The Globe and Mail’s recent reporting on the dire funding straits facing too many Canadian charities is an important wake-up call. The charitable sector can and should be a key player in a “whole of society” approach to tackling COVID-19-19′s pernicious social, economic and public health effects.
This we know: A financially wounded charitable sector suffering mass layoffs and reduced capacity will have long-term consequences for the post-COVID-19 recovery. We need a bold public policy response to address the funding crisis facing charities. The centrepiece of federal government action should be unleashing the immense, latent power of private foundations to save the charitable sector.
There are about 6,000 private foundations across the country. These institutions collectively hold upwards of $50-billion or more in endowed funds. In recent years private foundations donated $2.5-billion or more annually to registered Canadian charities.
In most cases private foundations were first established as a result of an individual or family generating capital gains on the sale of assets. Instead of paying all the taxes owing on these capital gains to government, Canadian tax law allows them to receive a tax credit by donating a portion of proceeds to a foundation that they control.
This is an incredible privilege. It permits the individual or family to determine how money should be spent on charitable activities that would otherwise have been taxed and distributed by governments. It also allows the assets in the foundation to grow tax-free in perpetuity.
Currently, private foundations are only required to give away 3.5 per cent of their endowments annually. Some donate more. The vast majority donate the minimum.
These foundations have seen their endowments swoon and then rapidly recover over course of 2020 as asset prices have surged on the back of the extraordinary fiscal and monetary policy enacted by governments. Canadian stock markets have all but recouped all their 2020 COVID-related losses. The major U.S. indexes are at all-time highs. Other asset classes such a real estate and bonds have posted strong year-to-year results.
As the saying goes, with great privilege comes great responsibility.
At this moment of national crisis when front-line charities responding to the community and social fallout of COVID-19 are swamped with urgent needs, the giving capacity of private foundations need to be put on a war footing.
To deploy the immense financial firepower of Canada’s private foundations, the federal government should double private foundations’ minimum annual disbursement from 3.5 per cent to 7% and keep it at this level for three years. This would inject billions of dollars into charities big and small supporting Canada’s overall response to the COVID-19 crisis during what could be a prolonged economic recovery.
A forward-thinking finance minister could use this period to assess if a return to the 3.5 per cent rule is in the public interest. There is a credible case to be made that the annual disbursement allotment should be raised to a permanently higher level to ensure that private foundations eventually spend themselves down thereby returning the entirety of their tax sheltered funds back to society.
Such a significant, one-time increase is proportionate to the current challenge facing the sector which is dire.
Imagine Canada, the country’s leading advocacy group for charities, is reporting that the percentage of its member charities seeing a decline in revenue is double that of the 2008 financial crisis or fully 69 per cent of all organizations. One third of charities are reporting declining expenditures. The comparison to the 2008-2009 period is stark. During that crisis Imagine Canada reports that charities were able to increase expenditures with nearly half of organizations reporting they were spending more on the delivery of services and programs year over year.
Some will complain that supersizing a foundation’s disbursement requirements for a limited period of time will lead to sloppy grant making. This a straw-man argument. There are many big, national and regional charities that have the capacity to wisely steward and spend donor funds on urgent community needs.
Think of this idea as a massive Kickstarter campaign for Canada’s charities. Its trigger is a minor regulatory tweak by Ottawa to the disbursement quota. The immediate result is it gets financially strained governments off the hook for spending billions of public funds to support causes that are normally funded by private donors. More importantly, it taps into the on-the-ground intelligence of individual foundations which, through years of giving, know which charities are the most effective and can deploy their funds with biggest impact in the shortest period of time.
The key point here is that we need to see the current crisis facing charities as requiring a collective response. Governments have taken the lead thus far at immense cost to the national treasury. Coping with the societal fallout of COVID-19 is going to require contributions from everyone, including Canada’s private foundations and the ten of billions of dollars that they control. The magnitude of the challenges Canada faces requires nothing less.
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