The Changing Landscape of Foundations and the Canadian Non-Profit Sector
The Changing Landscape of Foundations and the Canadian Nonprofit Sector
Introduction
Private foundations in Canada, as in Europe, the United Kingdom, and the United States, have an almost unlimited liberty to choose where and how they will make their difference to society. The philanthropic foundation form is common to many countries even if there is no uniform legal definition. In each of these societies, foundations governed by private citizens make decisions that have important social, policy, and sometimes political impact over time. Yet, in most cases, we do not know much about how they make their decisions, and how they go about the task of defining their goals and selecting their tools to achieve their purposes. As more of these foundations begin to explain their choices to the public, we are starting to understand more about the pressures and opportunities to which these foundations are responding.
For many foundations, the first decision is to adopt a mission, coupled perhaps with strategic goals. The choice of goals starts with the question: “What social good do we want to do with the resources we have?” Creating a strategy involves making choices of what to do with finite resources. So, foundations must choose where to put their assets of money, people, and time. They must do some serious thinking about what matters to them, what skills they might have or need, and with whom they want to work.
Foundation boards and leaders must consider many issues if they want to put a philanthropic strategy into play. Internally, foundations need to organize themselves to use their capital effectively through the tools of investments, grants, and program budgets. They must identify the outcomes they might hope for, the indicators and feedback that would help them learn from their work, and the staff capacities they might need to get it done. Externally, they must manage relations with their grantees and partners, whether these are organizations receiving their support or external collaborators in the work, including other foundations. They must figure out how to act more transparently and demonstrate accountability to the community. And they must understand their place in the larger system they are trying to change.
This question of place in a system is becoming more important to consider in the 2020s as social media and the publicity attracted by large philanthropic gifts draw more scrutiny to the strategies of foundations. They are making decisions in an environment that is changing rapidly. On the investment side, the assets being managed in foundation endowments are drawing critical attention. Foundations are being challenged to deploy more of their capital into investments with a social purpose or impact. It is no longer an unquestioned practice to separate investment policy from mission, as private foundations have done in the past, and to ignore the social impact of these investments. On the granting side, foundations are coming under pressure from communities to provide more unrestricted, multi-year, or general operating support, or to involve their partners directly in their decision-making about grants. This pressure was beginning to build before 2019 but were intensified by the impact of the pandemic. Many of the organizations foundations work with are inherently fragile and under-resourced. Foundations are being asked to consider whether their own processes and requirements in providing funds might, in fact, be adding to, instead of reducing, this fragility. Foundations are being pushed to acknowledge the power differences between themselves and their grantees and partners, open their decision-making, and engage the views and voices of those who seek foundation resources with which to do their work. To be fair, the pressure to ask these questions is not just external. Foundation staff and board members themselves are proactively raising them, and probably arguing about how to answer them.
A Look at the Recent History of Canadian Foundations
Currently in Canada, the nonprofit sector includes approximately 86,000 registered charities and another 85,000 nonprofits engaged in ‘public benefit activities’ and employs more than two million people. The main revenue sources that allow these organizations to do their valuable work include individual donations, corporate sponsorships, sales of goods and services, and grants from foundations and governments. In Canada, these diverse sources of revenue declined significantly as the global Covid-19 pandemic emerged in March 2020. Many charities also saw significant increases in client need as well as heavy volunteer and staff losses. Nonprofits that sold goods and services experienced the same decline in demand as many retail stores, leading to further revenue losses.
In response, the Government of Canada moved rapidly in May 2020 to increase funds available for charitable work, supporting thousands of organizations first through the federal Emergency Community Support Fund and then later through the Community Services Recovery Fund. Some Canadian foundations also enhanced their giving to the sector at the time, with many participating in the Give5 Campaign to donate at least 5.0% of their annual assets to charities. However, despite the increase in financial support, many organizations in the sector still struggled to survive. As a result, nonprofit leaders, legal experts, and the media began to question the roles of both the federal government and foundations. Given the expectation that the nonprofit sector would support society’s most vulnerable, whose responsibility was it to ensure that the sector itself did not collapse during the pandemic? In response, the annual disbursement quota for foundations quickly became a lightning rod for identifying a response.
Pre-Pandemic Canadian Foundation Disbursements
The significant growth and the allocation of foundation assets in the years leading up to the pandemic became an area of concern for a small cohort in the nonprofit sector. John Hallward, President of Sector3Insights and founder of GIV3, conducted a study that found Canadian foundations had accumulated over $80 billion in financial assets by 2020. Claire Brownell, a reporter at the online news platform The Logic, found the total investable assets held by Canadian foundations to be even higher, with significant increases from $59 billion in 2015 to $100 billion in 2019. However, even with this substantial asset growth, the Philanthropic Foundations of Canada administered a survey and found that, in 2019, only 74% of surveyed foundations were meeting their Disbursement Quota (DQ) requirements, while 23% of foundations were failing to do so. The report did not indicate whether the remaining 3.0% met their DQ requirements or not.
The impact of so many foundations not meeting their minimum rate of charitable spending resulted in a shortfall of $414 million in funds in 2019 that could have flowed to frontline charities and into communities. All but one of those foundations were private; the largest private foundation — the Mastercard Foundation — was responsible for 61% of the $414 million DQ shortfall.
The allocation of pre-pandemic foundation grants also revealed which organizations benefited from these funds and which did not. Gail Picco of The Charity Report conducted a study entitled Who Gives and Who Gets: The Beneficiaries of Private Foundation Philanthropy. The study examined five years of disbursement data (2014-2019) from the top 20 private foundations in Canada, which represented 75% of total private foundation giving in the country. The disbursement data revealed that private foundations gave a total of $1.63 billion in grants during the time period, as follows:
· 34.7% of grants were given to benefit institutions outside of Canada, mostly post-secondary institutions such as Oxford University in England and Stanford University in the United States.
· 19.7% of grants went to education charities, 90% of which were well known Canadian universities.
· 19.3% went to health charities; 32% of that funding went to hospital foundations.
· 7.2% of grants went to charities benefiting communities.
· 6.8% went to charities relieving poverty.
· 0.2% went to supporting Indigenous organizations.
· 0.1% went to supporting racialized communities.
Picco’s findings illustrate that most private foundations were not addressing many current pressing issues such as the environment, food insecurity, homelessness, or racial inequality. The report’s most significant conclusion was that, even with a higher DQ, very little funding would flow to frontline organizations or equity-seeking groups. Other reports by Indigenous organizations and organizations representing racialized communities, such as the Foundation for Black Communities and The Circle on Philanthropy and Aboriginal Peoples in Canada, echoed this sentiment.
With the significant asset growth of many foundations in the decade prior to the pandemic, and the fact that approximately 23% of Canadian foundations did not meet their DQ (some of them fell astoundingly short of it), many organizations advocated for increased support from foundations for the charitable sector. It also became clear that, to achieve a more equitable distribution of these funds, simply making changes to the DQ would not be sufficient; the charitable sector required more tools to encourage the flow of money to traditionally underrepresented groups and urgent social needs.
The Federal Response to Covid-19 and the Charitable Sector
Due to the Covid-19 pandemic, many nonprofits struggled to address massive social challenges such as food insecurity, soaring unemployment rates, mental health emergencies, and a housing crisis. Within the sector there were 63,000 reported job losses in 2020 and 213,000 job losses early in 2021. Other impacts included higher client demand for programs and services, decreased revenues and donations, and significant losses of both paid staff members and volunteers.
In light of these difficulties, the Canadian government acted quickly to support the charitable sector. As stated earlier, in April 2020, the government launched the Emergency Community Support Fund, which provided $350 million to charities and nonprofits that offered essential services to vulnerable populations. Many nonprofits and charities also accessed federal wage and rent subsidies to support their organizations throughout 2020 and 2021. In 2021, the federal government also announced the Community Services Recovery Fund to provide an additional $400 million to help charities and nonprofits adapt to the impacts of Covid-19 and modernize their work. The federal government offered targeted support for other organizations providing wraparound support services (i.e. food banks, senior support centers, women’s shelters, arts and sports organizations, etc. A number of public and private foundations followed the federal government’s model for supporting the charitable sector during the pandemic, as demonstrated below.
Foundation Responses to Covid-19 and the Charitable Sector
Many Canadian foundations re-evaluated their role within the charitable sector during the once-in-a-century crisis. In the early days, numerous foundations in Canada responded swiftly and began the GIVE5 Campaign to encourage other foundations to donate at least 5% of their annual assets to charities struggling during the pandemic. Organizers publicly asked “If not now, then when?” would the time be right to support the most vulnerable populations in Canada, including those serving Indigenous and Black communities. Supporters of the GIVE5 Campaign noted that while donations to the charitable sector had declined by $4.2B–$6.2B overall as a result of the pandemic, many Canadian foundations could afford to better assist the struggling nonprofit sector because they had enjoyed significant investment growth during the previous ten years.
The Campaign joined a global movement that designated May 4, 2020, as a Giving Tuesday designed to raise funds for struggling charities. While the intention was to have 100 Canadian foundations (of the more than 10,000 foundations in Canada) pledge to donate 5% of their annual assets, only 69 foundations across Canada did so. Even so, the campaign secured an additional $21.5 million in funds for the charitable sector. Through the initiative, many philanthropic organizations attempted to balance out the nonprofit sector’s significant losses in revenue by increasing their charitable spending.
Not all organizations agreed, however, with how much financial support foundations should be providing to the nonprofit sector. Philanthropic Foundations Canada, the largest member association of public, private, and corporate grantmakers in the country, argued that foundations cannot replace governments in their central mandate to respond to public emergencies. Nevertheless, the growing wealth of foundations, combined with the deepening inequality that emerged from the pandemic, led to new calls for examining the DQ as a tool for addressing these issues.
In response to the impact of Covid-19, as well as the broader debates about the role of foundations in the charitable sector, Finance Canada launched public consultations on the DQ on August 6, 2021. The consultations provided opportunities for organizations and individuals to comment on the annual DQ requirements and the potential means of government enforcement. In particular, Finance Canada encouraged respondents to comment on whether or not the DQ should be raised from 3.5% to 5% of a charity’s annual assets. A diversity of opinions from within the sector emerged in response.
Some of the sector’s most powerful organizations, such as the federally-appointed Advisory Committee to the Charitable Sector, did not outright support an increase in the DQ, arguing that raising the DQ alone would only benefit registered charities, not non-qualified donees in the nonprofit sector. Other submissions opposed the DQ increase while some recommended a meaningful increase in the DQ without mentioning a specific percentage. Others recommended developing a ‘sliding scale’ DQ based on asset size, and increasing the DQ to at least 5%, with a transition period provided to make the increase feasible. Many organizations recommended employing a wider variety of tools and approaches in addition to the DQ to support the broader nonprofit sector, ensure that funds were reaching historically disenfranchised populations, and increase equity in Canadian charitable giving.
Numerous organizations also commented on the policy tools needed to ensure funding would reach traditionally unfunded organizations. In Canada, many Indigenous and Black-led/Black-serving nonprofit organizations are not registered for charitable status and are instead considered non-qualified donees.
To address this inequity, many respondents argued for legislative changes to allow foundations to fund non-qualified donees, in order to provide better support for Indigenous and Black-led organizations in Canada.
At the end of the consultation period, the Department of Finance reported that approximately 120 charities had responded with written submissions which were evenly split between supporting and opposing an increase in the DQ. The opposing foundations were mainly private foundations concerned about their ability to exist in perpetuity. The foundations supportive of raising the DQ cited the urgency of the current need and pointed to the overall increase in investment returns in foundations’ assets. Many respondents were also cautious, identifying a lack of data as a reason to take a careful approach to adjusting the DQ.
Federal Budget 2022
On April 7, 2022, the Government of Canada responded to the findings of the DQ consultations when Deputy Prime Minister and Minister of Finance, Chrystia Freeland, tabled the federal budget in the House of Commons. The government announced it would raise the DQ from 3.5% to 5%, starting in January 2023. To mitigate the impact of the increase on smaller foundations, the increase would only apply to charities with over $1 million in invested assets. Another proposed change permitted charities/foundations to fund non-qualified donees providing that certain accountability requirements were implemented.
For the most part, sector reactions to the DQ announcement were positive, although some organizations argued that the government had not enacted a large enough increase while others argued that the DQ was now too high. In general, however, the increased DQ represented a shift in accountability for funding the nonprofit sector, with foundations now expected to shoulder a larger responsibility.
Many saw Budget 2022 as a progressive step forward for enhancing financial support for the nonprofit sector in Canada. However, when Finance Canada released the draft Income Tax Act legislative changes in May 2022, many nonprofit sector leaders were shocked. While the draft legislation — the Budget Implementation Act or BIA — increased the DQ to 5%, it also reinforced the tradition of ‘direction and control’ that characterized previous legal requirements when foundations funded non-qualified donees. Charities that did not exert direction and control over their donees faced the possibility of being stripped of their charitable status by the Canada Revenue Agency. Instead of making it easier to support non-qualified donees, the language in the BIA would remove the flexibility for accountability that foundations already exercised. Legislation now required very specific regulation of charities and foundations regarding their funding of non-qualified donees, including a due diligence review of the grantee; written agreements between the funder and the grantee with respect to the use of the funds; reporting and financial recordkeeping requirements; ongoing monitoring of the grantee organization; reviewing and approving the final report of the grantee organization; and withholding further disbursements and the recovery of funds if an agreement was not being followed according to previously specified guidelines.
The new bill would enshrine these requirements in legislation and give the CRA stronger oversight powers of the nonprofit sector while also reducing the amount of flexibility that charities/foundations had to build relationships with and fund nonprofit partners. There was widespread concern that with strengthened requirements for direction and control in the language of the BIA, grantmakers would be hesitant to collaborate with non-qualified donees for fear of not being able to enforce all of the requirements. Similarly, grantmakers thought many non-qualified donees would be less likely to engage with them due to such stringent requirements. As a result, while an increase in the DQ would assist eligible charities, the increase in funds might not reach the most marginalized groups such as Black organizations, Indigenous organizations, and many grassroots international organizations.
Due to these concerns, several nonprofits united and intensely lobbied the federal government to change the wording of the proposed legislation. Imagine Canada, with support from the McConnell Foundation, convened a delegation of representatives from 12 charitable and nonprofit groups, including the Ontario Nonprofit Network, Philanthropic Foundations Canada, Samaritan’s Purse, Imagine Canada, The Circle on Philanthropy, Foundation for Black Communities, McConnell Foundation, Cooperation Canada, the Network for the Advancement of Black Communities, and others to engage in 25 meetings with Cabinet Ministers, other parliamentarians and senior officials. A briefing note written by Imagine Canada outlined the coalitions’ main issues:
“Our proposed amendments to the BIA intend to mitigate the potential harm and capacity overload in our communities, which remains a risk under the current language. If the language were to stay as-is in the BIA, it would perpetuate a colonial dynamic with Indigenous and equity-deserving partners, undo the progress made on public equity initiatives and prior consultation, and cultivate a high level of risk-aversion to projects that would otherwise improve and support our society, creating a “chilling effect” on vital work.”
Cooperation Canada, along with 70 other Canadian humanitarian and international development organizations also wrote a letter urging the Government of Canada to amend the Budget Implementation Act to reflect the spirit of ‘resource accountability’ rather than ‘direction and control’. The concept for resource accountability had come from the 2019 report Catalyst for Change: A Roadmap to a Stronger Charitable Sector, which proposed replacing the wording “charitable activities carried out by itself” with simply “charitable activities”, requiring less funder oversight and more non-qualified donee autonomy over their work. The proposed changes would still give the funder financial control but would not require the ongoing operational control currently required. Instead, the funder would need to ensure that the donee had the capacity to carry out the activity before it provided funding.
In response to the cross-partisan lobbying efforts of the nonprofit coalition, the House of Commons Finance Committee successfully passed two amendments to the BIA. These amendments removed the requirements for grantees to share their financials with funders on demand, as well as the requirement for annual written reports. Instead, new language noted that a charity must maintain ‘‘documentation sufficient to demonstrate the purpose of the donation and that the money is spent on nothing but charitable activities aligned with the funder’s own charitable purposes.” These changes gave foundations more autonomy to self-identify how they would fund and maintain accountability for supporting non-qualified donees.
While the amendments did not address all of the sectors’ concerns, many in the sector still celebrated the wins achieved. Carelle Mang-Benza of Cooperation Canada stated that “The current language in the Budget Implementation Act bill is a testament to compelling and coordinated advocacy by the Canadian charitable sector, and the government’s willingness to listen and attend to the sector’s concerns.”
Conclusion
Why do foundations matter? Because they are part of an ecosystem. In a balanced ecosystem, one element depends on and contributes to many others. Take one away and the ecosystem is damaged in unexpected ways. In the ecosystem of philanthropy, long-life private foundations are only some of the actors, joining individual donors, donor-advised funds, giving circles, mutual aid associations, and online giving intermediaries. Giving itself is an action undertaken by many different players and not unique to foundations. But in our broader social ecosystem, long-life foundations contribute many important things beyond grants: knowledge-building, social research and development, network creation and convening, organization and infrastructure support, influence, and advocacy. They act as signals to others around ideas and innovations that will matter not today but maybe five or ten years from today. These contributions can and even should be made with others. What differentiates the foundation contribution is its continuity over time and the ability to give with patience for outcomes that may only be realizable in the long term. Philanthropic investments in designing and testing new social programming, or support for policy development studies, or core support to build networks and develop leaders, must be made and maintained for several years before generating maximum social benefit. Solving our country’s most complex challenges will require and depend on the continued investment of risk-tolerant and independent philanthropic capital. Philanthropic resource providers for social change are the must-have elements of the ecosystem we need if our future society is to be both more resilient and more sustainable.
The question ‘What is the responsibility of foundations to support the charitable sector in Canada?’ was raised in the public sphere during the global pandemic of 2020–2023. At a time of unprecedented social upheaval, expectations of foundation giving increased, especially in light of their significant asset growth. These expectations were heightened by the fact that a large percentage of foundations were not fulfilling their responsibilities to re-allocate a portion of those gains to charity. In a sense, many foundations had broken the social contract that governs their ability to accumulate and protect their capital, wherein philanthropists and their foundations receive significant tax breaks in return for redistributing a portion of their wealth. However, despite the extraordinary capital gains made in the ten years prior to the pandemic, a good proportion of Canadian foundations still did not abide by these societal and legal expectations. The impact of this negligence has been severe for charities, and for equity-deserving organizations in particular, many of which continue to struggle in the aftermath of the pandemic.
The legislated disbursement quota increase will benefit charities in Canada by providing larger public access to such gains in tax-sheltered wealth. It is possible that the legislative changes allowing foundations to fund non-qualified donees will also benefit previously unfunded Indigenous nonprofits, Black-led nonprofits, and other nonprofits in Canada and around the globe. It will likely be necessary, however, for nonprofit organizations and their allies to further advocate for changes in the regulatory guidelines to ensure foundations can effectively provide additional support.
No private foundation can or should hoard its assets. And no charitable foundation in Canada may give to grantees or partners that do not fit with its charitable purposes. They have a duty to serve public benefit. Within these rules, charities in Canada are granted operational freedom to set strategies and make choices if those choices are in pursuit of their charitable purposes. And foundations can make even greater use of this freedom given their financial independence. That said, foundations can and should be held to account for what they can do better.
On the critical issues of today – climate emergency, inequality, systemic racism, attacks on democratic institutions, the importance of reconciliation – Canadian philanthropy has much to offer inside and outside our borders. We live in a country whose economy has depended, in part, on extracting and burning carbon. We have an enormous environmental space at risk, in land, water, and air. Given this, Canadian philanthropists have an opportunity and an obligation to make space for policy development around a sustainable transition, to help generate ideas around carbon pricing and carbon capture, to help protect and conserve old forests and grasslands, and to support urban building and transportation strategies to get to the hugely challenging goal of net zero. We are citizens in a diverse and pluralist country that has supported a continual flow of immigrants from many parts of the world over the last twenty-five years. This means that Canadian philanthropy can work collaboratively and at scale on social and racial inclusion, and on strategies to strengthen civic engagement and our institutional and democratic responses to pluralism. And we live in a country where settlers share the land with the Indigenous Peoples who are the original inhabitants. This means an opportunity for Canadian philanthropy to be more creative in integrating Indigenous concepts of reciprocity and exchange with western philanthropic ideas of community building and improvement of society. Finally, we are people who have roots and connections in many countries around the world. Philanthropy can and should do more to support the global need for better public health, stronger democracies, and more solid governance.
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