Significant Changes That Will Impact Canadian Private Foundations in 2023

Many wealthy Canadians create private foundations for the purpose of granting funds to charitable causes. Up until 2023, the amount a private foundation must distribute to charitable organizations each year has been a minimum 3.5% of its assets. For example, a private foundation with $5M in assets needed to disburse at least $175,000 per year on charitable activities.

Effective January 1, 2023, legislation has increased this minimum to 5% on assets above $1M. The same $5M charity will now need to spend $235,000 on charitable activities, which amounts to a 34% increase.

Impact on Charitable Sector

According to Imagine Canada, private foundations held about $81B of assets in 2020 and granted $3.2B – this amounts to around 4% (clearly some foundations were choosing to give out more than the minimum 3.5%). Using the same $81B figure, the new 5% minimum will lead to around $4B of annual spending on charitable activities, or an increase of around 25% or $800M per year.

The impact will be significant for larger foundations like the Mastercard Foundation – Canada’s largest foundation at around $40B – which will likely need to grant hundreds of millions more per year to meet the new minimum. There are countless of charities that will benefit from change in the years to come – and hopefully we can see meaningful progress on some of the most pressing issues facing society.

Is the Change Sustainable?

But what about the foundations? We are coming off a period of significantly declining interest rates which propelled investment returns over the last 15 years. Many foundations have been able to continue to grow their asset base while granting 3.5% per year. However, in a higher/ rising interest rate environment where interest rates are not always going down and potentially lower asset returns across the board, it may be harder for foundations to meet these goals. We are also facing a higher inflation environment than we have in the past 15 years which erodes the spending power of foundations.

Even if investment returns stay attractive and inflation abates, some foundations may find themselves in a different position over the coming years. Here’s an illustrative example:

A foundation may have had an annual surplus of 2.5% over the last 15 years, and been able to continue to grow its assets, or support increased donations/grants to keep up with inflation. This may become more challenging in a new investing environment where investment returns are not propelled by interest rates, and foundations have declining purchasing power with high inflation.

Planning for an Uncertain Future

The legislation to increase the minimum to 5% intends to get more money into the hands of charities and it will no doubt achieve that goal in the short term. The question is whether this is sustainable over the long term. In this very uncertain world, it will become even more important for private foundations to plan for various scenarios to understand the potential impact over the long term. We have reviewed these changes with our foundation clients and suggest that every private foundation in Canada with assets above $1M should be evaluate their cash flow projections, asset mix and donation plans as well.

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