In Brief – leveraging time:
Charities solve vital problems every day but lack sustainable funding to address growing demands fully. I propose by using the power of compound interest over unlimited time, any size donation could develop into an impactful gift. Time is infinite after donors die.
Our current practice allows charities to accumulate capital via new donations, but not from investment returns on those donations. Allow me to present a balanced win-win opportunity that imagines the Canada Revenue Agency (CRA) adjusting their policy to allow charities to accumulate capital via investments.
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Power of Compounding – Ben Franklin knew
Ben Franklin, the famous American, showed me how I could give large sums to charities. Franklin was fascinated by the power of compounding over long periods. He experimented with compound interest through his last will. He bequeathed a small sum (for him!) of £2,000, which is around $150,000 in today's value. His experiment created an enterprise that turned the seed fund into millions. In 1990, two hundred years after his death and per Franklin's wishes, the managers wound down the enterprise and donated the proceeds.
Franklin's actions are a paradigm shift: save big money by using the power of compound interest over the endless time that exists after death. This concept opened a new window for me. I call it 'Ben's Way.'
Ben's Way allows my small donation, 'seed' money, to grow into large amounts. Who cares how little I have or how long it takes if I eventually raise large amounts? With this approach, I plan to give far more money to charities than I could have today.
Impact – Charities can solve our problems
Charities already know how to solve most of our society's issues but do not have funding to address them fully and sustainably. Some problems lack technical know-how and research, like developing fusion or new vaccines. But in large part, charities know how to improve our world in areas like housing, food, social welfare, health care, education, justice, and the environment, to name a few. The enabling ingredient – adequate funding - is unfortunately unavailable.
If we grow money after we pass, charitable giving would be more equitable in that everyone, not just the wealthy, could participate meaningfully. Today large donors have a significant impact by the sheer size of their donations. Smaller donors also have a considerable effect on aggregate but do not get individual satisfaction or recognition of their impact. Allowing smaller contributions to grow to a comparable size to today's large donations would be more equitable. In a society that aims to treat everyone as equals, small donations should have the chance to grow.
Ever since I heard about Franklin's donations, I wondered whether I could find an existing service to help me invest money for charity long after I die. I began searching. I could donate directly to a charitable foundation except for one catch: charities and foundations in Canada must disburse a minimum of 3.5% annually of all assets not currently used in charitable programs or administration. In other words, investment funds must put 3.5% of their value towards the charitable endeavour each year. This requirement is called the Disbursement Quota (DQ) by the CRA. The DQ is a well-intentioned instrument to ensure money given to charity does not languish in bank accounts without end.
However, I want to grow my funds first and then use them for charity when they become enormous. The DQ slows the growth rate so significantly on seed money investments that the approach is rendered infeasible. When I am saving for my retirement, I am not forced to spend my savings. To do so would defeat the purpose. If charities had a plan for eventually paying out, why can't they also save for the future?
My search for a service to meet my investment goals has turned up nothing. I believe no service exists to invest seed money over decades or centuries exempt from the DQ. So, I propose a new approach.
Proposal – Change the policy, not the law
We need a solution that allows invested donations to avoid the DQ while growing considerably inside the charity. The Canadian government can choose to permit this by adjusting the CRA policy regarding DQ exemptions.
Today the CRA permits DQ exemptions via written permission on invested funds over fundraising campaign periods of three to ten years. This approach is already allowed by law via the Income Tax Act (ITA). For example, charities arrange DQ exemptions for capital campaign drives to fund new buildings such as a hospital. Charities segregate funds into two streams I will label as 'DQ Applies' and 'DQ Exempt.'
Luckily the ITA does not specify the exact time limit for DQ exemptions. The ITA says, 'A registered charity may, with the approval in writing of the Minister, accumulate property for a particular purpose, on terms and conditions and over any period of time that the Minister specifies in the approval.' [Italics added]
I interpret this part of the law as giving the CRA the freedom to allow an exemption from the DQ for a portion of the charity's invested funds over decades or centuries. The law does not limit the DQ exemption to ten years; the CRA's policy does. The CRA needs only to change the policy.
The solution I propose is to create an extended 'payout plan' for pre-approval in writing by the Minister. This payout plan would feature a DQ Exempt fund that invests for the future. The payout plan requires the transfer of a specified portion from the DQ Exempt fund into the DQ Applies fund at specified times.
For example, the CRA could approve a payout plan to transfer 25% of the DQ Exempt funds' balance into the DQ Applies fund every 25 years. The remaining 75% of the charity's DQ Exempt fund continues to grow, and the cycle repeats every subsequent 25 years. Under this new policy, small sums of seed money would grow into large funds over time.
Balance – Control the Ingredients
Currently, donations support today's urgent needs. Putting money away to invest for the future reduces funding available for today. Yet not putting money away will cut off tomorrow. My hope is we will find potential donors so motivated by the idea of creating their own super legacy that we attract donations that offset the seed money set aside. Whatever the case, we must grow money for the future in a balanced way, reflecting today and tomorrow.
In this proposed future state, charities would set limits on how much to set aside as seed money. A donor could decide whether to participate and, if so, by how much. In our 25% / 25-year payout plan example, let's say a charity permits a maximum of 15% of every new donation that could go into the DQ Exempt fund. Donors could allocate any percentage up to that 15% if they wished, or nothing at all. The CRA would pre-approve the plan.
Results would vary with financial markets, but on average, our example 15% investment transfers back to the DQ Applies fund more than the entire 15% after the first 25 years. By year 100, the transferred amounts reach 1500%, with seed funds still in place for ever-larger future funding contributions. Every 25 years, a donor tribute could engage charities with the donor's descendants to recognize these significant gifts.
Super Legacies – a win-win situation
When charities and the CRA adopt such a payout plan, they create a win-win situation. The charity gains a sustainable source of ever-increasing funds, devoid of future fundraising costs. Without raising taxes, governments boost charities' financial resources while saving future tax deductions and reducing the pressure to give charities grants. Donors will feel they have done everything they could to set hope and charity in motion for the future.
Ben's Way can make a massive difference for our world's future, but only if we act.
I am on a journey of discovery. Any suggestions or comments would be most appreciated.
Stay safe,
Cheers, Cam Anderson Web: www.FutureLegacies.ca Email: Cam@FutureLegacies.ca Coquitlam, BC, Canada PS. Thanks for your support. If you know someone who shares my passion for funding a better future, please pass this along. PPS If you have received a copy of this email and have not subscribed, please do so here. You will keep abreast monthly on our project's progress to change the world with better financing. As a thank you for signing up, you will get Benjamin Franklin's Postscript's inspiring story. It is the true story of Franklin's final and possibly most significant experiment showing us how to give money to future generations.
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