Bill C-32: The Disbursement Quota Increase Will Create a More Equitable Distribution of Charitable Funds

On December 14, 2022, Senator Omidvar spoke to Bill C-32, the Fall Economic Statement Implementation Act. Watch her speech:

Hon. Ratna Omidvar: I, too, rise to speak on Bill C-32, the fall economic statement implementation act, 2022. I will focus my remarks on one tiny subsection of the act. You guessed right; it is about charities. I urge you to be charitable to me as I encroach on your time at this late hour, and for good reason, colleagues.

During — and after — the pandemic, when Canadians were in need, it was Canada’s many charities that stepped up to the plate to deliver essential services. It was not easy. This is not a sector that has the resources to pivot easily, but it did. In doing so, it provided much-needed services to young people in stress, to women in shelters and to poor people in need of food.

Now, post-pandemic, they are adjusting to new demands and a new reality. On the one hand, demands for their services are rising and, on the other hand, the level of donations is sinking. It is, again, the charities that are taking the brunt. They will be relieved and supportive of the measure in the bill that raises the disbursement quota for foundations from 3.5% to 5%. This measure, as Senator Loffreda has stated, will generate close to $400 million, or more, for charities throughout Canada.

As pointed out by the government, every year, charities are required to spend a minimum amount based on the value of their investment. If you set up a private foundation with an initial investment of $10 million for which you receive a charitable tax credit, there is an expectation that some base amount of the returns will be disbursed annually in pursuit of the charitable purpose of the foundation; this is known as the disbursement quota, or DQ. In the charitable sector, we call it the DQ, so I will call it the DQ as well. It ensures that charitable donations are being invested into our communities and not, instead, being hoarded in investment accounts.

In 1976, the government set the DQ at 5%. It subsequently lowered it to 4.5%, and it remained unchanged for 20 years — until 2004 when it was reduced from 4.5% to 3.5%. The policy rationale was that it needed to be more representative of historical, long-term real rates of return at that time. If you remember, there was a meltdown at that time. However, since then, the market has not only stabilized, but has generated returns of 10% or more, but the DQ has remained static at 3.5%.

Following consultations with the sector in 2021, Bill C-32 proposes to introduce a new, graduated disbursement quota for charities. For investment assets exceeding $1 million, the rate of the disbursement quota will be increased from 3.5% to 5%. This new, higher rate will boost support for the charitable sector, while being set at a level that is sustainable, and ensures the continuous availability of funding over the long term.

Colleagues, I support this measure for obvious reasons: It brings more private funding to charities. It brings us in line with similar jurisdictions, like the U.S. It is a modest change from 3.5% to 5%. Some advocates have pushed for a DQ of 10%, which would have seen more money go to charities. I believe that a jump to 10% would have been a leap too far, and would have seriously destabilized the sector. I am in full support of this cautious approach.

Who will this impact? There are roughly 5,800 private foundations in Canada with an asset base of $80 billion or so. In addition, there are charities like the YMCA who have endowments and trusts. Altogether, as Senator Loffreda has mentioned, they have an asset base of $116 billion.

Estimates suggest that the new proposed threshold of 5% for the DQ will trigger somewhere between $300 million to $500 million annually as incremental disbursements starting in 2023. Colleagues, this is not chump change. Given the needs of the hour — reconciliation, racial justice and equity, to name a few — an increase in the DQ is a reasonable policy ambition.

As always — in the foundation sector as well — there are leaders and laggards. Some foundations already disburse more than 3.5%; others don’t meet the floor. As just one example of leadership, colleagues, last week The Winnipeg Foundation received $500 million from an individual, Miriam Bergen — the biggest single donation ever in Canadian history from an individual. The Ivey Foundation — a storied foundation in Canada — announced last week that they would not just meet the disbursement quota, but they would spend down their entire capital of $100 million over the next five years. They will spend themselves out.

This, colleagues, is just to give you a flavour of the generosity of Canadians. However, there are many endowments, trusts and foundations that do less than the bare minimum. There are many so-called mom-and-pop foundations that do less than we would expect of them given that they reap significant tax benefits on set-up.

Foundations are, by the way, also a growth market, growing at a higher rate than other charities. This is, of course, good. For one, it signifies that people are generous and that wealth is growing at a rate fast enough for individuals to set up such institutions. For another, it means that more money is going into the community to meet various needs that are considered charitable under the law.

This change in the disbursement quota comes at the right time. You will remember that in June of last year, we passed Bill C-19, which created a third way for charities to work with non-charities that wouldn’t be stuck in the “own activities” or “direction and control” tests. It provided a reasonable, accountable path to get rid of the deeply imbedded form of systemic racism that was contained in the Income Tax Act, which made any intellectual property that was owned by the partner to be owned by the charity. I won’t go over the arguments. You approved it unanimously, and, thankfully, it was passed into law.

Colleagues, these are big and important changes. In its place will be strong and effective partnerships. The increase in the disbursement quota will increase the absolute amount of money spent on causes, and because of the new changes, it will create a more equitable distribution of charitable funds that will reach Indigenous, BIPOC and local development communities in the global south.

I should tell you that although I agree with this proposal, there was some initial feedback from foundations that I’d like to share with you.

First, we know that the markets have been in economic turmoil this past year, and foundations are concerned about their returns in the moment.

Second, some foundations have bylaws that require the retention of their initial capital in perpetuity — these charities and foundations may find themselves in the unenviable position of taking on riskier investments to meet the new higher disbursement quota.

However, my position is that what goes up must come down, and what goes down must go up — at least I tell myself that every time I view the returns on my own investments.

In addition, should a foundation or charity be in severe straits, they are able to ask the Canada Revenue Agency for special consideration and an agreement can be reached to disburse less than the 5%. Under this new bill, the Canada Revenue Agency would be required by law to publish all such arrangements in the interest of transparency. This is new, and a welcome change.

Colleagues, if the principle of this bill is to encourage more charitable giving into the community, then the bill does miss an important opportunity because the amendment does not cover the fastest-growing instrument of charitable giving in Canada, and that is donor-advised funds.

Donor-advised funds enable a group or individual to give money to an existing charitable foundation or corporate foundation and the foundation handles all the administration, governance and reporting, for which it charges a fee, generally a percentage of total assets. The donor gets a tax receipt for the full amount at the moment they create the fund, but there is no requirement for them to disburse from it on an annual basis. Instead, the investment can grow in the fund, invested by the institution and not disbursed for important causes.

Since donor-advised funds are simpler to set up than a private foundation, many philanthropists are choosing this new and simpler route. There is less governance, less management and fewer headaches, which is all good. However, the problem lies in the disbursement.

The holding entity, which is usually a community foundation or corporate foundation, likely has many sub-funds. If, in total, on an aggregate level, they disburse 5%, then they are fine, but there is no requirement for every single fund to meet the threshold of 3.5% or 5%.

Perhaps this is the next measure the government can look at in the future — I’m not making an amendment, colleagues — given that the value of donor-advised funds in Canada today stands at $4.5 billion.

In addition, there is a growing group of enlightened foundations that want to bring their whole selves to their charitable purpose. They are not satisfied with disbursing a mere 5% of their total assets. They are investing their assets not in the financial market but in what we would call program-related investments — in climate change, housing and reconciliation — and there is no allowance for them to include such progressive thinking in the disbursement quota.

Colleagues, in conclusion, I really welcome this measure and I encourage the government to look into future possibilities in the Income Tax Act to create greater fairness for both taxpayers and charities. Thank you.