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Your philanthropic legacy: is a private foundation right for you?

2020-12-02


Having already committed to significant charitable giving, you could choose to donate directly to charitable organizations or make gifts to public foundations (including donor-advised funds). But there are several advantages to using a private foundation that can make its establishment a worthwhile investment.

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Private foundations can be particularly attractive if you wish to get family involved in your philanthropic endeavors and create a lasting, multi-generational philanthropic legacy.

What are the benefits of a private foundation?

You can retain control over how and when the funds are deployed.

  • Where a large gift is made directly to a charity or donor-advised fund, there is a risk the funds will be directed to projects you do not wish to support. A letter of wishes is not legally binding on the recipient — the charity / donor-advised fund will make the ultimate decision regarding the use of the funds.
  • Since your private foundation will usually have a board you work closely with, you will maintain a degree of control or influence over what happens to your donation in the future. While you give up the ownership of any property donated, the private foundation can retain and invest most of the donation until such time as the appropriate recipient(s) have been identified.

Private foundations also allow you to invest the foundation’s assets in a manner that utilizes your business acumen and investment knowledge to maximize the returns and maximize the funds available for social benefit.

Gifts made to a private foundation are eligible for a tax receipt, which allows you to use the private foundation to reduce your tax burden.

When should I set up a private foundation?

It is generally beneficial to consider establishing a private foundation sooner rather than later. Registration can take time. The Canada Revenue Agency may take upwards of six months to assess an application for registration, and you may wish to start funding the private foundation as soon as possible to take advantage of the tax break while doing good in your community.

A private foundation can also be particularly useful when:

  • A significant disposition event is on the horizon (e.g. sale of a business or property) and you’re facing a large tax bill
  • You have excess cash you want to use for philanthropic purposes, but don’t want to give it to charities in a lump sum
  • You want to instill a philanthropic mindset in your heirs, provide them an opportunity to get involved in the distribution of the funds (on a voluntary or salaried basis), and / or give them the opportunity to get involved in a cause that is important to them and see the direct impact being made by their efforts

What are the costs?

Fees to set up a private foundation will vary according to the complexity of the foundation. You also need to consider there will be annual compliance costs, which will vary depending on whether audited financial statements are required. If it is expected that the private foundation will receive significant start up (≥$100,000) and/or annual (≥$20,000) contributions, a private foundation may be the preferred option.

What are the next steps?

If you’ve decided that a private foundation is the right fit for you, here are some considerations:

  • Are there specific causes, activities, and / or charities that you wish to support?
    • The four categories of charity are: relief of poverty, advancement of education, advancement of religion, and other purposes beneficial to the community in a way the law regards as charitable.
  • What kinds of property do you wish to donate (cash, land, publicly traded securities, private company shares, etc.)?
    • Depending on the property being donated, there are different tax implications (both to you as donor, and to the private foundation).
  • Who do you want to involve in making decisions on behalf of the foundation (e.g. directors/trustees)? Do you want the foundation to continue indefinitely? How will future directors/trustees be selected?
    • It is important to consider the future of the foundation and processes that should be in place to govern transitions of decision-making power. If you want your legacy to continue indefinitely, it’s best to put those controls in place at the outset.

If you have any questions or would like to discuss, please contact Hayley Maschek at 778.571.3500 or [email protected]. Hayley is a Specialty Tax Partner with MNP and serves as a national resource for charity and non-profit organization tax issues.