By Malcolm Burrows
Across the world granting foundations are grappling with their response to COVID-19. As a group, foundations, under the auspices of various umbrella organizations, are taking pledges or adopting principles to loosen grant restrictions and reporting requirements. Other foundations are advocating for increased granting levels — that is, giving more in a time of great need. This approach is, perhaps surprisingly, generating more debate.
A Canadian initiative, Give5.ca, is one of the groups advocating for increased granting through a time limited pledge in 2020. Simply, the ask is for foundations to pledge to grant at least of five percent of their assets to registered charities in 2020. That’s it. There are no restrictions related to cause or type of charity. Every charity and cause will be affected by the pandemic.
Give5 is a movement initiated by a broad coalition of foundations, not the usual charitable sector or foundation groups. There are private foundations, community foundations, environmental foundations, religious foundations and foundations with donor advised funds. At launch on May 4, there were 58 foundations with more than $4.5 billion in assets that had signed on. Full disclosure: I am on the Give5 steering committee and a number of foundations I’m involved with have pledged.
For most Give5 signatories making the pledge is an obvious act in the COVID-19 moment. Imagine Canada predicts that donations to Canadian charities could drop up to 50% or $6.2 billion due to the economic crisis caused by COVID. Assets in private foundations alone total over $81 billion. If every foundation granted at least 5% in 2020, there would be at least $1 billion extra granted to Canadian charities this year. Even with significant investment loses.
And let’s not forget that granting is the reason for being of foundations. Assets in foundations have already been donated and exist exclusively for “charitable purposes”. As Hilary Pearson, former CEO of Philanthropic Foundations Canada said on the Give5 launch webinar, this is “social capital, for social purposes, not just financial capital.”
Yet despite the societal need and charitable role of foundation, there is debate and misgivings behind the scenes. Many major foundations are sitting on the sidelines and not pledging. Why?
There are a few reasons: some legislative, some legal, some philosophical, and some that merely reflect the schisms and power dynamic within in the Canadian foundation community.
The Give5 slogan references the so-called 3.5% disbursement rule in the Income Tax Act of Canada. In simple terms, foundations with assets must use the equivalent of 3.5% of the average previous 24-month market value on charitable purposes each year, primarily granting to other registered charities. Historically, this number was 5% (starting in 1969), 4.5% in 1984 and then 3.5% in 2001. The U.S. rate is 5%.
Pre-2010, the disbursement quota rate was tied to income earned from invested capital and distributed annually. This is old trust law thinking and it was previously imbedded into the Income Tax Act. The rate went down because investment yields went down. Using capital was not an option.
While Give5 is not about legislative change, it is easy to imagine that a tweak to the Income Tax Act could change the giving landscape by introducing a 5% disbursement rate. The disbursement quota is an expression of public policy, and it could be increased to ensure there is more public benefit. Using charitable capital is the right thing to do, but there would be howls of protests from some foundations and sector organizations.
A little understood factor governing many foundations are legal restrictions, typically imposed by the donor at the time of the original donation. These trust conditions generally can’t be undone without a court application. A high bar. Many charities have standard fund documents that impose restrictions on how much an endowment could disburse each year. The Income Tax Act can’t change these trust restrictions. This creates a conflict of laws with the disbursement quota.
Many foundations with endowments are believers in the twin creeds of “capital preservation” and “perpetuity”. Philosophically, capital growth and foundation longevity are more valued than increasing grants to community charities. Investment losses are a major threat to the model. To be charitable, these foundations are prudent trustees being even handed, balancing the needs of today with the needs of tomorrow. To be uncharitable, they value power and institutionalization more than increased public benefit.
The range of views among Canadian foundations is now more diverse than ever. There are advocates for spend-down foundations, flexible granting, the urgency of climate change and addressing inequity. Perhaps there is a fear that an initiative like Give5 is really a trojan horse, attractive, but clearly designed for something other than its stated purpose. Foundations generally like self regulation, even if it only partly works, and the umbrella organizations don’t want to rock the boat.
A bit of debate does us all good, especially in a time of crisis. As Eric St. Pierre of Montreal’s Trottier Foundation said at the Give5 launch: “we always say we should save for a rainy day and right now it’s pouring.”
Malcolm Burrows is Head, Philanthropic Advisory Services for Scotia Wealth Management of Scotiatrust. He writes this column exclusively for each issue of Foundation Magazine.