Tuesday, April 27, 2021

How increasing the disbursement quote would help charities

There are increasingly strident calls for the government to increase the so-called disbursement quota (DQ) of Canadian charitable foundations, with claims being made that the current rate is inadequate and that a substantial incease in the DQ would greatly benefit charities at a time of great need. Last week's federal budget mentioned that the government was considering such a move, but fell short if actually instituting a change.

At first, I didn't understand how this would help them, so I did a bit of digging.

The disbursement quota is the minimum percentage of their holdings and investments that charitable foundations must release each year on their own activities and in grants to other charities. It ensures that foundation assets do not just sit there accumulating and hoarding and not being utilized for anything useful.

Since 2004, this rate has been set at 3.5% in Canada, down from the previous level of 4.5%, i.e. very little. Many charity activists believe that is should be raised to at at least 5% (the current DQ in the USA) or, according to some, to as much as 8% or 10%, at least temporarily, during the strictures of the pandemic. They justify this on the grounds that the long-term earnings of investments in, for example, the S&P stock exchange has been 10%-11% over the last centurty or so.

Others, however, urge caution, warning that increasing the DQ and setting the quota too high might damage the long-term viability of some foundations.

It seems to me that a temporary increase would be in order and, being temporary, would not harm the long-term health of the foundations in question.

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