This article appears in the June 2021 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
The federal government is looking at raising the minimum amount charitable foundations must grant to causes — a move that’s been met with mixed reactions by the charitable sector.
In the 2021 federal budget, the Liberals announced they would launch “public consultations with charities over the coming months on potentially increasing the disbursement quota and updating the [enforcement] tools at the Canada Revenue Agency’s disposal, beginning in 2022.” As of early June, the feds had provided no timelines or further details regarding the consultation.
With charitable foundations’ assets growing, some have called for charities’ so-called “disbursement quota” to be raised from 3.5% to as high as 10%. However, others suggest that raising the quota too high may jeopardize some foundations’ long-term sustainability, and would prefer to see a modest increase to the quota or other changes to how charities operate.
“There will be stakeholders lined up on each side of the argument,” said independent senator Ratna Omidvar, deputy chairwoman of the Special Senate Committee on the Charitable Sector. “[The government has] to try to figure out the risks and rewards on going forward on this.”
Omidvar said she favours increasing the quota but hasn’t taken a position on how high it should be. “There are a large number of primarily smaller foundations that are possibly below the disbursement quota rate or just at it, and it is these organizations that we should be concerned about,” she said. “Raising [the quota] by a few percentage points will make a big difference to the communities that are hurting.”
In the budget, the government acknowledged that most foundations “meet or exceed their disbursement quotas.” However, foundations’ “grant-making and other charitable activities have not kept pace” with the growth of their assets, the feds argued.
Charitable foundations, both public and private, are registered charities that primarily fund charitable activities directly or via grants to qualified entities that deliver charitable services. The foundations issue tax receipts to donors, and then grant donated funds over time.
According to Toronto-based Imagine Canada, in 2018, public and private foundations held $92 billion in assets, up by 171% from 2008, when assets stood at $34 billion.
Raising the disbursement quota could increase support for charitable causes by $1 billion–$2 billion annually, the government argued in the budget.
The disbursement quota has changed several times, most recently in 2004, when it was lowered to 3.5% from 4.5%. Calls to raise the quota predate the pandemic but became louder last year when charities took a double hit: a severe drop in revenue accompanied by growing need for charitable services due to Covid-19.
John Hallward, founder and chairman of the GIV3 charity in Montreal, advocates for increasing the disbursement quota to 7%–10% for a five-year test period. He launched a campaign called “Increase the Grants,” arguing that this quota range “encourages more generosity” from foundations while minimally affecting those that give more than 3.5%.
“It’s quite shocking that the distribution quota is as low as it is,” said Sadia Zaman, CEO of Inspirit Foundation in Toronto. Inspirit invests all the assets it doesn’t grant in a year into impact investing. Last year, Inspirit granted 5% of its assets and invested the rest in impact investment initiatives.
Some charitable foundation associations, including Imagine Canada, declined to take a position on raising the quota, but welcome the government’s decision to launch consultations on the matter.
“We’re supportive of finding ways to unlock more capital that can benefit charitable organizations so they can further their missions,” said Bruce MacDonald, president and CEO of Imagine Canada. “But we would want to make sure that these kinds of policy decisions are being made with lots of questions being asked, and facts and good data.”
Janine Davies, vice-president of Raymond James Ltd. and executive director of the Raymond James Canada Foundation in Vancouver, estimates her foundation granted 12%–15% of its assets last year. “We would have no problem with an increased disbursement quota,” she said. However, she noted, some foundations may be challenged to meet a higher quota, which could push them to become more aggressive in investing their capital.
Carol Bezaire, senior vice-president of tax, estate and strategic philanthropy with Mackenzie Investments in Toronto, said Mackenzie’s Strategic Charitable Giving Foundation regularly “far exceeds” the annual quota. But charities also benefit from the “growth in the value” of their assets, which can help them meet tomorrow’s needs, she said.
Raising the quota to 5% would be “a reasonable middle ground between the 3.5% status quo and the 10% call for total system change,” said Malcolm Burrows, head of philanthropic advisory services with Scotia Wealth Management in Toronto. “A 5% rate may not produce all the extra dollars predicted in the federal budget, but it’s a positive change.”
However, Susan Manwaring, partner with law firm Miller Thomson LLP in Toronto, said raising the disbursement quota could lead to several difficult legal issues for charitable foundations.
One key issue is that some endowments in charitable foundations contain restrictions imposed by the original donor. These trust restrictions may allow only interest and dividends earned in the endowment to be used for granting, for example. If interest and dividends from the endowment are insufficient to meet the disbursement quota, the foundation may find itself in a conflict between the Income Tax Act and trust law.
While a charity could go to court to have the trust’s terms changed, there’s no guarantee that action would be successful.
“Trust law says that you can only change what the donor originally intended if the [trust’s original] purpose is impossible [to carry out],” Manwaring says. “It doesn’t say you can change [the trust] because the disbursement quota [has increased].”
Another issue, Manwaring said, is that provincial trustee acts governing charities require charitable assets to be invested prudently. A dramatic rise in the disbursement quota could cause foundations to take on more risk, leading to liability issues for trustees or boards of directors.
Increasing the disbursement quota probably won’t “make a huge bit of difference,” Manwaring said. She instead favours the changes contained in Bill S-222, tabled by Omidvar in February, which would give charities greater flexibility to provide resources and to work with non-qualified donees, such as not-for-profit organizations, social enterprises and co-operatives.
“If you want [charities] to be more effective and able to help more people, there are changes that could be implemented that would do it,” Manwaring said. “[Raising the disbursement quota] is not one of them.”