Foundations can afford to use more of the billions they have collectively accumulated. A new disbursement quota is in order.
Most Canadian taxpayers do not realize that charitable foundations have accumulated over $80 billion in assets, using taxpayers’ money via charitable tax credits. Once people are informed, they overwhelmingly feel our tax policies need to be changed, forcing more of these billions to help our struggling charities. And the COVID-19 crisis demands it, now.
For several years, Canada has been facing a growing “charity gap.” There is a shortage of funding to cover the growing need for the services required to maintain civility in our communities. They include social services for those experiencing homelessness, hunger, abuse, and support for the elderly, animal welfare, environmental health and medical research. The gap is being exacerbated by COVID-19, with a negative impact on charity revenue made worse by an increase in demand for greater charitable social services.
We cannot simply expect our governments to fill in the expanding charity gap. Practically all levels of government have deficits and carry significant debt, which is increasing exponentially due to the COVID-19 crisis. They cannot responsibly raise taxes to spend more on the charity gap without negative consequences. Raising taxes chases away wealth, investors, business, and weakens the economy, shrinking the tax base the government needs in the first place.
Instead of being solely responsible for providing all social services, our governments have outsourced part of their responsibility by appointing charities and foundations to be their “agents.” These organizations receive preferential tax treatment to provide social services on behalf of governments. To help ensure their success, policies have been established to offer charity tax credits to donors to incentivize charitable giving to these organizations. In turn, these organizations are accountable to voters and taxpayers.
Foundations have accumulated over $80 billion
The policies regulating foundations are not working as well as they should. The most recently reported data indicates over $80 billion of financial assets have been accumulated within foundations, more than doubling in the past 6 years. Their assets have been growing at about 10 percent a year for the past decade, well above inflation and the growth in our GDP. Clearly, foundations have chosen, on their own accord, to accumulate assets rather than disburse more money to charities.
One big reason why policies regulating foundations have not been made better could be that most Canadians are unaware of what is happening with foundations, thus allowing the status quo to continue. In a recent Ipsos Canada poll (April 23-26, 2020), only 12 percent of Canadian adults claim to be aware that foundations have accumulated over $80 billion in assets. In contrast, when made aware of the $80 billion accumulation, 47 percent of Canadians felt this was unacceptable, plus 40 percent more who said it was somewhat acceptable.
A disbursement quota (DQ) determines the amount that foundations must disburse annually from their assets to qualified registered Canadian charities or to their own charitable programs. The original DQ requirement in the 1950s called for foundations to disburse 90 percent of the donated funds from the prior year in the following year. Over time, the federal government was convinced to change the DQ to represent a percent of foundation assets rather than incoming donations. The DQ was set at 5 percent of assets but was reduced to 4.5 percent, and then again to today’s 3.5 percent of accumulated assets.
Much of the argument reflected the performance of the financial markets and the need to preserve capital in the foundations. And this is where our policies lost sight of the purpose of foundations and their duty to taxpayers. Foundations do not exist to outperform the financial markets nor to accumulate money on the sidelines. They exist as agents of the government (you and me) to provide social services and charitable good, leveraging our tax dollars by way of charity tax credits. In turn, it is fair to expect that our “public purse” money is used relatively quickly to benefit the generation of taxpayers that is providing the charity tax credits.
The case for foundations (but with stronger policies)
To be clear, foundations play an important role because they can act independently of government bureaucracy, make decisions free of the politics of elected officials, take risks government departments avoid, address problems that may not be politically popular, and think about longer-term solutions that extend beyond the next election cycle.
However, we need our governments to exercise stronger controls to ensure these agents are meeting the needs and wishes of the electorate, and in a timely manner.
Raising the minimum disbursement requirement in Canada from 3.5 percent to 10 percent of foundation assets each year would offer a balance between accomplishing greater good, sooner, while also allowing some longevity for foundation capital.
A 10 percent DQ would quickly redirect billions of additional dollars annually to the aid of charities without cost to our government budgets. It would help alleviate the massive funding pressure so many charitable organizations are experiencing. The money is already present in the foundations. We just need stronger policies to ensure foundation leaders are disbursing more of it sooner.
While I appreciate that increasing the disbursement requirement would erode foundation endowments over time, a 10 percent DQ offers longevity of the foundation capital for 20+ years, based on the average performance that we have observed in the financial markets over the last 30 years. This is likely long enough to make a lasting impact as a legacy gift, and perhaps is longer than the remaining life span of most donors. And clearly the original donor and/or the next generation of family members can add more money over time to replenish the coffers.
Every generation creates both new wealth and new philanthropists. Just witness the rapid accumulation of assets in foundations over the past decade. This reflects a recent phenomenon of new and/or living philanthropists. Furthermore, as Baby Boomers continue to age, there is a significant amount of money likely to be donated over the next 10 to 30 years. And if there are no future philanthropists, this is the shortcoming of future generations, and not something that should disadvantage current taxpayers.
A proposed five-year pilot test in response to the COVID-19 crisis
To account for the significant impact of COVID-19 on charities, let’s consider a five-year pilot test with an increased distribution quota of 10 percent. These are unprecedented times, and there is a need for all hands on deck. All possible solutions need to be evaluated, and one of the easiest, most affordable, and widely supported by Canadians is the requirement for more immediate access to foundation assets. A five-year window would also provide time for things to return to normal. As the data comes in, the policy could be reviewed again.
The research insights show that once Canadians become aware of the wealth accumulation in foundations, they strongly agree that policies need to change. I urge foundation leaders, policy-makers and the public to consider this issue more closely and to act quickly to make changes for the public good. Imagine what could be accomplished with billions more flowing into the charitable sector each year starting with the COVID-19 crisis.
This article is part of the The Coronavirus Pandemic: Canada’s Response special feature.