Almost everyone I speak with about the proposed Ben's Way Funds Generator asks if there is a 'catch.' By wondering about a catch, perhaps they are really asking whether legal or taxation issues prevent the business as proposed from operating. They probably guess there is a catch. Otherwise, wouldn't this already exist?
The answer is probably that there is no catch, i.e. it won't be illegal, and taxation won't kill the idea. It will take a lot of work to get this going, but doesn't everything worthwhile?
Given that it is likely possible, doesn't it seem odd that some form of a Ben's Way Fund Generator is not already humming along?
Well, actually, ** Newsflash!** - I have found one such enterprise in the UK called 'Patient Philanthropy.' Finally, an organization exists to harness compounding over decades and centuries for public purpose!
Formed in Oct 2021, in connection with Founders Pledge and Effective Altruism, Patient Philanthropy plans to invest donations for decades and centuries until a significant need arises, triggering a spend (they are still working on identifying the payout triggers). This service does not (as far as I understand) permit donor customization of triggers nor of choice of charities to be assisted.
This fund is structured as a charity permitting donors to receive tax receipts. UK charitable foundations differ from Canada as they do not have a tax-driven requirement to spend a percentage of their invested money yearly (such as we have with the Canada Revenue Agency ‘Disbursement Quota’(DQ)). Thus, in the UK, contributions from tax-deductible donations to the Patient Philanthropy fund compound yearly at the maximum growth rate possible.
The most obvious catch is that this Ben's Way program takes a very long time to come to fruition. Manifesting our hope that this carries on long after we are all dead and gone is the challenge. Something tangible needs to demonstrate this potential. Determining how to structure the business form of the organization is the first step. In short, do we set up a charity, a trust, a non-profit, a for-profit or something else?
Recently, I have begun discussing with Canadian lawyers about what is actually required. Let me share some of my thoughts here.
What business form is needed for Canada?
Regardless of which is ideal, building upon existing structure types provides two advantages: 1) existing business forms and principles are well understood and supported with legal precedents, and 2) permanence. Changes to these forms would affect the entire economy and are unlikely to be significantly adjusted without pushback.
Success Criteria for the new organization
I could expand the reasoning for each criterion on the list below, but for brevity, these are fairly self-evident. At a high level, we need a Canadian organization that is capable of:
Accumulating large sums of money on an ongoing basis
Delivering payouts regularly in perpetuity (or as a target: a millennium!)
Growing the funds permits investing using the widest range of investment vehicles, including social impact investments.
Enforcing individual seed fund contributors' charitable giving choices and payouts
Protecting the funds and the payout program from nefarious manipulation or theft
Being flexible, resilient, and open to change when organizational and investment opportunities arise that assist rather than risk successfully meeting seed contributors' wishes.
Let's relook now at the various fundamental forms. This section continues from our discussions last month, this time focusing on how the success criteria specifically apply.
Using Charities as a vehicle
In Canada, charities must annually spend the Disbursement Quota minimum (soon to be 5%) of investments for their charitable purpose. This DQ requirement is a reasonable demand as the Government of Canada gives tax credits for charitable gifts. However, the DQ prevents fully effective compounding since a good portion of the growth is spent annually. Let me explain.
Compounding is the exponential growth that occurs by compounding both the original seed funds and the growth from the prior compounding. With our personal finances, only by enabling effective compounding can we grow our retirement funds and other savings to levels desired for our future. We try not to spend our retirement funds before retiring because we know that is a sure step backwards from our goal. The same concept applies here; charities need unfettered compounding to become financially independent.
With a Funds Generator, we want to accumulate large sums, so spending as we go prevents this. Therefore, a charity can't be the organizational format of choice in Canada.
What about Trusts?
Trusts have existed for centuries, creating a broad body of types of trusts and supportive legal precedents. Personal trusts, however, are subject to anti-perpetuity law in most provinces (except Saskatchewan, Manitoba and Nova Scotia.) The anti-perpetuity laws were initially created to address 17th-century needs (especially related to land) to ensure trusts do not withhold assets from beneficiaries for an undetermined or indefinite amount of time. Under the law, trusts must be wound down after typically 21 years (the period varies by province).
We need to deliver payouts for centuries, so this anti-perpetuity wind-down requirement is not compatible with our goals. Thus, the use of basic personal trusts is unsuitable for a Funds Generator.
Trusts, however, come in many flavours. In Canada, the CRA lists approximately thirty types of trusts. Sifting through these to find a good fit for our extended timeframe needs is beyond this writer's skill level. From that list, a Public Investment Trust sounds promising, except that the trust requires investment only in public corporations and does not satisfy our need for diverse social impact investing.
We won't rule out trusts as a suitable business form yet. Experts need to make the call.
Could Non-Profits work?
At a common sense level, using a non-profit seems appropriate as the Ben's Way service is for charity. Non-profits, however, are not allowed to accumulate large sums of money in an ongoing manner, so this form (including associations and cooperatives) does not work.
For-Profits possibly?
Using a For-Profit structure like a corporation seems counterintuitive, as, after all, a Ben's Way Fund Generator is about raising money for charity. But if you step back and look at who generates the money today for charity, it is, in fact, For-Profit companies. They either donate directly or provide employees and founders with the capital for their eventual donation.
Even more encouraging is that a For-Profit can meet many of our success criteria. For-profits are capable of the accumulation of money, can enter into and enforce perpetual contracts, can last in perpetuity, and can invest in any investment form desired.
For-profits, however, have an Achilles heel in that they have shares. Shareholders may choose at any time to manipulate the purpose of the corporation and even give themselves all the funds!
Unless a way exists to leverage the advantages of corporations while constraining the negatives, For-Profits business forms are not suitable on a stand-alone basis.
Is there a hybrid solution?
In Europe and in the USA, new forms of ownership are arising mainly to keep the beneficial purpose of a For-Profit company after a generous founder divests their shares.
One format of interest is called a Perpetual Purpose Trust, which permits a trust to hold the voting shares of a For-Profit for the beneficiary. In this case, the beneficiary is defined not as a person but is defined as 'the purpose.' Since the trust holds the purpose, theoretically, manipulation of the company to drain the assets is avoided.
This hybrid solution for our startup sounds promising.
Conclusion
Suffice it to say, until a workable organization structure is determined, no amount of calculations and theorizing can make a Ben's Way Fund Generator exist. A working prototype would go a long way to garner enthusiasm.
Hence, my queries to Canadian legal and accounting wizards, in hope and faith that there is a way.
After all, Ben Franklin did this, so why can't we?
תגובות