In this comment I encourage foundations to be more active in the current difficult economic times. Many are working hard with their partners in the sector to do just that.
With the global meltdown of financial markets, we have seen some Canadian public and private foundations lose substantial amounts of the market value of their endowments. Although this is only on paper, for many it has been quite shocking.
Some of these foundations have excess room in their disbursement quota and are not legally obligated to expend funds this year or next year. For those foundations that are not legally required to disburse funds, and are legally allowed to encroach on capital, I would ask them to seriously consider that if the downturn is as serious as some have projected that their funds disbursed now could be far more valuable than funds disbursed later in an economic boom. Not only are the needs of charities greater but the needs of their beneficiaries are greater as well.
Other foundations have no excess in disbursement quota, perhaps a deficit and are concerned that they will not be able to disburse both this year and next without encroaching on capital. Some of these have ten-year gifts that created the “endowment” and in many cases did not anticipate encroaching on capital even if it was to satisfy the disbursement quota. This is not really a CRA issue. It is a public guardian and trustee issue and careful consideration needs to be given to the trust document. In some cases an application to court may be necessary. Others have no restriction on their ability to encroach on capital but they are not interested in encroaching on capital because their capital has been substantially reduced and they may be asking/lobbying for special dispensation from CRA to deal with this situation. Some will be looking to CRA to provide a reducation in disbursement quota. CRA has a Form T2094, Registered Charities: Application to Reduce Disbursement Quota. Specifically, they don’t want to be required to spend their 3.5% disbursement quota requirement.
Of course, many foundations have invested in a manner that they received a far higher rate of return in previous years but interestingly, many just disburse 3.5% irrespective of the amount of money they are able to disburse. The Department of Finance and the Income Tax Act does not require that the foundations disburse more when they have a very good year.
I realize that if there is one thing that most people can agree on is that the disbursement quota system is complicated and may not be achieving what it was set out to accomplish. I realize that Department of Finance is looking at revising the disbursement quota. But I don’t think that this is really an issue of disbursement quota. I think it is an issue of who is prepared to do what when times are tough and who got proper advice when setting up their endowments. In many cases a special purpose trust, private foundation or an isolated endowment is not the appropriate vehicle for philanthropic giving - despite the fact that some organizations use them as a cookie cutter approach to philanthropy.
In these tough times some foundations will do more, some will do the same with less, some will do less and others will do nothing.
It is difficult for private and public foundations to look at their monthly statements and those declines from the height of the value of the portfolio and the value of the stock market. It hurts.
However, some charities because of reduced government funding, reduced donations and reduced funds from foundations may see a 10 - 20% decline in their revenue over the next year or two. Some may have to lay off some of their staff and curtail their programs in a time of increased need. However painful it is for a foundation to look at a monthly statement, I guess I feel more empathy for the boards of operating charities and their CEO’s who may have to lay off staff and cut programs just when the need is greatest.
It is interesting that Warren Buffett when deciding to give the Bill and Melinda Gates Foundation by far the largest gift anyone has ever seen, he had only one significant stipulation. He required that the funds could not be accumulated and donations in his lifetime must be spent in the year of donation and over and above the 5% US disbursement quota required already of the Bill and Melinda Gates Foundation . As well, donations after his death needed to be fully spent within 10 years of his death. Warren Buffett is an interesting individual and certainly knows a lot more about finances than many. He was more impressed with the idea of having a meaningful impact on the world’s greatest problems rather than tying up capital in perpetuity.
In these difficult economic times, it would be more beneficial if foundations focus less on what is the minimum that can be disbursed after talking to their corporate lawyer, accountant or financial institution, but rather on how can they best contribute to making our society better in these tough economic times.
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Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.