts of wealth, and they are hoarding that wealth when it could be used to deal with the very serious issues our country is dealing with right now. It’s just not right.”
Hallward’s Giv3 Foundation is being advised by government relations specialists on how best to lobby the government to increase the disbursement quota, is recruiting high-profile supporters, and has invested in a website that encourages all Canadians to get involved.
“This is something that people working in the charity sector, donors to charity and everyday Canadians can get involved with. Visit increasingthegrants.ca and find out how you can get involved. We can all have a voice in this. Every Canadian can have an impact.”
The increase in the DQ does not require legislative action but can be done as a regulatory change.
“In no context should 3.5% be the floor,” says Chunilall. “The annual rate of return for the last decade is 10% for a regular investor. The idea that we can’t erode capital is a false choice when capital is being produced in abundance.”
Bill Young wonders whether private foundations should consider themselves private investment management firms or charitable entities.
“What other business defines itself by 3.5% of its operations, as opposed to the 96.5% of the business it does,” he says. “Why would anyone have objections to increasing this. If a foundation’s purpose is to do good, then it will help do good.”
Not everyone feels the same way.
Philanthropic Foundations Canada (PFC) is a member association of private foundations, public foundations, and other grant makers. Created in 1999, it became a charity itself in 2002 and has, since at least 2006, lobbied the federal government on tax treatment for foundations.
“PFC wants to avoid simplistic and blunt ‘solutions’– with unintended consequences – that divide the sector when we need consistent and aligned key messages with the Federal Government to make progress,” a spokesperson told The Charity Report.
“A mandated increase in the disbursement quota does not … offer a sinecure for achieving impact and relevance in this hour of public need. The ‘’what’’ and ‘’how’’ of giving matters as much as the amount of giving,” Jean-Marc Mangin, President and CEO of Philanthropic Foundations Canada wrote in a January 8, 2021 blog.
“Notwithstanding … much-needed changes, foundations cannot replace governments in their central mandate to respond to public emergencies,” he added.
Over the past decade, Imagine Canada has become one of the most recognized voices in the charity sector and has partnered with Philanthropic Foundations of Canada on lobbying efforts to changes to the Income Tax Act and on management of charities.
Since the beginning of the pandemic, Imagine Canada has called for the federal government to create a $10 billion stabilization fund for the charity sector. But it does not currently see an increase to the disbursement quota as part of the toolbox.
“At this point we are working with our Public Policy Committee and our Board of Directors to finalize our position on this topic,” says Imagine Canada CEO Bruce MacDonald. “We are always interested in ideas that create additional sources of revenue for sector organizations. As with all priority policy recommendations, we will need to fully understand the implications. We are particularly interested in having a clearer picture of the potential financial infusion in both the short term and the long term.”
Imagine Canada’s ask for to the federal government for $10 billion would translate into a DQ of 20% for one year or a DQ of 12% for two years, estimates Bahen.
MacDonald, along with Philanthropic Foundations of Canada’s former CEO Hilary Pearson, chairs the Government of Canada’s Advisory Committee on the Charitable Sector (ACCS).
Launched in August 2019, the ACCS “advises the Minister of National Revenue and the Commissioner of the CRA on important and emerging issues facing registered charities and other qualified donees on an ongoing basis.” The issue of raising the disbursement quota has not come up on the ACCS agenda.
“We have been working on a number of issues and expect to have our first report out shortly,” says Pearson. “The Committee hopefully has a long life and will be planning to examine many of the recommendations from the [Special Senate Committee on the Charitable Sector] as it moves forward, which could certainly include the DQ.”
Ruth MacKenzie is President and CEO of the Canadian Association of Gift Planners (CAGP), an advocacy organization for “beneficial tax and legislative environment that strengthens philanthropic giving.”
Established in 1993, CAGP bills itself as “the only Canadian professional association that brings together charitable fundraisers and professional [financial] advisors.” Prior to her work with CAGP, MacKenzie was a regional chief grant reviewer for Ontario Trillium Foundation, and she is currently a board member of Canada Helps.
“We will not be supporting the campaign, nor at this time, we will not be actively/publicly voicing our opposition,” says MacKenzie. “I believe there would be unintended consequences for foundations, [donor advised funds] and organizations that hold endowments if this were to happen.”
“Government is getting at the end of its policy tool kit to be able to respond to what we are dealing with now,” says Chunilall. “Philanthropy has a bigger role to play. And scarcity is not the issue.”
“I don’t know why this hasn’t been changed already. Perhaps there haven’t been any strong advocates for it,” says Young, “it doesn’t mean more regulation. There’s no additional regulation by increasing the DQ.”
“A concern for me is that an increase now is too little too late,” says Bahen. “I worry about rumours of raising the DQ to 4.5%. That’s too little. It wouldn’t be ineffective.
“I think foundations need a push,” says Omidvar.
“The DQ has only decreased in the last two decades, partially as a result of their call to shepherd and grow their resources after instability in the financial markets. However, financial markets have more than recovered. Even during these unstable times, the market has done well, whilst average Canadians have not. I also believe that the assets held by foundations are in a sense public money held in private hands. The public now needs private foundations to step up.”
“We should also start doing other things too,” says Young. “For example, in 10 years we should be taxing the investments of foundations who don’t invest in social impact. If the purpose of the foundation is to do good, then why wouldn’t you want 100% of your money doing that.”
“The K-shaped recovery demonstrates the dynamic we are now witnessing. Wealth is being lost by poor people every day. For rich people, it’s increasing,” says Chunilall.
In its intelligence report Where Wealth Resides, published in July 2020, The Charity Report determined—based on gross asset value in 2018—if the disbursement quota was increased to 10%, it could generate 14.4 billion for the charity economy in five years
John Hallward says that amount has grown significantly from the gross asset value determined in 2018. In 2019, the S&P annual stock index, averaged 28.9% in earnings. In 2020, S&P reported average earnings of more than 16%.
“Where is the moral courage?” asks Bahen. “That’s what I find appalling. There is no courage. This should have been done a year ago. I find it egregious that the sector is asking the government to do more, but charities are sitting on billions of dollars, and they are not willing to contribute. And these dollars were tax credited by the Canadian people.
“I keep going back to what [former Bank of Canada chairman] Mark Carney said in the Economist, one week after the pandemic was declared. He said,
“When it’s over, companies will be judged by “what they did during the war”, how they treated their employees, suppliers and customers, by who shared and who hoarded.”
If you’d like to become involved in the effort to increase the disbursement quota, visit increasethegrants.ca.
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