Charities are a critical sector in the Canadian economy. They provide employment and funding to essential front-line services on many critical issues, including health, poverty, education and the environment.
Canadians may not realize that much of the funding charities provide to non-profit organizations comes from income earned on sizable investments. This means large charities, including community foundations, are sitting on billions of dollars in investment accounts, funds which are not actively serving our communities that are truly in need today. With so many pressing local and global challenges, Canadians want, need and deserve to see charities spending more of these charitable funds on causes that matter most to them.
A change next year to the federal rules governing charitable funds could unlock more of that money, moving much-needed funds from charitable foundations’ investment accounts to non-profit organizations that the charities support. The new rules will increase the mandatory minimum amount that registered charities must spend from their investments each year, from 3.5 percent of the value of their investments, to five percent. This applies to charities with investment assets of more than $1 million.
While the increase is an important first step toward reducing financial barriers for organizations working to solve the most pressing social issues of our time, it is only a baby step toward the urgent need to free up more money now and it doesn’t go nearly far enough. There is so much more that the charitable sector can do today to support the communities they serve.
First, progressive voices in the sector need to push back against philanthropic leaders who believe charitable foundation assets should sit in investment accounts indefinitely, rather than be put to work, right away, actually helping our communities. We have to have faith that future generations and future wealth development will continue to build charitable resources. A recent Philanthropic Foundations Canada survey shows that charitable foundations are seeing returns of significantly more than five percent annually on their investments, offsetting arguments that spending money today threatens their futures.
The majority of Canadians feel that charitable funds, supported by taxpayer-funded charitable tax credits, should be put into circulation more rapidly on the front lines, and not be held interminably. In a July 2022 GIV3 and Ipsos poll, two-thirds of Canadian adults said charitable funds should be distributed within 10 to 15 years of receiving tax credits, with 36 percent wanting to see the funds spent within 2.5 years. In fact, the report found that the mandatory minimum amount (which registered charities must spend from their investments each year on charitable causes) should be above 10 percent to align with public opinion, a view consistent across geography, age group, and among high-income households. Said another way, Canadians feel charities should be spending twice the amount that will become next year’s new and increased minimum.
The national charitable organization Imagine Canada analyzed the impact that such a 10 percent mandatory minimum would have on the largest foundations and found that the vast majority could disburse 10 percent of their capital without even spending any of their endowment. (An endowment is typically a grant or gift intended to be held in perpetuity, providing a long-term source of income).
A philanthropic model that sets the bar so low as to only commit to 3.5 percent disbursements annually while the world grapples with existential crises is not meeting the need it exists to serve.
It’s also time that charitable foundations make endowment investment choices for social impact, as well as for profit. Charity investment portfolios should be 100 percent mission-aligned. Impact investing is an essential path forward to force change at both ends of the equation.
Or better yet, charities should think about a spend-down strategy of their endowments, like the recently announced spend-down of the Ivey Foundation’s full endowment of $100 million over the next five years.
Another way to increase social impact is by moving the permanent endowment to equity-seeking groups that have been starved of funding and agency. The Laidlaw and Inspirit Foundations did this recently with a commitment of $3.85 million to help the Foundation for Black Communities establish its own endowment to provide a sustainable base of funding for organizations that it supports.
While the charitable sector is well-intentioned and does life-changing work, Canadians need to demand real change if we are to meet today’s challenges. Now is the time for Canada’s charitable sector to truly work in partnership with and support the communities they serve.
About the author:
Lisa Wolverton is President of The Philanthropy Workshop Canada.