A one-paragraph change in last week’s federal budget could give Canada’s hard-hit charities a shot in the arm and unlock as much as $4-billion in extra annual funding for them at a time when the need for their help is soaring.
The budget said the government is considering an increase to its disbursement quota (DQ) for charitable foundations. That’s the minimum percentage of their holdings they must spend each year on their own activities and in grants to other charities. The DQ has been fixed at 3.5 per cent of foundation assets since 2004, when it was lowered from 4.5 per cent. By contrast, the quota in the United States has been at 5 per cent for years.
The government plans to hold consultations with charities to determine a new quota that would take effect in 2022. Figures included in the budget indicated that hiking the DQ to 5 per cent would increase support for charities by between $1-billion and $2-billion annually.
Many charity advocates say the DQ should move to 10 per cent given the massive growth in charitable foundation assets in recent years. Investment earnings on those holdings accumulate tax free, and total assets have more than doubled over the past decade to $85-billion. But others urge caution and argue that setting the quota too high will damage the long-term viability of some foundations.
The COVID-19 pandemic has added more urgency to the debate. Donations to charities have plummeted by as much as 40 per cent, while demand for their services has surged. Many organizations have laid off staff, closed offices and suspended operations to cope with the revenue shortfall.
A group called Increase the Grants is calling for the DQ to be set at between 7 per cent and 10 per cent for five years to help charities recover. The government could then assess the impact and settle on a future rate, the group says. “I would like to see enough of an increase that makes a difference to the charitable sector in terms of releasing a lot of funds,” said John Hallward, a veteran charity executive who is leading the campaign.
He and other advocates singled out the massive growth in assets at private foundations, which are typically set up by wealthy individuals or families. The budget said that, since 2010, the assets of private foundations have risen twice as fast as public foundations, and they now account for more than half the total. While many private foundations disburse more than the 3.5-per-cent minimum, enough barely meet it for the government and others to argue it’s time to review the threshold.
“It’s just bad public policy to have [the DQ] so low in normal times, let alone in a COVID pandemic,” said Kate Bahen, managing director of Charity Intelligence, a charitable organization that studies the sector.
Ms. Bahen has calculated that a 10-per-cent quota would boost annual charitable funding by $4-billion. Another study by The Charity Report found that a similar quota would generate an extra $14.4-billion over five years.
Upping the DQ could have a particularly dramatic impact on the Mastercard Foundation, which has more than $40-billion in assets and is by far Canada’s largest charity. The private foundation funds a variety of programs in Africa, and it was set up in Toronto in 2006 when the credit-card giant went public on the New York Stock Exchange. It still holds about 112 million Mastercard shares, which have rocketed in price from about US$4.50 a share in 2006 to US$388, taking into account a stock split.
Ms. Bahen estimated that a 10-per-cent DQ would mean at least $1-billion in extra annual disbursements by the charity. But the true figure would likely be higher since Ms. Bahen’s calculations were based on the foundation’s 2019 regulatory filings, when its assets were about $20-billion.
The foundation has been given a special 15-year “averaging arrangement” by the Canada Revenue Agency, which has allowed its outlays to fall below the 3.5-per-cent target in some years. That arrangement ends on Dec. 31, 2021.
“We are unique in that our assets resulted from a single gift from a single donor with no donation tax credit provided by Canada,” said Toni Tiemens, a spokesperson for the foundation. She added that it welcomes the DQ review. “The foundation’s assets are subject to temporary gift restrictions that for the time being cause their value to be highly volatile, creating unique challenges in our disbursement quota calculation.”
Representatives of private foundations say there are several complexities in changing the DQ. For example, many have received gifts that have restrictions about drawing down capital. If the DQ were set too high, these foundations could have difficulty meeting the target if they didn’t earn enough from investments and through donations. A high DQ could also threaten the longevity of some foundations, they argue. “We need to look at the rate that serves the needs of Canada now but also the needs of Canada in the future,” said Jean-Marc Mangin, chief executive of Philanthropic Foundations Canada, which represents private and public foundations.
Malcolm Burrows, head of philanthropic advisory services at the Bank of Nova Scotia, said Bill Gates and other billionaires have changed the nature of charitable giving and Canada’s DQ should be higher. “It’s a whole change in thinking in the philanthropic world, led by [Mr. Gates and others] saying that the needs right now are so urgent that we need to readjust the balance between investing capital and providing public benefit.”