Imagine Canada policy position: A scaled disbursement quota to release new funds
Access to funding has been top of mind in organizations across the sector since the onset of the COVID-19 pandemic. According to our latest research, more than 4 in 10 charities are still facing declines in revenue. Among these charities, the average revenue decline is 44%.
In response to the financial troubles that organizations are facing, the 2021 federal budget committed to consultations on a potential increase to the disbursement quota (DQ). The DQ is the amount that registered charities are required to spend each year either on their own charitable activities or on gifts to qualified donees (e.g. other charities). The conversation has focused primarily on foundations, which tend to invest from their endowed funds and grant to operating charities using the investment income.
Our recommendation: A scaled disbursement quota based on asset sizes
Our analysis took into account the immense growth of the foundation sector over the last decade particularly among larger organizations, the relatively little new spending that would be released if the DQ was raised to 5% for all organizations, and shifting socio-economic contexts including the pandemic. Based on our analysis, we recommend the Department of Finance apply different quotas to foundations based on the amount of assets they hold. In practice, this would mean that relatively small foundations would remain at the 3.5% quota, and subsequent tiers would be expected to spend higher amounts at 7% and beyond. Our data has uncovered that of the largest foundations (those with above 3 billion in assets), 84% would not be depleting their income and spending against their endowment at a 10% DQ level.
Let’s keep the disbursement quota conversation going
To support the maintenance of an effective and responsive disbursement regime, we also ask that the DQ be reviewed at 5 year intervals. We see these consultations as the beginning, rather than the end, of a sector-wide dialogue on the scope of issues that the consultation has raised. These issues include the appropriate timing of the release of funds for public benefit against contexts including the pandemic; what constitutes effective transparency measures; the net sustainability of the sector; and the direction of disbursements and the role of charitable foundations in promoting a more equitable funding environment.
Our data driven approach: Analysis of 11 years of disbursement quota data
To recommend measures that would have a meaningful and positive impact on the sector’s funding environment, we analyzed data from 11 years of T3010 forms to inform our submission. Graphs from this analysis are included in the submission’s appendix, where we present findings on compliance with the current DQ, where net income depletion would occur across different asset sizes at varying DQ levels, and what new funds would be released at different quotas. Of course, one of the major challenges to any discussion about the disbursement quota is a lack of reliable data from the T3010 datast. Our recommendations also seek to address this information gap.
Summary of recommendations
- Implement a scaled disbursement quota designed to infuse new funds and reflect the different realities of the foundation community. Assign a graduated range of percentages to foundations based on their inclusion in categories as determined by asset size and designation. For example, the minimum threshold of 3.5% could be maintained for smaller organizations (those under $1 million in assets) and range upwards in the area of 7% and beyond for larger organizations.
- Commit to a mandated review of the disbursement quota at five year intervals. Proactively engage the sector in the review, and seek the perspectives of organizations outside the legal and foundation communities (i.e. grantees and potential grantees).
- a. Allocate funding to a coalition of charitable sector organizations and expertise for education and guidance to foundations in accessing new communities within the scope of their charitable purpose and in developing equitable granting practices; and b. Apply an equity principle to transparency & accountability measures applied through the T3010 process. Ask foundations how they intend to apply considerations of equity to their disbursements.
- Commit resources to identifying the causes of T3010 completion errors. From there, appropriate expectations across asset size classes, as well as adequate reporting enforcement & education mechanisms can be developed.
- Implement transparency and accountability measures through the T3010, with varied expectations across scaled categories (a range of simplified-to-detailed T3010 forms to complement a graduated scale DQ regime), leading to enhanced clarity of donor advised funds, and greater accountability to the public of the foundation’s accumulation and disbursement strategies.
- Ground the periodic review of the disbursement quota and evolution of the regulatory regime in the principle of ‘intergenerational justice’ -- that the current generation is due some decision-making authority over the timing of the release of funds for public benefit.