Foundations in Canada receive sizable tax breaks to fund charitable causes. Are they a good deal? Does their charitable spending at least offset the loss of tax revenues?
Some observers have their doubts. Take Bill Young. He set up his own private foundation in 2001 under the name of Bealight Foundation, and a subsequent charitable organization called Social Finance Partners. In a 2021 submission to the Department of Finance, he wrote:
“… the way foundations are currently set up and administered is frankly poor public policy. Here’s why: anyone like me who has set up a foundation is given a significant tax break, often close to 50% of the gift provided to the foundation. In return for giving up this 50% today, the government only requires foundations to grant [a small percentage] of their assets to operating charities each year … and allows them to invest the rest of their assets [tax free] in whatever securities they choose …. the foregone tax revenue is considerable …. That doesn’t seem like a fair return to me.”
The amount of tax revenue given up could be quite large considering the size of the sector. In 2021, more than 10,000 foundations in Canada administered over $100 billion in tax-exempt assets, according to the Department of Finance.
How much did they contribute toward charitable causes? As far as I can see, the most recent data available is from 2018 . In that year, private and public foundations handed out $7 billion in grants against $91.9 billion in assets, based on stats from Imagine Canada. No estimates of the taxes foregone within a progressive tax system seem to be available, unfortunately, which leaves us defaulting to the opinions of Young and other foundation CEOs.
What might be worth pointing out is that most of the heavy lifting is done by public foundations. Nearly two-thirds of the grants came from them even though they managed just a little over one-third of total foundation assets. Also, grants from public foundations were 12.4% of their asset base versus 4.6% for private foundations.
Assets and Grants (2018) All Private and Public Foundations*
Source: Imagine Canada (February 2021) via Philanthropic Foundations Canada.
Private foundations are set up mostly by wealthy families and are governed by a board of directors composed of mostly family members. Public foundations are associated with hospitals, universities, and communities, and have boards composed mostly of independent directors serving at an “arm’s length.”
Over the period from 2005 to 2021, the number of private foundations grew by 47% to 6,189. Growth in public foundations barely budged, edging up only 8% to 4,644.
Growth in Number of Foundations 2005-2021
Source: Canada Revenue Agency (charities listings as of March 2021) via Philanthropic Foundations Canada
Perhaps the proposal in Federal Budget 2022 to increase the annual distribution quota to 5% and other measures may help redress the imbalance. Still, even with the proposed measures, it would seem more can be done by private foundations considering the wide gap with public foundations.
Young’s solution to ensuring Canadians earn a return commensurate to the tax dollars given up to the private foundations of wealthy families is to require they invest more of their assets with social and environmental impacts in mind. Private foundations are charitable entities so it could be argued that the pursuit of returns on at least some of their assets should be subject to the condition that there is also a positive social or environmental impact.
For example, there have been successful cases of social bonds yielding positive returns to both investors and social causes. Of note were the social bonds funding pilot projects that succeeded in substantially reducing recidivism rates among released prison inmates. Having fewer ex-cons return to incarceration yielded cost savings to public administrators and a positive return to social bond investors.
Similarly, investments could be made in attempts to ameliorate other social problems. Hey, count me in if someone wants help with reducing high suicide rates among teenagers or improving access to legal services for all classes of people, not just the rich or subsidized poor.