Private Foundations: Philanthropy & Family

You work hard for your money. When giving it away to support a cause you care deeply about, it makes complete sense why you would be concerned with how exactly it is spent and what impact your donation is making. If you are a wealthy individual that wants more involvement and control over your philanthropic efforts, consider establishing a private foundation.

Following amendments to the Income Tax Act in 2007, private foundations have become an increasingly popular form of philanthropy in the past decade. They have been proven to be remarkably successful philanthropic engine for positive change that allows you to contribute to a cause you feel passionately about and reduce your taxes while creating a lasting legacy for you and your family.
 

What is a private foundation?

Under the Canada Revenue Agency’s (CRA) regulations, there are three main classifications of registered charities – charitable organizations, public foundations, and private foundations. Essentially, a private foundation is a trust or corporation that is a registered charity typically controlled by a single donor or family. The majority of board members are “non-arms-length directors”, meaning they tend to be directly involved in the decision making process. Private foundations are commonly referred to as family foundations as they are often created by families as a way to manage their wealth while deepening social consciousness and promoting family philanthropic action.

A private foundation can either fund its own charitable initiatives or provide donations to other eligible parties that will carry out the work. Qualifying recipients include:

• Other registered charities

• Most Canadian post-secondary institutes

• Select foreign universities

• The United Nations and associated UN agencies

• Canadian federal, provincial, and municipal governments

If you care passionately about a cause and have considerable wealth, a private foundation may be the most appropriate option for you as it will provide you with tax advantages and allow you to have control over the investment and disbursement of donations. This way you can maximize the impact your money makes by distributing it the way that aligns most with your charitable objectives.

Below are some things you should know about private foundations to determine if it is the right fit for you and your family.

 
Engages your family in philanthropy

A private foundation is a good way to engage your family in philanthropy. Family members can be involved in the private foundation in a variety of capacities including donors, trustees, directors, or employees. By educating young family members about the importance of giving back to the community, these instilled philanthropic values will be carried into the future and impact generations to come.

Private foundations also offer the opportunity for strong, positive cross-generational engagement. Your foundation can help to maintain and strengthen family ties as it can provide for a reason (other than holiday time) to gather and spend time with one another. Through goal-setting, collaborating, problem solving and exploring aspirations for the foundation’s future, your private foundation can offer you and your family the opportunity to bond through the pursuit of a common goal.

Additionally, family foundations provide the opportunity for family members to develop valuable practical competencies such as teamwork, leadership, negotiation, and problem solving, at a young age. 
 

Provides you with greater control

One of the most attractive parts of establishing a private foundation is the heightened level of control that it gives you over the investment and disbursement of your donated funds.

Wealthy individuals are commonly plagued with a variety of stressors when it comes to their charitable giving. You may get overwhelmed by requests from friends about what organizations to donate to. You may be unsure of how your donation is actually contributing to the organization’s cause and feel overwhelmed with the task of determining which organization is the best to support. Establishing a private foundation allows you to reduce the impact of these stressors as it gives you control over the exact allocation of donated funds so that your money supports exactly what you want it to support.

With great control also comes more flexibility, as well. Being able to adapt your foundation’s charitable objectives and operations to changing needs or desires is another benefit of private foundations.
 

Realize tax-savings

On top of the personal fulfillment you get from contributing to a cause you care about, there are also several tax advantages that make the prospect of establishing a private foundation even more appealing.

Issuance of donation tax-receipts. Your private foundation can issue tax-receipts to individuals and corporations for the fair market value of the gift at the time of donation. Donation tax credits can be claimed by individual donors for up to 75% of your income in a given year. Corporate donors can claim tax deduction to reduce their corporate tax liability, as well. Essentially, this just means that your personal tax liability is greatly reduced and the money you would have to give to the government in taxes is instead being given to a cause you care deeply about.

Capital gains exemption on donation of stocks. Further, private foundations are eligible to receive donations of stocks and securities. Donating highly appreciated stocks is an incredibly strategic and highly tax efficient way to give to charity as they are exempt from taxation on capital gains. Check out our article about ‘Donating Securities to Charity’ on our blog for a more detailed explanation.

Tax-sheltered growth on income. Any income that is earned on your foundation’s assets gets to compound and grow without being subject to taxation. This means you accumulate more money that is redirected to support the cause you care deeply about.  
 

Additional financial considerations

Beyond taxation, private foundations provide for other financial benefits. If your foundation employs family members, they are eligible to receive reasonable compensation in alignment with their job responsibilities. Additionally, you can also submit travel and other expenses to the foundation for reimbursement on eligible expenses.
 

Leave a lasting legacy

Private foundations exist in perpetuity, allowing you to continue supporting your cause after you die. The control over the foundation and its’ assets can be passed down to succeeding generations so that your impact outlives you. 
 

Potential drawbacks of private foundations

While private foundations can provide you with the opportunity to experience significant tax advantages while leaving a lasting legacy, there are a few requirements that need to be carefully considered.

Time commitment. Establishing a private foundation demands a significant time commitment. An application to become a registered charity must be created and submitted to the Charities Directorate Division of the CRA for approval. This application includes essential documents such as by-laws and governance structures proving that the foundation is entirely ‘charitable in nature’. This is determined by law if the organization ‘provides broad public benefit rather than benefiting a few individuals or closely related group’. Preparation of the required documents to prove your foundation’s charitable nature can take a considerable amount of time.

Financial costs. In addition to the time commitment, there are significant legal and accounting fees associated with setting up a private foundation. Accompanying these initial expenses, there are also ongoing costs associated with the daily operation of your foundation and ensuring that the books are adequately maintained, employees are being paid, and your foundation remains legally compliant.
 

Conclusion

If you are a wealthy individual or family looking to create a lasting legacy, consider starting a private charitable foundation. Private foundations provide families with the opportunity to engage in meaningful charitable work while realizing significant tax advantages. This way, the charitable work you support gets the most ‘bang for your buck’.

This form of philanthropy is a win-win-win opportunity for the donor, the charity, and the greater good.  If you have any questions regarding whether a private foundation is right for you, please do not hesitate to reach out to any members of the Bongard Wealth Advisory team. We’re here to help.