All About Estates

Should Foundations Give More?

Charitable foundations are grappling with their response to COVID-19.  A Canadian initiative, Give5.ca, is 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.

Give5 is a movement initiated by a broad coalition of foundations. 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.

Exclusively For Charitable Purposes

For most Give5 signatories making the pledge is an obvious act in the face of COVID. Assets in foundations have already been donated and exist exclusively for “charitable purposes”.  Moreover, 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.

The Debate

Yet despite the societal need and charitable role of foundation, there is debate 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 the Canadian foundation community.

Disbursement Quota

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 through granting. Historically, this number was 5% (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 that was  distributed annually.  This is old trust law thinking, and it used to be embedded into the Income Tax Act. The rate went down because investment yields went down. Using capital was not an option.

Conflict of Laws

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.

Perpetuity

Many foundations with endowments are believers in the twin creeds of “capital preservation” and “perpetuity”.  Philosophically, capital growth and foundation longevity are given precedent over increasing immediate grants to community charities. Investment losses are a major threat to the model.

To be charitable, these foundations are prudent trustees.  They must be even-handed, balancing the needs of today with the needs of tomorrow. To be uncharitable, some critics think certain foundations value power and institutionalization more than increased public benefit.

It’s Raining Now

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 its pouring.”

About Malcolm Burrows
Malcolm is a philanthropic advisor with 30 years of experience. He is head, philanthropic advisory services at Scotia Wealth Management and founder of Aqueduct Foundation. Views are his own. malcolm.burrows@scotiawealth.com

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