Budget 2015: Background on limited partnerships

The 2015 federal budget proposes to permit charities to invest in limited partnerships. This change is welcome and part of a suite of changes to the regulatory framework surrounding social finance that CFC, community foundations and others, with particular leadership from Philanthropic Foundations of Canada have been advocating over the last few years. In the coming days we will be sharing more details about the proposed change to the LP rule and what it means for community foundation investment practices.

The opportunity

Community foundations are increasingly turning to social finance as a tool to invest even more in their communities. Since the release Canadian Task Force on Social Finance report in 2010, including key recommendation that foundations invest at least 10% of their assets in mission-related investments by 2020, we have made significant progress. Across the community foundation movement there are over $180 million in mission-related investments- just under $50 million in community investments and over $130 million in screened investments- to date, and this number is growing steadily. Reaching our collective goal to more than double this in the next five years is achievable and would create significant impact in Canadian communities.

The change proposed today will reduce an impediment to foundations’ ability to make impact investments- since many use this structure- and equally reduce a hindrance to investment-portfolio diversification by facilitating alternative investments such as real estate.

A collective effort

This change has been catalyzed by a tremendous collective lobbying effort.
Together with the MaRS Centre for Impact Investing, CFC has convened foundations to clarify the key regulatory barriers to social finance, through which we determined that the prohibition against investing in Limited Partnerships was a top priority.

Community foundations in Hamilton, Ottawa and Vancouver have demonstrated leadership in working closely with Philanthropic Foundations of Canada, and in concert with private foundations like the J.W. McConnell Family Foundation to make the case via letters, presentations and meetings with the Department of Finance on the specific challenges associated with the LP issue. CFC President Ian Bird was a member of then-Minister of Economic and Social Development Jason Kenney’s Ministerial Advisory Council on Social Innovation, which made recommendations around social finance to federal ministers.

What’s next

Other key changes that we are looking for include an overhaul of the rules around charities operating un-related businesses to reflect the emergence of social enterprise activities and the need for charities to diversify their revenue streams. Currently, charities can only operate businesses that are 90% volunteer run or “linked or subordinate” to the charitable purpose.

A second key issue relates to Program-Related Investments or PRIs. These are investments made with charities as well as for-profit and non-profit enterprises to further the foundation’s program objectives, which also aim to generate financial returns, with a tolerance for below-market returns. Clarification and changes are needed around definitions like “market-rate” and “impact,” amongst other items. Despite a clarification from CRA in 2012, there uncertainty remains, leading to a lack of action.

Clarity around the interaction of PRIs with disbursement quotas, and the role of non-qualified donees, has the potential to bring new foundations into the game and unlock significant new dollars for impact.

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