There is a debate about the future of charitable tax incentives in Canada and whether perpetual, also known as permanently endowed, gifts are an appropriate and impactful way to support charities. The question is whether donors should be entitled to a charitable tax receipt if their gift is a permanently endowed one. For instance, if a donor makes a gift of $1,000,000 to a charity with the intent that the gift be endowed with only the income from the gift be used each year to support the charity's activities in perpetuity, should that donor be able to claim the full tax credit available?
It is important to remember that, under the current rules, this gift generates a tax savings of approximately $450,000 to the donor (the actual amount depends on the province in which the donor resides). This means that, as a result of the gift, governments forego this $450,000 in savings in tax revenue).
I believe that donors should still receive a donation tax credit on permanent gifts. Let's start with the argument supporting the elimination of the tax credit for permanently endowed gifts. That argument is based on two presumptions:
1. A non-endowed gift is more impactful, or alternatively that an endowed gift is less impactful and
2. instituting a rule inherently disincenting endowed gifts would lead to more immediate, non-endowed gifts.
There is no evidence to support either of these claims.
On the other hand, the ramifications of eliminating the tax credit would have a profound impact on giving in Canada. Let's look at some different categories -
Endowed giving vehicles are substantial The elimination of the tax credit on permanently endowed gifts would effectively eliminate, or dramatically reduce, gifts to Donor Advised Funds and private Foundations which are, almost by definition, endowed gifts. While there is no formal, legal definition of an endowed gift in Canada, I believe we can agree that they are intended as where the principle is preserved and only the interest is spent. Private Foundations and Donor Advised Funds provide tens of millions of dollars per year to charities.
Charities benefit from direct endowed gifts Many charities prefer immediate gifts for impact, but some charities have a longer term view. This second groups benefits tremendously from long-term endowed gifts which provide the charity with a regular income from which they can draw. Any change that would eliminate or dramatically reduce endowed gifts that are given directly to charities would create problems for important community institutions. For example, Universities rely on these gifts to support permanent chairs that benefit students over long periods of time. Many charities also benefit from endowments which can provide an income stream that is very positive from a budgeting and sustainability perspective.
Donor-centered is important Consistently charities preach about the need to be donor-centered. I can't think of something less donor-centered than no longer allowing the donor to support their favourite causes in ways that matter to them.
Endowments fulfill a true legacy Picture a scenario where donor makes a gift of $1,000,000 to support a program over a long period of time, guaranteeing its long-term sustainability. Compared that to the donor who makes a gift of $50,000 per year to same program. In both cases, the donor is contributing generously to the health of the program. But one day, the donor passes away. What if the donor doesn't leave a legacy gift? What if there is no longer a financial incentive to leave a legacy gift? The support is gone and the program dies with the passing of the donor.
Legacy gifts are key Eliminating endowments would effectively eliminate legacy gifts. Most legacy gifts are endowed to support a charity's programs and initiatives over time. If we don't allow these gifts to be receipted, we are eliminating major estate and tax planning incentives that encourage these large gifts.
No proof this will lead to more gifts There is an underlying presumption that favouring non-endowed gifts will result in the donor simply shifting his or her preference to immediate gifts. There is absolutely no evidence to suggest that if the donor's incentive to start up a Donor Advised Fund or endow a University Chair, was eliminated, the donor would then shift their gift to an immediate one. Anecdotally, from talking to many donors, they simply wouldn't give or would continue to give at current, lower levels. This would represent a significant net loss for our sector.
Endowment funds are not idle - they grow and do good Money in endowment funds is not idle. It grows, increasing the amount available for long-term giving. This money never accrues back to the donor. There is no benefit to the donor from this growth. With impact investments, these funds actually have the capacity to create social good in other ways. I philosophically support the notion that perpetual gifts are challenging.
Although I understand the challenges with perpetual giving, I do not support the idea of limiting the tax benefits associated with them. The public benefits too much from these gifts to eliminate them.
Brad Offman is the Chief Executive Officer at Spire Philanthropy. Spire provides strategic counsel to charities on building sustainable and lucrative corporate and institutional relationships. He also gives strategic counsel to financial institutions and corporations looking to grow their philanthropic practice, through product development and more focused approach to community. He has particular expertise in endowment building and structures and the strategic uses of planned giving.
