Building Your Legacy with a Private Foundation

Would you like to take a more strategic approach to your giving? Do you want to have a sustained impact on your community or in an area that interests you? Would you like to pass on philanthropic values to your children and grandchildren, or involve other family members in your giving? There are many ways to give meaning and structure to your philanthropy, and a private foundation is one such way.

What is a private foundation?

A private foundation is a philanthropic vehicle that can provide greater flexibility for charitable giving by you and your family. It is constituted and operated exclusively for charitable giving purposes. A private foundation may be created by trust or incorporation. It fulfills its charitable purposes through the disbursement of its assets to other qualified donees; typically other registered charities. Registered charities that are designated as private foundations are charitable foundations in which:

The majority of the directors or trustees do not deal at arm’s length with each other or with the foundation’s principal contributor(s); or
A contributor to the foundation controls the foundation.

Advantages of the private foundation

A private foundation provides flexibility for donors wishing to take a more strategic and long-term approach to their giving. A private foundation can be controlled by the donor and the donor’s family, as these individuals are permitted to be trustees or directors of the foundation. As such, they remain in a position of influence or control many aspects of the foundation’s operations, including decisions on:

Investment management of the donated assets;
Distribution of income earned by the foundation; and
Grants made by the foundation.

The donor’s creation of the foundation means that the foundation can be named for the donor or the donor’s family. It is an opportunity to create a philanthropic legacy that survives the founder’s death or can exist for a defined period of time.

Factors to consider whether a private foundation is right for you

If you are considering a private foundation there are some key issues to be considered when determining if this vehicle is the right option for you:• You would like to have an organization that reflects your interests;

You wish to be more personally engaged with the process of giving, and direct where funds are allocated;
You would like to engage your family through a vehicle that connects the different generations around a cause or project in your community, or has meaning to your family; and
You are interested in taking a more hands on approach with grant-seekers.

How to start a foundation

To be a registered charitable foundation, the entity must apply for, and be granted registered charity status by the Canada Revenue Agency (“CRA”). This involves crafting the constituting documents of the foundation and other governance documents, such as by-laws, and then making an application to the Charities Directorate Division of the CRA. Many individuals interested in creating a private foundation will retain a lawyer experienced in charity law to draft the legal documents and file the application with CRA for charitable status.

Funding and operating a private foundation

In many cases, funding comes from an individual or family unit, or even by businesses related to the founder of the foundation. In order for a contribution to qualify as a gift for tax receipting purposes, it must be a transfer of property by the donor for which no consideration is expected.

The operations of a private foundation are generally managed by directors or trustees that do not deal with each other at arm’s length.

While the investment of the assets of the foundation can be managed by the trustees and directors, in many cases these powers are delegated to an investment management firm. Since 3.5% of the investable assets must be disbursed each year to registered charities, a professional investment manager can be retained to ensure that the goal of growing the capital is achieved and only the annual revenue is disbursed to donees. It is important to pay attention to the 3.5% disbursement quota as this is a requirement by Federal law in order to maintain the charitable status of a private foundation.

Tax treatment of gifts made to a private foundation

Gifts of cash and gifts of property to a private foundation are eligible to be tax receipted for the property’s fair market value at the time the gift is made.

A donor can claim a donation tax credit in the case of an individual, or a donation tax deduction in the case of a corporation, to reduce personal or corporate tax liabilities, subject to annual net income limitation. A special donation incentive will apply when publicly-traded marketable securities that are listed on a stock exchange are donated to a private foundation.

Many private foundations are created to coincide with a significant event in the founder’s life, such as the sale of a business. The sale of a business can result in a tax liability as well as significant cash proceeds, so the establishment of a private foundation at this time can provide some tax relief to the business owner. For more information, you can consult the Canada Revenue Agency website which includes some key information on the tax treatment of gifts made to a private foundation.

Often creating and giving shape to one’s charitable giving through a private foundation can be rewarding, as well as a learning experience for those who are new to the concept. Planning in advance can make the philanthropic journey even more fulfilling, and is therefore recommended that you speak with a BMO Philanthropic Advisor about whether a private foundation is the right choice for you and your family.

Thank you to Diane Mehagan from BMO Nesbitt Burns for providing this article.