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Too much or not enough? Five philanthropy execs on proposed rule change

Raising the disbursement percentage would unleash funds, but the devil could be in the details

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The last time Canada Revenue Agency took a count of charitable organizations, in March 2021, there were an astonishing 86,258 charities in Canada, including 4,961 public foundations and 6,189 private ones. Every single one is required to conform to the same federal guidelines in order to maintain its charitable tax status.

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One of these, known as the disbursement quota, or DQ, has recently been up for discussion.

Simply put, the DQ is the minimum amount a charity must give away annually, based on the value of its property and investments and averaged over 24 months. Introduced in 1976, it was originally set at 5 per cent. In the 1980s, it was dropped to 4.5 per cent and extended to public foundations. In 2004, after several years of weak market performance had slowed investment growth for charitable funds, it was lowered again to 3.5 per cent.

The charitable-sector advocacy group Imagine Canada estimates that in 2018 (its most recent figures), following years of robust investment earnings, public and private foundations held more than $90 billion in assets and made $7 billion in grants. A consultation process initiated by the federal government has been exploring a potential increase in the DQ from 3.5 per cent to 5 per cent, which would match the U.S. level and potentially release millions of these charitable dollars into the COVID-weary landscape.

As the consultation was being completed at the end of September 2021, we asked experts in the charitable sector where they thought the DQ should be set, or whether it should even be regulated at all.

Jean-Marc Mangin, Philanthropic Foundations Canada

“For PFC, we welcome the consultation, but increasing the DQ is an insufficient condition to improve the impact of the charitable sector,” says Jean-Marc Mangin, president of the membership service and advocacy organization Philanthropic Foundations Canada (PFC) in Ottawa.

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PFC supports an increase to 5 per cent, given an opportunity for regular future review and a reasonable transition time, but it also advocates for three additional considerations, he says. The first is increased access to charitable dollars over all, especially for the classification of “non-qualified donees” that tends to include youth, Indigenous people and racialized communities.

Second, he says, “you need to increase the share of impact investments in your portfolio [to generate] positive social and economic return. Social housing is the best example. This is a game-changer that could unlock potentially billions of dollars to serve the common good.”

The final consideration is “to improve the data that we have for the charitable sector, to improve the planning by organizations, funders and government. Improving the T3010 – the report that all charitable organizations have to submit – would have significant returns with modest investment.”

Marvi Ricker, BMO Family Office

“I think 5 per cent should be the minimum. I could see it going higher,” says Marvi Ricker, managing director of family philanthropy and legacy for BMO Family Office in Toronto. “Personally, I would make it 10 per cent.”

Ricker says “most foundations have healthy returns; they invest for the long term and therefore they’re generally invested more in equities than in bonds, so when the markets are decent, they can expect a return of at least 6 per cent. In good markets, it can be double that.

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“They pay no tax,” she continues, “so it grows over time unless you’re disbursing at a very aggressive rate. A lot of people have trouble with the fact that the amount of money sitting in endowments is huge compared to the amount being paid out each year.”

Jehad Aliweiwi, Laidlaw Foundation

“I would rather the sector had regulated itself,” says Jehad Aliweiwi, executive director of the Laidlaw Foundation in Toronto, which focuses on youth facing challenges in the justice, education and care systems. “We are at a time when philanthropy will be even more needed, and the philanthropic sector has come through and provided additional support to deal with this unprecedented situation.

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“Most foundations give 5 per cent,” Aliweiwi says. “We’ve gone through several cycles of incredible market return; 5 per cent is a minimum guideline, and I don’t think it should be an issue.”

Nonetheless, he favours “a thoughtful strategy that would reflect the fact that this is an incredibly diverse landscape. There are foundations that need start-up support that will allow them not to disburse, because they want to build. There are tools and options; I think this doesn’t need to be as heavily regulated.”

Ruth MacKenzie, Canadian Association of Gift Planners

“We feel this whole conversation around increasing the disbursement quota is happening in the absence of clear data, says Ruth MacKenzie, president and CEO of the Canadian Association of Gift Planners (CAGP) in Ottawa, which is a national association of about 1,400 members who work in charities or support clients with philanthropic aims.

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If government incentivized us, maybe charities could give away more at this critical time.

Danny Ritter, Richter Family Office

“The data that we have access to shows that they’re already disbursing well above that 3.5-per-cent minimum,” she says. “To significantly raise the disbursement quota may create some difficulties for some charities that have to disburse funds and run operations; in some cases, they may not be able to reach that threshold.”

Instead, “we need to be talking about values of philanthropic giving and not make this a compliance issue,” she says. “If [charities] feel they can give more, raising the disbursement quota won’t make a difference. I’m not sure it will have the outcome that government hopes it will.”

Danny Ritter, Richter Family Office

“It’s an irony in some ways,” says Danny Ritter, a partner with the Richter Family Office in Montreal. “In 2004, when they reduced the DQ to 3.5 per cent, they said the reasoning was [that it would reflect] real returns. We’ve never had lower fixed-income returns from our bonds. It’s an irony of the government to say ‘we know there are great needs out there, so maybe it’s time to rethink the disbursement quota.’”

In order to maintain an endowment while paying out 3.5 per cent annually and covering the costs of inflation and administration, he says, investments might need to earn 6.5 per cent at a time when “the rates of return on conservative investment have never been lower.”

Ritter favours the alternative of temporary tax incentives for charitable donations of all sizes: “If government incentivized us, maybe charities could give away more at this critical time.”

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