How does your family foundation or fund set its annual giving budget? This is a question that arises each year, and is one that requires some discussion within a family.

The legal requirements mandated by the CRA are actually very minimal. Under the Charities Act and to comply with a foundation’s charitable purpose, endowed foundations must give 3.5% of average asset value over the previous two years. This is known as a foundation’s Disbursement Quota. At one time, the DQ was 5% but it was revised lower over twenty years ago. By way of comparison, American foundations must give 5% annually.

While this is the legal requirement, many foundations are actually growing in asset value. If they invest funds with shrewd fund managers, returns of 8% or higher each year are common. Some foundations aspire to exist in perpetuity, allowing future generations of their families to steward assets after the founders pass on.

A recent article in the Financial Post suggested that the public sees a 3.5% minimum payout as ultra-conservative and contradictory to the charitable purpose that foundations should have. Retaining assets to grow them for the future ignores needs that exist now. The author of this article, John Hallward, advocates for a 10% payout be legally established by the CRA, and for foundations to consider a plan to sunset their activities (ie. give it all away by a specific point in time).

There’s also the Give 5 Campaign which urges Canadian foundations to give 5% of assets this year.

Each family must discover its own sweet spot as they navigate between the lowest acceptable level and the generosity that can occur now. Consider these questions:

• How long will your foundation exist?
• How many generations of your family will be invited to steward these assets?
• At what point will your current charitable intent become diffused by future generations stewarding the funds?
• How will your foundation’s governance be impacted by the natural growth in families after 3 and 4 generations?
• Is there a value in sunsetting your foundation?
• Will it sunset after your departure, or after the departure of the second or third generation?

We’ve developed actuarial tables that show how your foundation’s commitment to various strategies will impact its generosity. Clients may contact us for this fascinating template.

Download the article: Financial Post – Foundations need to spend more 20210203