(November 2, 2021) Well known philanthropist and social entrepreneur Bill Young has come out strongly in favour of taxing the investments of private and public foundations and has recommended Finance Canada consider doing so immediately in his submission regarding the disbursement quota, Boosting charitable spending in our communities.
Bill Young is the founder and chairman of Social Capital Partners, a nonprofit social finance organization, funder and president of the Bealight Foundation, past board member of Philanthropic Foundations Canada and a donor advisor of the Young Fund at the Hamilton Community Foundation. He has participated in numerous advisory boards and taskforces related to social finance and social innovation
He says the issues of taxing foundation assets is “inextricably tied” to discussion of the disbursement quota.
“If our goal is to see foundations generate the greatest impact for operating charities, we need to examine how theydeploy all their assets, not just their grants,” he wrote in his submission.
“The way foundations are currently set up and regulated is poor public policy. Anyone like me, who starts afoundation, is given a significant tax break for doing so, often close to 50% of the gift provided to the foundation.”
He says in return for giving up that 50% today, the government requires foundations to grant only 3.5% oftheir assets to operating charities each year and allows them to invest the other 96.5% of their assets in any securities they choose, foregoing all the tax on their investment earnings in perpetuity. The forgone tax revenue under this current system is considerable.
The Charity Report is currently conducting research on the asset growth of public foundations indicating they cumulatively held $40 billion in assets in 2019, which has grown from $4 billion since 2006—growth they paid no capital gains tax on. If individuals or companies had assets whose value went from $4 billion to $40 billion, however, they could expect to pay close to $9 billion in capital gains tax.
And, while charitable foundations pay no tax on the earnings they make off investments, those investments don’t have to be used for any beneficial social impact.
“I strongly believe that more needs to be done by government to rectify this imbalance,” says Bill Young.
He recommends that the government should immediately announce that, starting 10 years from now, it will tax all investment earning of charitable foundations that aren’t classified as impact investments.
He says this move would immediately catalyze the redeployment of tens of billions of dollars—mostly tied up in conventional stocks and bonds—into investments in affordable housing, clean energy, and other socialpurpose businesses or community bonds.
It says the ten-year time frame will allow time to decide and classify which investments qualify as impact investments, provide time for foundations to define their investment strategy and redeploy their investments without “requiring a fire sale in order to avoid being taxed on their non-impact earnings.” It also gives time for new intermediaries and impact investment managers to be developed to provide the expertise and impact investmentopportunities to foundations so they can implement their new investment strategies.
“The benefits to the government and Canadian taxpayers are so significant,” say Young. “This doesn’t cost the government a cent yet will immediately catalyze significant new capital for affordable housing and clean energy … It would immediately encourage foundations to think about how all their assets can be deployed for societal benefit rather than just those dedicated to grant making.”
Young says he believes it critical to announce the government’s intent to do this now to cause the immediate behaviour change, rather than study the issue and then announce saying the fact that it won’t happen for ten years allows plenty of time for the studying and planning.
“Let’s start the clock on having foundations deploy all their assets for societal benefit right away.”
Some foundation boards are already asking themselves whether they should be more than a private investment management companies that give away only a portion their excess cash flow to charity.
That’s because, says Young, “under the current rules, Canadian foundations are effectively private investment management companies that grant 3.5% of their assets to charity each year and invest the other 96.5% in conventional securities tax free.
“And I don’t believe that is what Canadian policy makers or taxpayers want.”
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