Updated: Dec 22, 2021
by Simon Mallett
The negative impact of COVID-19 on charities across the country has left many organizations in dire need of support. This need has sparked a conversation about how foundations in Canada might be called upon to increase their impact on the charitable sector. Specifically, there have been calls to increase the disbursement quota (DQ), which is the minimum amount a foundation must spend each year, calculated as a percentage of the total value of their property.
Since 2004, the DQ has been set at 3.5% (when it was lowered from 4.5%), however anyone who has been watching the stock market in recent years likely knows that growth that has, in general, exceeded the rate of the DQ, which has led to accumulation of additional resources within many private foundations. While many private foundations spend more than the minimum DQ annually, this accumulation of resources at a time when charities and organizations are experiencing such need seems out of balance and has brought about these calls to revisit the DQ, as a higher quota would undoubtedly result in more money being available to charities through grants.
In response to these calls for an increase to the DQ, in Budget 2021, the Liberal Party of Canada announced they would be undertaking a review of the DQ, which is now underway. This could pave the way for a change to the quota with the introduction of Budget 2022. However, with an election having been called since that announcement, an increase to the DQ has also become an election issue, as the Conservative Party of Canada has announced their intention to raise the DQ to 7.5% as part of their platform. A more than doubling of the current DQ would result in billions of new dollars becoming available to charities across the country but would also require the unlikely continuation of recent returns on investments to keep foundations sustainable.
The impact of a DQ that is higher than the average rate of return for foundations with an endowment would be the diminishing value of foundation holdings over the years. This would mean that, over time, the funding available from foundations would decrease until foundations have depleted their resources and close. New foundations might emerge in that time, but the long-term sustainability of existing foundations would be in question. Some argue that this approach is acceptable, presenting the very valid perspective that especially in areas such as climate change, the importance of increased short-term funding outweighs the long-term decrease. However, many other sectors are better served by sustainable long-term funding being available from foundations, and so finding a balance between increasing short-term funding and sustaining long-term funding is the ideal goal for many.
But the question of how foundations in Canada can increase their impact should not be limited to the setting of the disbursement quota. As the current review takes place, there is an opportunity to look at other elements of charitable giving to see how regulatory and policy changes might intersect with a DQ increase to truly maximize the impact that can be made.
Foundations can use their resources for their own charitable programs or to make gifts to qualified donees. Qualified donees include registered charities, universities, municipalities, and a select few types of other organizations. However, the list of qualified donees excludes many organizations doing grassroots work or work that benefits equity-deserving communities. It does not include all not-for-profits, and many of Calgary’s arts organizations supporting and amplifying IBPOC voices, for example, are not registered charities. One way to work within these regulations is for a charity to partner with a non-charity to access foundation funding, however, the charity must maintain ‘direction and control’ of the funds provided, which limits the autonomy of the non-charity organization in executing the programming.
There is also a misconception that a charity can just receive funds on behalf of a non-charity and flow through the funds to them, but this is in violation of the Income Tax Act, and so is not a viable way to support these organizations. An increase to the DQ would make additional grant funds available, which is great for charities, but would do little to address the inequity of funding that is present in the Canadian not-for-profit sector due to the current definition of a qualified donee.
In February 2021, Senator Ratna Omidvar tabled Bill S-222, The Effective and Accountable Charities Act, which is intended to break down barriers for Canadian charities working with other organizations. This would certainly be a step in the right direction but would still leave non-charities relying on partnerships with charities to receive funding.
As part of my work at Rozsa Foundation, I’ve been on the board of Philanthropic Foundations Canada (PFC) for the past three years. PFC is a voice for private Canadian foundations, engaging in public policy, education, and gathering opportunities to allow foundations to learn from each other. As part of the federal government’s consultation process on DQ amounts, PFC has put forward a number of suggestions regarding the DQ and its conditions. PFC has proposed an increase to a DQ of 5%, which would infuse the charitable sector with approximately $1.3 billion annually above what is currently available, while also helping to ensure that those funds remain available to the sector in perpetuity by not drawing down too heavily on foundation assets.
In addition, a key part of PFC’s recommendations is also a set of additional suggestions that will make a change to the DQ more impactful. One of these suggestions speaks to the need for a broadening of the definition of qualified donees to include not-for-profits that are not registered charities, which would allow far more organizations, including many that are IBPOC-led and that support equity-deserving populations, to access funds from foundations in Canada. This would be a change of real significance in increasing the impact of foundations in Canada.
The Rozsa Foundation has historically exceeded the disbursement quota on an annual basis and has drawn on its endowment to make additional contributions in times of need, such as our 2020 COVID-19 related granting. An increase to the disbursement quota would mean additional resources could be allocated to our Arts Leadership Programs, which are charitable spending, as well as to our donations to qualified donees through our Granting Program. That said, one of the most significant barriers we experience in being able to support greater equity and change in the arts sector is the requirement that organizations need to be registered charities to receive support from the Rozsa Foundation. As we’ve established our own equity commitments, the implementation of PFC’s suggestions would go a long way toward making it possible for the Rozsa Foundation to be able to support IBPOC-led arts initiatives and would undoubtedly allow us to increase our impact on the arts sector in Alberta. It’s a change we’re certainly hoping to see realized.
We’ll continue to follow the review of the DQ and its outcomes, and hope that the health of the charitable sector stays front of mind throughout the federal election as well as into the future. This is a time of great need but also one of tremendous opportunity.