A short history of philanthropic perpetuity: tax havens, Catholic corruption and corporate control

This story is part of the Future of Good editorial fellowship covering the social impact world’s rapidly changing funding models, supported by Community Foundations of Canada and United Way Centraide Canada. 

Canada’s philanthropic sector is normally pretty calm. Charities apply for support. Foundations give out grants. Both groups attend conferences together and a few feathers are ruffled, but no big flaps. 

This last year however, things have been different. Call it the pandemic effect. Call it a tipping point around racial justice. Call it a long overdue reckoning over the genocide of Indigenous peoples. But whatever it is, it’s obvious — the roots of the philanthropic sector are under attack — and the pitchforks (albeit some, quite gentle) are coming out from all sides. 

During the last fourteen months, many of those pitchforks have been trained on the disbursement quota (DQ) — the charitable regulation that governs the rate at which Canadian foundations have to, well, engage in philanthropy. The federal minimum DQ rate in Canada is 3.5 percent of total assets each year, allowing most foundations to keep the vast majority of their endowments invested, and to exist in perpetuity. 

In May of last year, a coalition of philanthropic sector advocates came together under the ‘Give5’ banner, calling on Canadian foundations to disburse at least five percent of their assets to support charities facing the realities of the pandemic. It was billed as a one-time thing — an important gesture to meet an extraordinary moment. Ultimately, 69 foundations took the pledge. 

But from high atop the large pile of endowment cash, once the DQ ball got rolling, it wouldn’t stop. 

The Circle released #Other95, a call for foundations to consider what they’re doing with the ‘other 95’ percent of their assets and a provocation to consider ‘spending down’. Then the Increase the Grants group launched, pushing stories in the Toronto Star, Financial Post and Globe and Mail, arguing for an increase in the DQ. Alongside, a growing chorus of sector associations and leaders got into the game. In a February story in the Charity Report, Community Foundations of Canada and Senator Ratna Omidvar made their positions clear: the federal government should raise the disbursement quota for good.

But not everyone agreed. 

In a March press release, Imagine Canada, a non-profit and philanthropic association, said, “Our current position on this file is that there is a lack of sufficient evidence to inform a particular legislative adjustment to the disbursement quota.” And Philanthropic Foundations of Canada too has expressed hesitancy about a possible DQ change.  

But as I watched this play out I wondered: How the hell did we get here — to this place where institutional philanthropy largely assumes perpetuity?

For most people, giving to charity is a simple transaction — you pick an organization and you donate. But for many wealthy philanthropists with private foundations, it’s a different story. In their case, federal policy has had to forcefully intervene, mandating a minimum timeline for funds to flow to communities in order to resist the stockpiling of charitable funds within perpetual endowments. 

Of course, it wasn’t always this way. 

Looking back, three moments in history make it clear that perpetuity is alive and well not because it’s ‘natural’ or ‘normal’ but because it’s been useful for elites — for medieval property holders resisting feudal taxes, for the supremacy of the Catholic Church, and later, for the industrial barons of Turtle Island. 

The birth of trusts in England: The king, his land holders and tax havens

Hinting at a future yet to unfold, the roots of the modern day charitable foundation lie in medieval tax avoidance. 

For centuries in Europe, the land was a thing people lived on and lived off of — not anybody’s property. Certainly, an individual might cultivate crops on a patch of earth, but after their barley came to harvest, the land would go back into communal hands for grazing animals. 

This changed during the medieval period, with the rise of ‘feudal tenure’ — legal contracts between the King and land holders. Through these contracts, land holders received the right to the Crown’s protection and the right to live off of their enclosed parcel of land. In exchange, many land holders were required to fight on behalf of the Crown and required to pay ‘fines’ — a sort of medieval property tax — due to the Crown upon their death. 

Only some land holders didn’t really like paying their taxes. So they enlisted the help of clever lawyers and accountants to help them solve their problem. And solve the problem they did. 

Up until the early 14th century, if a land holder died and did not have a male heir who was over 21, the land would fall into Crown hands until the heir aged up. Notably, bloodletting was all the rage in medicine at the time, so dying before your eldest son reached 21 wasn’t uncommon. While waiting for the son to age into ownership, the Crown could collect the rents paid by peasants who lived on the land — this, in effect, was the medieval property tax. And it was governed by early English common law.  

Beginning in the 1320s, however, a workaround was hatched. Prior to death, the land holder would transfer his land title to a small group of trusted friends or associates (say, the best man at his wedding, his healthiest friend and his most prudent pal). And after their friend’s death, these ‘trustees’ would hold the land until the deceased’s male heir reached the age of 21. Bada-bing, bada-boom — this practice cut the Crown and his lords out of the equation altogether. 

“They were medieval tax havens,” said David J. Seipp, professor of law at Boston University. “It was an arrangement that was technically ‘outside the law’ — technically, the law couldn’t even see it — but lawyers knew how to do this for their clients.” 

The pre-modern private trust wasn’t necessarily perpetual in orientation, but crucially, it outlived the land holder. It was also a wealth-preservation tool that provided the land holder with the opportunity to dictate what should happen to his land after he died; and to appoint ‘trustees’ (his pals) to see to it that it would be done. These elements have all informed the modern day charitable foundation.

Further, during this period, the same approach also enabled vassals to transfer their land to the Catholic church. This practice also skirted Crown taxes, and crucially, gave the land holder a better shot at heaven in the afterlife. 

Catholic corruption and the the roots of the modern foundation

Perpetuity enters the picture with the rise of the pre-modern charitable trust. 

As private wealth grew in medieval Europe, the affluent increasingly showed care for others through philanthropy. “In medieval England, making a gift to the poor was part of practicing religion,” writes Evelyn Brody, an American professor of law, in an article on the subject. Most commonly, these donations were channeled through the Catholic church — the largest civil service organization in pre-modern Europe. 

Commonly, donations would occur during the faithful’s life, such as through church tithing. But increasingly during the medieval period, deathbed donations became common. “Traditionally a priest would come to take a dying landowner’s last confession,” said Seipp. “The family always suspected that the priest would strongly influence the landowner to make a deathbed donation to the church for the better chance of saving the dying landowner’s soul.”

And the family wasn’t wrong. Over time it became common for a parishioner to split the assets of his will into three: one chunk for his kids, another for his wife and a third for his soul. This last part went to the church. 

“Western European Christianity developed a belief in purgatory. Most [people] would not go immediately to heaven or hell, but to purgatory — a sort of unpleasant waiting room,” said Seipp, “and prayers, sent by the living, could earn or win a dead soul’s entry into heaven.” 

Over time, these prayers became quite a lucrative enterprise for the church. For a particular price, priests would hold an annual mass for the deceased. For another, they’d light a perpetual candle for their soul. These practices helped to link the church with the concept of perpetuity — it was, after all, an institution which held a parishioner’s hopes for their afterlife. 

The perpetual structure of the institution was also crucial in its ability to achieve its mission — to carry out the work of Jesus Christ and to spread the word of God. This was best accomplished through the acquisition of land. Quite simply, more land meant more churches. 

“The use of the perpetuity for the Catholic church, the largest [at the time] property holder in England, was clearly that it allowed the institution to pass on property from generation to generation — and especially to keep it from entering the market and being divided,” said Benjamin Soskis, a senior research associate at the U.S.-based Center on Nonprofits and Philanthropy, by phone. 

However, these pre-modern charitable trusts were not governed by English common law. Over time, this allowed for corruption. Sometimes, the priests let the candle’s flame die out (leaving the deceased’s soul prayer-less). Sometimes, they used donations for a purpose other than what had been promised to the deceased or their family, including church beautification. 

Upsetting the Crown and the nation’s wealthy parishioners is a sure fire way to prompt legislation, which would thus follow in fits and starts over the next several centuries. First, with the passing of the Statute of Charitable Uses in 1601, and later with the 1853 British Charitable Trust Act — a document laid the groundwork for the first British charitable foundations (which would then form the template for the first such institutions in North America).   

Perpetual foundations in the Americas: Generosity, corporate control and legacy

The rise of the modern charitable foundation in both Canada and the U.S. didn’t occur in earnest until the early 20th century, spurred with wealth generated by industrialization and resource extraction. During this period, wealth accrued unevenly (hello, capitalism!), amassing vast riches for a small group of American and Canadian entrepreneurs. 

Some of these industrialists gave money away during their lifetime. For instance, Julius Rosenwald, the co-owner of Sears, railed against perpetuity and instructed his foundations’ trustees to spend down his foundation shortly after his passing. They did, and the foundation contributed over $70 million to secondary and post-secondary educational institutions across the country, in total. 

Many others however, opted for the perpetual structure, leveraging the template developed in England. Among them were oil magnate John D. Rockefeller in the United States and sugar refinery giant J.W. McConnell in Canada. 

Some perpetuity-oriented philanthropists were no doubt motivated by charitable aspirations, believing that they could do more good by giving more dollars over time, leveraging the power of interest earned on their endowment. Some, no doubt, were also swayed by self-interested factors, chiefly: corporate control and legacy. 

In America, during the depression in the 1930s, lawmakers hiked tax rates to generate the revenue necessary for broad social spending. Estate taxes went sky high, which spooked many private entrepreneurs. Their fear was simple: If they died, their heirs might need to sell off the family company in order to pay the tax bill.

At the time, taking a company public was not an attractive option to many business owners, and so, “good lawyers everywhere were looking for ways to reduce their clients tax burden,” says Eric J. Abrahamson, an American historian of philanthropy.  

The plan they devised was rather ingenious. The entrepreneur would create a charitable foundation and give it a non-voting, controlling stake of the company. He’d then re-draft his will, bequeathing another portion of the company (with voting rights, in this instance) to surviving heirs — (ringing any bells, from centuries past)? The donation of shares to the charity would dramatically reduce the entrepreneur’s wealth, but it’d save a whack of taxes and preserve the family’s control over their company. 

In an article on the subject, Abrahamson notes that hundreds of foundations used this strategy, including Henry Ford who “let go of one of the greatest fortunes created in the history of the nation, but…saved his heirs an estimated $321 million in inheritance taxes.” So too was this strategy used by the W.K. Kellogg Foundation, the Pew Memorial Trust and the Gulf Oil Foundation, according to a 1965 report by the U.S. Treasury Department. 

“Far more than their concerns about their philanthropic intent, these donors did not want to see their babies go into somebody else’s control,” said Abrahamson. 

Furthermore, perpetuity was essential for this scheme to work, as spending down the foundation’s assets would have meant selling the company shares, diluting the heirs’ control over the company.

North of the 49th parallel, this practice was much less widely used, according to several Canadian charitable lawyers. But for philanthropists in both countries there was a second less altruistic motivation for perpetuity: legacy. 

“The reason why the foundations want to exist — is that they’re holding — or continue to hold the legacy of the owner,” said Peter R. Eleson, a professor at the University of Victoria who has written several books about Canadian philanthropy. “In many respects, at least initially, the foundations very much took on the kind of social evangelical (both in a way to do things, and in a religious sense) values of the founding person.” 

In Canada, this kind of motivation is often attributed to donors who are particularly fond of ‘capital’ projects — the building of new buildings or the purchase of new equipment — which offer the opportunity for naming civic infrastructure. 

For instance, donations from the Massey foundation, the first private foundation in Canada, helped build Massey Hall at the University of Toronto — an institution that carries the legacy of its benefactor. More recently, a $35 million donation from mining businessman Peter Munk helped to launch that university’s School of Global Affairs, offering him the same perpetual notoriety. 

Throughout history accountability comes from the “public eye”

At the root of the modern charitable foundation is the structure of the ‘trust’ — the three-way link between the land holder, his trustees and his heir. In the medieval era, the word “trust” was used to connote the faith that the land holder was bestowing in his trustees to honor his wishes — to do right by him. 

This same relationship of faith seems embedded in the links between the donor, their trustees, and the public. 

In outlining the differences between charitable foundations and corporations or government, Eric Abrahamson argues that unlike corporations (who have shareholders) or government (who responds to citizen’s votes) the only real accountability for philanthropy “is in the public eye.” 

He also said that sometimes, throughout history, philanthropists have been “surprised” by just how energetic that public accountability can be, if foundations are not seen as operating in good faith. 

In medieval England, spurred by the Protestant Reformation (and the desire for an annulment of his marriage), King Henry VIII seized much of the Catholic church’s land, vowing to reign in the churches’ excess. And 1969, in the United States, citizens and lawmakers alike pushed for an end to the perpetual foundation, in response to what was seen as “self-dealing” activity, landing ultimately a six percent disbursement quota instead. 

Over the past year, this same sort of energy has been on display in relation to the disbursement quota, in op-eds, conference sessions and conversations between colleagues. 

Sensing this pressure, the Federal government announced in the 2021 budget that it would engage the charitable sector in consultations about a potential increase to the DQ in 2022. In response, earlier this month, Ed Waitzer, a retired lawyer, penned an op-ed in the Toronto Star, arguing that it’s not the charitable sector who should be consulted — but the public. 

If the history of perpetuity demonstrates anything, it’s that today’s crop of powerful philanthropists would be well served by avoiding that fate. Because today, as was the case back then, they have much to gain from perpetuity. 

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