By Todd Jaques, Director of Policy and Research
Last week’s federal budget included a few hot topics for the philanthropic sector, if not the charitable sector more broadly, including an increase to the disbursement quota, changes to how charities can work with non-qualified donees, and some new reporting and transparency requirements. Over the next few blog posts, we’ll offer some commentary on all three. Today, let’s look at the proposed changes to the disbursement quota.
By now, most folks reading this are probably familiar with the disbursement quota and recent attention paid to its possible increase. Last week, we learned the government plans to raise the quota from 3.5% to 5% for charities with over $1M in invested assets. Some in the philanthropic sector are pleased with this change, citing organizational sustainability for foundations and grantees as their primary rationale, but given the climate crisis, continued biodiversity loss, rising inequities, and now, an inflation rate of over 5%, this paltry 1.5% increase can be seen as regressive.
While it’s true that operating charities and small foundations closer to the $1M asset threshold may warrant different rules, mid-sized and large foundations sitting on hundreds of millions in assets should be required to disburse a more significant proportion on an annual basis. These institutions receive preferential tax treatment in exchange for the public benefit they are supposed to provide. That the public benefit need only apply to 5% of their capital should have us collectively questioning such tax-exempt status.
If we look, for example, at the entirety of their assets, this quota allows foundations to undertake investment activities with up to 95% of their capital. Meaning the regulations provide a safeguard to flowthrough funding to private enterprise more than they require public benefit. In these regulations we find a microcosm of philanthropy and its subordinate position relative to the accumulation of private wealth and the markets.
Common arguments against a more radical increase to the disbursement quota are generally predicated on the idea that foundations need to ensure they are sustainable over time, and that a disbursement quota of say 20, 30, or 40% would undermine a foundation’s ability to support community initiatives over the longer term. You don’t have to dig too far under the surface to find the root of the issue – philanthropic institutions see their roles as permanent. For foundations to continue to exist, gross economic inequality and massive wealth accumulation must also continue. Under this formulation, philanthropy is a product of economic inequality, while also being a vehicle to help maintain economic inequality. It is no surprise that after consultations with the philanthropic sector, the government is introducing nothing more than an incremental change. Redirecting funding away from public revenues with 95% going to the market and 5% to public benefit is an unfortunate, albeit predictable, outcome.
The deficiency of the disbursement quota increase is made worse by its five-year review period. At a time when we should all be feeling a profound sense of urgency, legislation that allows for 95% of foundation assets to remain in capital markets for half a decade is irresponsible. By the time we revisit the disbursement quota, we will have had five more years of widening inequality, five more years of species loss, and we’ll be five years closer to an unlivable planet. Markets share a large part of the responsibility for these conditions, making this quota, be it 3.5% or 5%, even more problematic.
Without regulatory changes requiring foundations to issue a much more significant proportion of their assets toward public benefit, foundations must voluntarily commit to granting at a rate far beyond the quota floor of 5%. We can’t afford to wait five years to make this happen. For our part, MakeWay is committed to taking an active approach to disbursements, and we’ll be developing new protocols over the coming months to ensure that we continue to be well beyond the 5% required.
Check back next week for a look at the budget’s changes to how charities can work with non-qualified donees, and the new transparency and reporting requirements.
