Would a New Disbursement Quota Help?
By Laura Bonnett
Significant conversations have been happening at the federal level and in non-profit circles concerning the disbursement quota (DQ) that governs the charitable spending requirements of foundations in Canada.
The disbursement quota defines the minimum amount that Foundations, as charities, must spend every year on their own charitable programs or on gifts to qualified donees. According to the Canada Revenue Agency (CRA), the quota is determined based upon the value, averaged over a 24-month period, of a charity’s property (real estate or investments) not used for charitable activities or administration.
While originally set at 5 percent when it was introduced in 1976 to govern private foundations, it was decreased to 4.5 percent in the 1980s (and expanded to cover public foundations), and then decreased again to 3.5 percent in 2004. The expectation when it was first implemented was that the immediate tax benefits provided to the foundation should result in immediate charitable benefits to society.
So, what is the context now? Foundation assets have ballooned in the last decade, which has in part led to a call for an enhanced DQ. In Policy Options John Hallward reports that over $80 billion of financial assets have accumulated within Canadian foundations, more than doubling within the past six years. Other estimates by Claire Brownell of The Logic indicate that total investable assets held by Canadian foundations increased 70 percent from 2015 to 2019.
The majority of Canadian foundations are, however meeting their social and legal obligations to disburse 3.5 percent of their assets. A survey conducted by the Philanthropic Foundations of Canada of its members and other large foundations found that prior to the pandemic 75 percent of foundations were meeting their DQ requirements–and yet 23 percent still were not. Comparatively speaking, however, Canada does not rate high in its overall charitable spending rate. In 2020 the Harvard Kennedy School released a study of 14 countries, the Global Philanthropy Report, which placed Canada the fourth lowest in the world for its foundation charitable spend rate (at 6 percent) behind all European, Latin American and other North American countries in the study.
The devastating impact of the pandemic on charities and non-profits in Canada as well as other broader debates in the charitable sector led the Department of Finance Canada to launch a public consultation on August 6, 2021 to review the annual disbursement quota and to identify the regulatory tools to enforce it. A diversity of opinion has emerged in response.
Some of the sector’s most powerful organizations, such as the Advisory Committee on the Charitable Sector, did not outright support an increase in the DQ, arguing that raising the DQ alone will not achieve the goal of supporting organizations in the non-profit sector. Others — such as the Community Foundations of Canada — have recommended a meaningful increase in the DQ without mentioning a specific percentage, while still others — Imagine Canada — first argued that there wasn’t enough evidence to recommend an increase, and then updated that position to include support for a scaled DQ for foundations, based on their asset size. The Philanthropic Foundations of Canada supported a DQ increase to a minimum of 5 percent, alongside a ‘reasonable’ transition period. All of the submissions also recommended a wider variety of tools and approaches were needed beyond the DQ, in order to support the charitable sector.
So, would increasing the DQ succeed in creating a more just charitable sector? An analysis by Charity Intelligence found that increasing the DQ to 10 percent would generate an extra $4 billion in charitable funding annually. However, other studies have found that it is not just a matter of raising the DQ, but also ensuring transparency and compliance for foundations that are not even currently meeting their legal obligations.
Investigative reports by Claire Brownell of The Logic found that many private foundations are not meeting their annual 3.5 percent DQ requirements. She found that in 2019, 1 in 5 (or 14) of the country’s largest foundations failed to meet their minimum rate of charitable spending, resulting in a shortfall of $414 million in funds that ‘would have flowed to frontline charities and into communities’. All but one of those foundations is private. The largest of these, the Mastercard Foundation, was responsible for 61 percent of the $414 million DQ shortfall in 2019. Nevertheless, on the surface it appears that these foundations were in compliance with CRA regulations. Foundations are able to apply for an exemption in their annual quota if they have exceeded it in the previous 5 years. However, when The Logic did the math for the previous 5 years, four of these private foundations still failed to meet their minimum payout requirements.
The priorities of many private foundations do not necessarily address pressing issues today — the environment, food insecurity, homelessness, racial inequality, etc. A recent study by The Charity Report entitled Who Gives and Who Gets: The Beneficiaries of Private Foundation Philanthropy sheds some light on this issue. The study looked at the top 20 private foundations in Canada which represented 75 percent of the total private foundation giving in Canada. The most recent 5 years of data revealed that they gave a total of $1.63 billion in grants, as follows:
- 34.7 percent were given to benefit institutions outside of Canada, mostly post-secondary institutions such as Oxford and Stanford University
- 19.7 percent of their grants went to education charities, 90 percent of which were well-known Canadian universities
- 19.3 percent went to health charities; 32 percent of that was to hospital foundations
- 7.2 percent of grants went to charities benefiting communities. Among the top 10 grant recipients in this category were the Fraser Institute and the MaRS Discovery District
- 6.8 percent went to charities relieving poverty
- 0.2 percent went to support Indigenous organizations
- 0.1 percent went to support racialized communities
The most significant conclusion of the report is that even if the disbursement quota was raised — and based on where private foundations are spending their money right now — very little of those funds would serve equity-seeking organizations. These findings echo those by Indigenous organizations and organizations representing racialized communities such as the Foundation for Black Communities and the Indigenous Peoples Resilience Fund.
So, how can grant-making integrate a justice-oriented approach? While the many organizations that made submissions to the DQ inquiry did not necessarily agree on the exact number for a new DQ, their majority of their submissions all pointed to the fact that a more equitable philanthropic sector in Canada is needed, and that they are prepared to put the work in to achieve that future.
Justice-oriented grant-making requires a shift in the balance of power between granters and grantees. As has been noted by others, many charitable organizations are reticent to speak out about the disbursement quota in case it impacts their future funding opportunities. Applying community-centric fundraising principles to grant-making can shift this imbalance and also allow us to see that our grant-making must be grounded in race and equity in order to achieve social justice.
We must also resurrect the original social contract that underscored the establishment the disbursement quota. Canadians were willing to allow enhanced tax benefits to philanthropists — public and private — provided they re-distributed a percentage of their wealth to serve the broader public good. It is clear that, while the majority of foundations in Canada are doing so, there are many that are not. If philanthropists are to receive the substantial tax benefits that foundations provide, they must live up to their end of the bargain to distribute that wealth accordingly. And it goes without saying that an increase in the disbursement quota would better achieve that goal.
The ‘trickle-down’ grantmaking that comes as a result of the DQ is not in and of itself sufficient, however. The extraordinary capital gains made by foundations in the last decade should be re-positioned to better support the charitable sector, and the proper policy and legislative tools implemented to help them do so.
Many organizations have recently recommended ways to transform the relationships between non-profit organizations, the Government of Canada and foundations to better achieve social justice. And as Co-founder of the Foundation for Black Communities Liban Abokor notes, “We must adopt the appropriate sense of urgency, reject incrementalism and demand transformation at scale.”
Now it’s time to put our words into action.
Laura Bonnett, Ph.D. is CEO of YellowTree Grant Services, Inc., in Ottawa Ontario.