Our view on the Budget 2022 proposal to hike disbursement quotas
With Budget 2022, the federal government has proposed changes to the rules applying to the minimum annual disbursement quota, with the intended effect of increasing money flowing to and within the charitable sector. The question is: Will these changes have the intended effect, or will they simply diminish the long-term support available to charities from foundation funders?
As we noted in an earlier blog, the federal government has been floating the idea of increasing the annual disbursement quota (DQ) for registered charities for some time. The DQ is the minimum calculated amount that a registered charity is required to spend each year on it’s own charitable programs or on gifts to qualified donees. The quota is currently set at 3.5 per cent of a registered charity’s property not used directly in charitable activities or administration. The purpose of the DQ is to prevent foundations from sitting on funds without distributing them to support charitable activities.
Budget 2022 would see the DQ rate increased to 5 per cent of ‘… the portion of property not used in charitable activities or administration that exceeds $1 million.’ The budget would also clarify that ‘… expenditures for administration and management are not considered qualifying expenditures for the purpose of satisfying a charity’s DQ.’ The new rules would come into effect on or after January 1st, 2023.
We support the move to a 5 per cent minimum annual disbursement to the charitable sector; donors with Foundation accounts at Canada Gives easily achieve those levels, and often give more.
Why an increase to 5 per cent, but not more? The government acknowledges that ‘reasonable asset growth’ within a foundation is a desirable objective to ensure funding sustainability across the sector, and we agree. Foundations and donor advised funds play an important role in the not-for-profit sector as they can support charitable programs both now and in the future by investing their assets. But is a 5 per cent disbursement net of investment fees and costs achievable every year within the confines of the prudence required by CRA and the Trustee Act, which governs how charitable funds can be managed? Some significant changes will need to be addressed with respect to asset mix constraints, the mandatory use of traditional fixed income instruments and a more liberal view on the use of alternative investment options.
Shifting the focus
Our other concern is that the new rules, as proposed, may do far less to channel funds from non-complying foundations to charitable organizations than the federal government might expect. In fact, the measures are poised to be relatively ineffectual. The reality is that this change in the rule seems to needlessly penalize those active grant-making foundations that are already meeting or exceeding the current 3.5 per cent disbursement quota, and does little to change the behaviour of those that are not.
The DQ isn’t the real issue. We believe the government’s attention should be focused on the reason 67 per cent (as per the latest data) of the top private foundations are giving less than 3.5 per cent, and not meeting disbursement obligations.
In our experience, it’s not that philanthropists are hoarding money in aid of some sort of tax-sheltering scheme, as the prevailing myth suggests. It’s that they struggle to meaningfully donate money as they move from the ad hoc support made by individual donors, to creating a strategic focus that provides meaningful ongoing support in a sustainable way. Having to satisfy an even larger annual disbursement quota is simply increasing what is perceived as an onerous obligation—one that’s particularly challenging if they’re operating a private foundation on their own—when they may not have the time in the first place.
Others may struggle to find causes that align with their values, and want to make impactful gifts, but don’t understand the tools and practises that can help them get there. As many novice philanthropists soon learn, effective engagement with charities takes time and effort.
A turnkey service experience
The advantage of becoming a member of the Canada Gives family of Foundations is the concierge service experience available to all of our donor clients and their families. While we manage all Canada Revenue Agency compliance requirements and the many technical aspects of managing a Foundation account on their behalf, they also have access to the expertise of our Client Services team, whose role is to help them maximize the scope and impact of their giving decisions.
Having assistance to develop a strategic approach to philanthropy also makes it easier for our Foundation account donors to make giving a habit across generations. One of the great joys that many of our donor clients glean from their work is being able to involve children and grandchildren. But today’s generation is more time-pressed and will often choose not to continue managing their family Foundation if the process isn’t easy, fun and involves a turnkey reporting and governance experience (e.g., the service offered by a Canada Gives Foundation account).
The government’s proposed DQ changes are not ill-founded, but without education and guidance for Foundation donors, it may do little to improve the flow of funding to the charitable sector now and into the future.
The Canada Gives team