This editorial ‘Charitable Tax Law and a Fair and Just COVID-19 Recovery‘ introduces PhiLab’s January 2021’s Special Edition: Philanthropy and Charitable Tax Law
For those of us who work within—or alongside—the Canadian philanthropic sector, 2020 was a year of reflection, learning, and adaptation. In addition to emphasizing the structural roots of social, health, and economic inequities in Canadian society, COVID-19 highlighted significant gaps between what the Canadian philanthropic sector currently provides and what communities need. Naturally, this invigorated much discussion and debate around how the sector can better address these gaps.
And yet, while these conversations have focused on grantmaking foundation strategy (e.g., loosening restrictions on how grants can be spent, as well as grantee reporting requirements), less attention has been paid to the rules, regulations, and laws governing the philanthropic sector. Described in the Canadian Income Tax Act, these rules, regulations, and laws provide grantmaking foundations with generous charitable tax benefits, while also establishing a range of requirements and limitations that foundations must abide by. Simply put, these charitable tax laws determine what can and cannot be done within the sector.
In this introduction to PhiLab Quebec’s Special Issue on “Philanthropy and Charitable Tax Law,” I discuss the importance of these rules, regulations, and laws as they relate to a just and fair COVID-19 recovery, as well as broader movements for social, economic, and ecological justice. To do this, I focus on three key topics that have received some critical scrutiny within the context of COVID-19: (1) the disbursement quota; (2) qualified v. non-qualified donees; and (3) charitable tax incentives.
In Canada, charitable tax law requires that philanthropic foundations give away 3.5% of their total assets to registered charities annually in order to maintain their legal designation. This “disbursement quota” has decreased over the past half-century, from 5% in 1975, to 4.5% in 1984, to the 3.5% rate set in 2004.
While certainly a longstanding area of contention, debate around the disbursement quota rate took centre stage in May 2020 with the creation of the GIVE5 pledge. Launched as part of #GivingTuesdayNow—a global day of giving created as an emergency response to COVID-19—GIVE5 asked grantmaking foundations to commit to distributing a minimum of 5% of their assets in 2020.
Support for GIVE5 was grounded in two complementary arguments. First, proponents viewed the pledge as a necessary response to increased health, social, and economic needs caused by the pandemic, and the belief that Canadian philanthropic foundations had a responsibility to step to the plate. Second, many argued that the 3.5% disbursement quota was far too low, especially considering that, over the past 10 years, foundation assets have grown on average by 10% annually. Although the GIVE5 initiative highlights this discrepancy between asset growth and disbursement, while making the case for philanthropic foundations to give more, it is important to note that it’s an entirely voluntary initiative. In other words, while foundations may give 5% or more of their assets during 2020, this is not legally mandated.
This raises an important question: if the purpose of philanthropy is to direct private dollars toward a public good, why does current charitable tax law enable and incentivize grantmaking foundations to grow their assets at far quicker rate than they disburse them, particularly during a pandemic when so many are suffering? Likewise, would changes to laws around the disbursement quota help grantmaking foundations, as well as the philanthropic sector at large, better fulfill their social purpose and mission?
Over the past 12 months, we’ve seen grassroots solidarity and community organizing in response to the COVID-19 pandemic take the shape of mutual aid organizations, caremongering networks, and social movements. However, while these informal organizations are often best positioned to address issues on the ground, they are typically forced to do so from outside the philanthropic sector. Categorized as “non-qualified donees,” these movements and organizations are prohibited from receiving donations from philanthropic foundations.
In the early stages of the pandemic, there was a significant push by the philanthropic sector to create resources that would help funders navigate these rules, regulations, and laws in order to channel resources to non-qualified donees. Philanthropic Foundations Canada, for example, put out a guide that addresses this issue. Nevertheless, the vast majority of grantmaking foundations have not supported non-qualified donees during the pandemic.
By making it exceedingly difficult for funders to work with non-qualified donees, the Canadian philanthropic sector risks reaffirming itself as an elite and “top-down” institution—whether it likes it or not. While the work of organizations like PFC—as well as funders like the Laidlaw Foundation and the Chagnon Foundation—facilitate and contribute to the transfer of philanthropic resources to grassroots groups, COVID-19 has made clear that these funding relationships can no longer be viewed as the rare exception. Rather, they must be encouraged and simplified through formal means. This demands changes at the level of charity tax law.
Charitable Tax Incentives
During the most recent Throne Speech, the Federal Government spoke about the need to tax extreme wealth inequality and generate additional tax revenue to fund a fair and just COVID-19 recovery. Specifically, the Liberals mentioned capping the tax deduction available for stock options, as well as curbing the problem of corporate tax avoidance by digital giants. The Federal NDP party, on the other hand, proposed slightly more extensive reforms, including the (re)institution of an excess profits tax, as well as a wealth tax on those with more than $20 million in assets.
These sorts of debates around taxing the super-rich to fund a fair and just recovery implicate the philanthropic sector. For the most part, Canadian private foundations are either run by—or connected to——Canada’s wealthiest families and most profitable businesses: the target of these new progressive tax measures.
But, perhaps even more importantly, the philanthropic sector is powered by some of the most generous charitable tax incentives in the world. And while these tax measures encourage philanthropic giving and the growth of philanthropic assets, they also shrink government tax revenue. The sector is embedded within the larger Canadian political economy and serves as an important part of Canada’s social policy infrastructure.
As Canadians reflect on how new tax policies can aide in the COVID-19 recovery, why should the philanthropic sector be exempt? Are charitable tax incentives too generous? Should foundations earn income on their investments tax free? Should new rules be placed on foundation endowments requiring socially responsible investment? These sorts of questions should feature prominently in discussions and debates about how to make the philanthropic sector work for social, economic, and ecological justice.
As we enter 2021 and shift our attention toward philanthropy’s role in a just and equitable recovery, we need to give ourselves permission to reflect on, and reimagine, all aspects of the philanthropic sector. This includes looking at changes in grantmaking practice and foundation policy during the COVID-19 response, and how this can be applied in the long term toward a more responsive, democratic, and progressive philanthropic sector. However, we can’t focus entirely on what happens at the foundation level; we need to locate the work that we do within the larger Canadian political economy and social policy ecosystem. This means examining charitable tax law, even when it means asking more from donors. It also means focusing not just on celebrating the “model foundations” that choose to exceed the disbursement quota, donate to non-qualified donees, or have a 100% social impact portfolio. Rather, we need to institute rules and regulations that make these “model” policies and practices a defining feature of all grantmaking foundations. In this way, charitable tax law plays a fundamental role in linking the philanthropic sector with movements for social, economic, and ecological justice.
Would you like to react to this editorial? We strongly encourage readers and members of the philanthropic sector to share their comments on the charitable tax law, send us an email at email@example.com.
Case Study: Pledge to GIVE5 (September 2020), Series of case studies evaluating the Canadian philanthropic sector’s response to the COVID-19 pandemic, Isidora G. Sidorovska.