A group of foundations are struggling to meet the higher rate of charitable spending the federal government introduced last year, according to the head of Canada’s private foundation association. 

In response to a sustained advocacy campaign, the federal government introduced the new rate in late 2022 to increase the amount of money flowing to the charitable sector. 

The new law raised the minimum charitable spending rate from 3.5 to five per cent for a foundation’s assets not used for charitable activities above $1 million. 

For instance, in 2023, a charity with assets of $1.25 million and no property was required to spend $47,500 on charitable activities — $35,000 on their first $1 million (calculated at the long-held 3.5 per cent rate) and $12,500 on the remaining $250,000 (calculated at the higher 5 per cent rate). 

Imagine Canada estimated the change would result in an additional $200 million per year of charitable spending. 

Despite the benefits, adapting to the hike has been a challenge for some foundations that had previously been spending at the 3.5 per cent rate and have limited staff capacity, said Jean-Marc Mangin, CEO of Philanthropic Foundations Canada.

“To do your giving well, it goes beyond sending a cheque to the usual suspects. You want to develop solid, multi-year partnerships, understand the nature [of their work] and be a partner for many years — and that takes time,” he said. 

While the financial markets performed better in 2023 than in 2022, some foundations also experienced underwhelming investment performance last year, Mangin said. 

Foundations whose investment returns didn’t cover their new, higher charitable spending may have been forced to dip into their endowment reserves. 

Future of Good contacted about a dozen PFC members with no or few staff to inquire about their experience with the higher DQ, but only one organization agreed to an interview and said they’d experienced no trouble with the higher rate. 

For those struggling, however, Mangin urges calm. 

The disbursement quota rate is calculated on a two-year period, giving foundations ample time to make up for any lower spending this year, he said. 

Foundations facing issues with low capacity should also turn to their peers for support, he added. 

Many foundations and charities have already completed due diligence on grantees needing additional capital. He said that if a peer’s charitable purposes fall within your own, nothing stops you from channelling funds to their organization.

To help make this work easier, some philanthropic associations have also established group email threads, commonly called listservs, and affinity groups that can be mined for pre-vetted grantees. 

In 2023, Environment Funders Canada, an association for environmental funders, launched a listserv called Project Clearinghouse, where foundations provide information about grantees they support and encourage co-funding.  

PFC also offers several affinity groups for funders focused on the arts, seniors, mental health, and early childhood education, which can also be used to identify opportunities, said Sara Krynitzki, the organization’s director of public affairs. 

Another option for speeding up due diligence work is funding intermediary organizations that re-grant to others, said Mangin. 

Some foundations have taken this approach as part of reconciliation or equity strategies. 

In 2023, the McConnell Foundation committed to grant $10 million to the Indigenous Peoples Resilience Fund, which re-grants to other Indigenous groups. 

The Laidlaw and Inspirit Foundations also offered capital transfers to the Foundation for Black Communities, which re-grants to Black community groups nationwide. 

Many not troubled by DQ hike

Despite the challenges for some, the higher DQ has not posed any issues for many others, said Mangin. 

Many foundations were already granting at or near the five per cent rate before the DQ hike, making the new law easily accommodated, he said. 

This has been the case for the Paul Barber Foundation, a volunteer-run family foundation established in 2021 focusing on women, youth and the arts. 

Though the performance of the foundation’s investments was lacklustre in 2023, the higher DQ did not pose a barrier because they had already been granting at four per cent, said board president Thea Barber. 

In addition, several of the foundation’s grants were multi-year, further reducing the amount of annual administrative work, she said. 

CRA says DQ exemptions uncommon

Charities struggling with implementing the higher DQ might not find much sympathy from the Canada Revenue Agency.

While charities can request an exemption from the disbursement quota, few are granted and only after an organization has “exhausted all other available means” to make up for the shortfall, according to a CRA spokesperson. 

In 2021, for instance, just four exemptions were granted across the sector’s some 80,000 charities, according to CRA. 

In calendar year 2023, no foundations requested exemptions, though a CRA spokesperson said it may be too soon to tell if any will do so. 

Charities are typically only able to request an exemption after submitting their annual T3010 form, which can occur up to six months after the end of their fiscal year. 

CRA says any charity struggling with a spending shortfall can draw on disbursement “excesses” beyond the required annual rate from the five previous fiscal periods. 

Yet, they cautioned that continuous under-spending may lead to the revocation of charitable status. 

DQ hike to be re-assessed 

In Budget 2023, the federal government promised the new, higher disbursement quota rate would be re-assessed after five years to see how it impacts foundations’ assets. 

During consultations on this subject, some foundations argued a higher disbursement quota was a bad idea, jeopardizing their ability to remain in perpetuity to support their communities. 

Others argued long-term investment performance has been strong enough that many foundations will likely be able to grant at the higher rate in perpetuity. 

Some additionally argued perpetuity should not be the norm for foundations when communities nationwide face pressing social, economic and environmental concerns.

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