For any nonprofit organization, diverse and steady income sources are key to sustainability.
Whether you’re running a small local charity or a large conglomerate of programs and initiatives, ensuring long-term funding is essential for keeping your mission alive and achieving growth goals.
In a recent webcast Bruce MacDonald, President and CEO of Imagine Canada, and Daniel Oh, Nonprofit Industry Leader at Sage Canada, engaged with leaders at Edmonton Community Foundation, Philanthropic Foundations Canada, and the Covenant House Vancouver.
During the webcast, they explore insights on the endowment debate and how nonprofits can secure a strong financial future. They also take a closer look at how recent events, including the disbursement quota changes, have affected nonprofit organizations and their approach to fundraising.
What are the new rules?
The increase to the disbursement quota (DQ) was announced in the Federal Budget 2022 and has now become law under Bill C-32, the Fall Economic Statement Implementation Act 2022, which received royal assent on December 15, 2022.
The DQ will now be 3.5% on the portion of non-charitable property up to $1 million, and 5% on property exceeding $1 million. This new rate will apply to charities’ financial periods starting on or after January 1, 2023, and there is a 2-year window for charities to meet the DQ rate of each year.
You can read more details about this new legislation on Imagine Canada’s website.
The changes to the disbursement quota in the nonprofit sector are raising questions among organizations and their people.
Leaders in the space have been discussing how best to use resources more wisely, weigh up longer-term investment options and discover new approaches to donor giving.
While this shift has been met with enthusiasm by some organizations as they recognize the potential benefits that could come from these changes, many leaders are also expressing concern.
These changes may have negative consequences for organizations, from limiting their ability to carry out meaningful programs and initiatives, to potentially jeopardizing their funding models.
As a result, many nonprofit organizations are feeling uncertain about their financial prospects, and the full extent of the changes’ impact remains unclear.
6 key insights from Canadian nonprofits
The Canadian nonprofit sector has seen some interesting developments when it comes to endowment and perpetuity over the past year. Here are the key takeaways our discussion panel touched on during the webcast:
- Endowment funds can provide sustainable autonomy for organizations, but recent quota changes coupled with inflation are proving that erosion may impact its value long-term.
- Governments need to recognize their role in providing systemic change while philanthropy helps unlock public resources through engagement over a long period of time.
- Technology plays an important role in donor conversations today, with expectations of charities having their operations in order and utilizing the right technologies to maximize returns.
- There is a need for new foundations to bring fresh perspectives, relationships, and common issues forward.
- As younger philanthropists embrace a new approach to legacy giving, endowments, and taxation, and donor acknowledgment must be tailored to the unique needs of different generations.
- The term “perpetuity” is seen as an intent to provide long-term support; spin down, time limits, and annual giving can also be employed to ensure a lasting legacy.
Are these changes a good thing for the nonprofit sector?
With the proposed changes to the disbursement quota, nonprofit leaders are questioning their giving models and approaches. Community foundations, specifically, will face a significant rollback in their endowment value as they struggle to meet the revised standards.
Tina Thomas, CEO of Edmonton Community Foundation, speaks to some of the problems she sees with the recent changes.
“It’s very clear from the math that we did that—even with very optimistic views of returns and pessimistic views of inflation—that we would be eroding the value of those endowments quickly from day 1.”
Thomas emphasizes the importance of endowments and the need for them to be available as one of the tools in the philanthropy toolbox.
“A 5% disbursement quota erodes the value of the endowment that’s created,” Thomas continues, “It’s within a couple of decades that the value of that endowment is gone.”
Philanthropic Foundations Canada’s President and CEO, Jean-Marc Mangin says “endowments are a powerful, legitimate, and much needed tool to support the common good”.
He suggests though that the changes are enabling conditions to create more of a level playing field.
“At 5% for us it is a balance. It’s about maximizing giving to a range of very important causes across the country but also protecting the ability to maintain the endowments of the long-term,” explains Mangin.
Preeti Gill, Senior Manager at Covenant House Vancouver shares a different perspective.
“I am hopeful and cautiously optimistic that this change in disbursement quotas will increase funding from endowment donors and at least a part of that funding is going to come to community nonprofits like mine.”
“A rule change that forces some endowment donors to act doesn’t feel like real and true altruism. And it really doesn’t feel like the way that we are going to grow philanthropy in this country. Lawyers will probably benefit the most from CRA rule changes,” Gill adds.
Redefining philanthropy and perpetuity
The current changes in the way nonprofits disburse funds have caused leaders to question their existing operations and seek new ways to sustain their books. While some suggest spending down endowments as a solution, this approach may not be the best option for many organizations.
In fact, according to Thomas, endowment models provide nonprofits with more control and resources.
“I think the real power of endowments and the endowment model is that organizations, nonprofits, and charitable-sector organizations can take control of their own destiny, they can create their own sustainability, and then autonomy that comes with it by having their own funds,” she says.
Mangin believes that philanthropy should not replace government efforts, but rather partner with them to address issues over the long-term and shape public policy. Mangin further emphasizes that philanthropy can bring innovative and creative solutions to complex problems, making it a valuable contributor to the sector.
Despite the ongoing discussions and debates around the right approach to managing endowments and disbursement quotas, collaboration is key. The nonprofit sector, philanthropy, and government entities must work together to achieve long-term sustainability, autonomy, and impactful solutions for the common good.
To hear all the insights and understand the wider affect these changes are having on nonprofit organizations, watch the discussion in full here.
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