Late, but hopefully not too little
Budget 2021 should implement an immediate and significant increase in foundations’ payout rate to support Canadian charities.
Covid has triggered a crisis in the charity sector, its enormity unprecedented in our lives. Canada’s government is responding as much as it can, with a federal deficit on track to exceed $381 billion. Individual Canadians have dug deeper into their pockets to donate. Some private and philanthropic foundations have increased their grants to help frontline charities. Philanthropic Foundations Canada (PFC) reports its members are committed to spend $85 million in new grants. Only a few private foundations are members of PFC, and $85 million is only a 1% increase in grants. Too many of Canada’s largest private and philanthropic foundations are absent in stepping up. When volunteering is insufficient, conscription is necessary. There’s a quick fix that is long overdue and critically needed.
In the 2021 budget, we urge Canada’s Finance Minister to review and to raise the required payout rate.
“What’s the payout rate, and why does it matter?” you may ask. The payout rate – formally called the disbursement quota – is a little-known technical regulation of philanthropic foundations. The payout rate sets the minimum level foundations must give to charities and spend each year. While a dry and dull policy, the payout rate is critical. It can’t be neglected. The payout rate regulates billions of dollars in funding for frontline charities. As interest rates underscore economic activity, the payout rate affects liquidity in the charity sector.
Canada’s payout rate is 3.5%. This is less than the US payout rate of 5%. The key benefit of philanthropic foundations is their funding to charities. With a lower payout rate, Canadian philanthropic foundations do less good than American foundations.
With Canada’s 3.5% payout rate, a foundation with $1 million in investments must grant to charities or spend on its inhouse charity programs $35,000 each year. That’s it. The rest of the money, the other $965,000, is invested and grows tax-free. And the capital to establish a foundation is tax receipted. The benefits philanthropists receive must be balanced with the public benefit. At 3.5%, along with the other tax concessions, the payout rate is tilted too heavily to the philanthropist’s advantage. A payout rate increase is one step to correct this imbalance.
In 2005, community foundations and Philanthropic Foundations Canada successfully lobbied for a cut in the payout rate from 4.5% to 3.5%. Such a low payout rate is bad public policy. While foundations get all the tax benefits upfront, a lower payout rate defers the benefits Canada gets further into the future. A lower payout rate serves an elite of 4,670 foundations with more than $1 million in endowments at the expense of over 52,000 frontline charities that receive foundation grants. Hilary Pearson, former CEO of PFC, today recognizes this error and calls for bigger grants: “much more than the minimum is a must”.
The silver lining of this past mistake is that it enabled foundations to amass fortunes. Fortunes that are needed today. In 2018 the elite of foundations hold a record $79.8 billion in investments. Canada’s foundations have the capacity to give back.
Raising the payout rate is a quick and easy fix. The Finance Minister has the sole discretion to change the payout rate. This authority is written explicitly in the laws regulating foundations. The Finance Minister can raise the payout rate with a stroke of her pen. She should.
What’s the right payout rate?
Using the most recent CRA Charities Directorate data for 2018, Charity Intelligence has crunched the numbers to show how much different scenarios of payout rates would result in new foundation spending. Here’s our analysis on how a change in the payout rate affects funding for charities:
Sector experts hold different opinions about what Canada’s payout rate should be. Here are four different scenarios:
Imagine Canada, the charity sector’s advocate, and leaders of 140 Canadian charities call for the government to give $7.2 billion. Alternatively, this $7.2 billion could be funded by philanthropic foundations in a variety of ways:
- 15% payout rate for one year,
- 11% payout rate for two years, or
- 5% payout rate for three years.
For context, foundations spent $8.6 billion in 2018. $7.2 billion would be, at most, 9% of foundations’ assets of $79.8 billion.
IncreaseTheGrant’s initiative calls for a 10% payout rate. Charity Intelligence’s model shows this would see foundations spend an additional $3.4 billion each year. This would be a 46% increase in foundation spending.
Rumours are that private foundations are countering with a 4.5% payout rate offer. A 4.5% payout rate would see an estimated $604 million in new foundation spending. This is an 11% increase over current granting levels. This would restore the payout rate to 2004 levels (still below US levels). If these rumours are true, this is a stingy offer. It is also too little to be effective for a response to covid.
A Team Canada approach: Canada’s government has doubled its spending in response to covid from $334 billion in 2019 to $719 billion forecast in 2020. Maybe foundations, whose core purpose is to support charities, should also double their spending? A double would be $8.6 billion in new funding, 19% more than Imagine Canada’s appeal.
Late, but not too little.
In any disaster response, quick action is essential. A fast response mitigates further damage. It has been over a year and the government is late in raising the payout rate. Now the biggest risk is that an increase may be too little. Canada’s charity sector would benefit from the Finance Minister’s leadership in raising the payout rate on philanthropic foundations.
“Now is the time for leadership. None of us will look back at this time and wish we did less.”
Center of Effective Philanthropy
Details on the breakdown of sources of additional funding under different payout rate scenarios.
COVID-19 Philanthropic Response, Philanthropic Foundations Canada, June 2020. Results from 50 funders survey, these results are not inclusive of private foundations’ response.
Hilary Pearson, The pandemic is a clarifying moment for philanthropy
A Team Canada Approach to Fighting COVID-19 Finance Department November 20, 2020
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