All About Estates

The Senate Speaks Charity

It’s hard to underestimate the importance of the Special Senate Committee on the Charitable Sector report to that was released on June 20th.  After almost 18 months of hearings and consideration, this once-in-a-generation study came up with 42 recommendation on topics ranging from volunteerism, social enterprise, regulatory system, and judicial review process.  There are five recommendations that deal with giving and tax incentives.

Review Tax Measures

Recommendation 9 makes a motherhood and apple pie statement about the need to “review existing tax measures available to individual donors in order to strengthen the culture of giving among new and current charitable donors.”  This anodyne proposal appears intended to encourage further tax incentives for ordinary donations, despite the failure of past incentives such as the “first-time donor super tax credit”.  As the success of crowd-funding has shown, a tax receipt is not essential to encourage people to make ordinary gifts from income.

Private Shares and Real Estate

Recommendations 34 and 35 resurrect the idea of eliminating capital gain on gifts from donations of private shares and taxable real estate.  A version of this proposal almost became law in 2017, but was withdrawn when the Federal Government changed.

There is no question that private shares and taxable real estate represent the two largest reservoirs of capital property in Canada that are not exempt from capital gain when donated.  They are especially important in smaller communities where wealth creation is less tied to public companies.  The renewed tension on this idea is welcome.

Disbursement Quota and Funds that “Languish”

Section 4 addresses “Donor Advised Funds”.  The report does not define the term, which is bizarre considering that the Income Tax Act does not either.  Does the term apply to all foundations with donor advised funds?  In Canada, this list includes community foundations, religious foundations, independent foundation, some hospital foundations, foundation that work with financial institutions and foundations operated by financial institutions.

Recommendation 36 and 37 seem to be responding to anxiety about the growth of foundations with donor advised funds.  The growth is due to a combination of wealth accumulation, aging population, tax incentives and family composition – all factors that are driving the “major gift” boom for larger charities.

Number 36 recommends examining the idea of increasing the 3.5% disbursement quota for registered charities.  It also raises the question if the disbursement quota rate should remain fixed in the Income Tax Act or be subject to regulation.

The merits of a higher disbursement rate is worth debating because payout is directly linked to public benefit.  The Canadian minimum rate of 3.5% is low relative to some other jurisdictions and designed to support long-term endowments.  But is there Canadian evidence that foundations with donor advised funds are not granting out at high enough rates?  Quite the contrary.

Recommendation 37 features the most provocative verb in the report: languish.  It recommends that “charities with donor advised funds consider means of ensuring that donations do not languish in donor-advised funds, but are instead used to fund charitable activities in a timely fashion.”

Huh?  I agree completely with the need for funding charities – that the sole objective of foundations –  but what the heck makes the Committee believe funds “languish” in foundations with donor advised funds?  Do funds “languish” in university, hospital or private foundation endowments?

The Committee heard testimony from researcher Keith Sjogren that Canada Revenue Agency data shows that the average distribution rate of the foundations with donor advised funds is approximately 12 per cent of assets per annum.  Other witnesses offered rumours about donor advised funds, i.e. “there are stories…”.   The concerns seem to relate to excessive donor or investment industry control, which is the duty of Boards of Directors to address.

Hearsay, especially in a parliamentary report, needs to be backed by evidence.  That said, Boards of foundations with donor advised funds should take note.  Boards needs to exercise good governance to advance charitable purpose and ensure granting flexibility and high payout rates are promoted.  Languish?  It’s a shot fired.  At the very least, audits may follow.

While it’s hard to underestimate the importance of the report, it’s even harder to know if the recommendations will have any traction.  Many of the recommendations deserve further attention, others don’t.  It’ll take a few years to see which ones will take.

About Malcolm Burrows
Malcolm is a philanthropic advisor with 25+ years of experience. He is head, philanthropic advisory services at Scotia Wealth Management and founder of Aqueduct Foundation. malcolm.burrows@scotiawealth.com

3 Comments

  1. Pamela

    June 27, 2019 - 1:31 pm
    Reply

    Excellent article! Can you share the link please for the published recommendations. As someone contemplating establishing a donor advised fund, I have been looking at financial statements and always look at annual charity disbursements relative to annual revenue. I want to make sure that the charities I choose are getting the best present day and future payouts to support their work

  2. David Barker

    July 16, 2019 - 8:29 pm
    Reply

    I’m guessing “languish” is a direct shot at DAFs offered by financial institutions. The committee commented several times on the possible conflict of interest, where the FI profits by retaining, rather than releasing the assets. I guess we’ll see.

    • Malcolm Burrows

      July 23, 2019 - 6:10 pm
      Reply

      Thanks for the comment, David. All registered charities with donor advised funds must follow the same rules and in law there is currently now difference among the different entities. It would require a major revision to the Income Tax Act to isolate one group of foundations with donor advised funds. That said, the Report is a push for greater accountability across the board, which is always a positive things.

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