Advocates for reforming the charitable sector are heralding the federal government’s decision to raise the rate at which charitable foundations are required to give away money, as well as its pledge to make the finances of those foundations more transparent.

Last week’s federal budget included a commitment to raise that minimum rate, known as the disbursement quota (DQ), to five per cent for investable assets held by charities that exceed $1 million. The previous rate of 3.5 per cent will continue to be applied to any amount under $1 million. The changes go into effect in 2023 and will be reviewed after five years.

The commitment comes after an investigation by The Logic found that seven per cent of charities, and one in five of the country’s largest foundations, failed to meet the DQ in 2019, for a collective spending shortfall of $414 million. These foundations, which include those run by some of the country’s wealthiest families, are not necessarily breaking the law thanks to a variety of loopholes they can use.

The total investable assets held by Canadian foundations—which give grants to operating charities so they can fund their work, in a relationship comparable to that between banks and businesses—have increased 70 per cent from 2015 to 2019, from $59 billion to $100 billion.

Kate Bahen, managing director of the research organization Charity Intelligence Canada, said she was thrilled with the changes announced in the budget. The improved data collection and stricter assessments of whether foundations are meeting the DQ are good news, she said.

She estimated the increased rate will result in an additional $954 million flowing to operating charities each year, for a total of $4.8 billion over five years.

“It shows great leadership by the Finance Department,” Bahen said. “Three and a half per cent to five per cent may not look like a big number, but mathematically, it’s a 42 per cent increase in funding. So while the numbers look small, they mask the magnitude.”

Yonis Hassan, chief executive of the non-profit Justice Fund, which has advocated for the DQ to be increased to 10 per cent, called the increase “a decent start.” “However, we’re concerned about the lack of clarity and ambition,” he said.

Justice Fund had been anticipating “more bold commitments to Indigenous communities, more bold commitments to Black communities,” Hassan said. 

The budget says the increased rate was designed to “boost support for the charitable sector while being set at a level that is sustainable, ensuring the continued availability of funding over the longer term.” Philanthropic Foundations Canada, a lobbying group for foundations, has advocated for any increase to the DQ to not be so drastic as to force organizations to spend at a rate that would cause them to eventually run out of money and wind down, something critics have called a bad public-policy goal.

Imagine Canada, which represents charities more broadly, said in an analysis of the budget that the move “will improve the sector’s funding environment.” The five-year review should incorporate the views of “organizations outside the legal and foundation communities”—that is, of groups that get money from foundations, not just the foundations that are required to share it out.

In addition to increasing the minimum spending rate, the budget includes measures to increase transparency and accountability for foundations.

The Canada Revenue Agency (CRA) will improve its charity-related data collection and monitor whether they are meeting the disbursement quota, according to the budget. Finance Canada did not answer questions by deadline about how the government’s demands on charities will change, or other technical details about the increase to the quota.

Hassan said he hopes the new compliance work doesn’t cause undue hardships for smaller organizations supporting less-funded causes. “When the CRA says ‘accountability,’ it often means increased oversight and scrutiny towards racialized groups, Muslim groups, groups that are working on LGBT rights, groups that are working on abortion overseas, folks that are working on Indigenous reconciliation,” he said.

In its “GBA+” (gender-based analysis plus) assessment of how the new moves will affect different groups, the government said it expects women to benefit slightly more than men, because more foundation money will flow to charity recipients and “approximately 75 per cent of people employed in the non-profit and charitable sector are women.” Also, charities tend to serve vulnerable people. The assessment didn’t say anything about how oversight will affect the charities themselves.

The federal government is also proposing to allow the CRA to publicly disclose information related to a decision about whether to grant a charity relief from its DQ requirements.

As The Logic reported, the Mastercard Foundation, Canada’s largest foundation, with more than US$39 billion in assets, ended a 15-year arrangement with the CRA in December that allowed it to spend less than the minimum 3.5 per cent rate in some periods, as long as it made up for the shortfall with excess spending in other periods. The Mastercard Foundation alone was responsible for 60 per cent of the $414-million shortfall in spending The Logic identified in 2019.

Neither the CRA nor the minister responsible for it, Diane Lebouthillier, would say why the tax authority agreed to the deal with the Mastercard Foundation, or even confirm the deal existed. The number of charities with similar arrangements is unknown.

In an online post, Canadian charity lawyers Mark Blumberg and Helene Mersky criticized the federal government for not raising the DQ further, but called the new public-disclosure proposal “one slight glimmer of positivity.” They wrote, “Finally, the public will be able to know which charities CRA is allowing to have a lower disbursement quota.”

With files from David Reevely