Establishing a Private Foundation.
A private foundation is a not-for-profit organization that is set up solely for charitable purposes. A Private Foundation is typically controlled by a single donor or a family.
Benefits of Setting up a Private Foundation:
1. Charity Status: Private foundations must be become a Registered Charity with the CRA. This allows you to issue donor receipts to those who contribute to the foundation
2. Personal and Family Involvement: By setting up a private foundation, you can be personally involved with the distribution of your funds. Family members can also take on a key role in running the foundation. Whether it be doing philanthropic research and presenting to the board members, or being directly involved in the decision-making process, there are endless opportunities for your foundation to become a family-powered initiative.
3. Control of Where Your Funds Go: As the funder of your foundation, you have the final say on where and how your funds are dispersed. Private foundations can be used to fund programs inside of your community or outside of your community, such as national or international initiatives.
4. Leaving a Legacy: A Private foundation can continue in perpetuity. This means that your charitable giving can continue for as long as your foundation exists. Your foundation can become a family heirloom that is passed on from generation to generation, keeping your legacy alive.
5. Community Involvement: Distributing funds from your private foundation will give your family recognition and influence in your community, which can in turn, expand your fundraising and giving opportunities.
Donating money through a private foundation has tremendous tax benefits for the donor:
1. Any income earned within the foundation is considered tax exempt. This is a valuable benefit that allows all returns to be available for use, furthering your charitable giving.
2. During their lifetime, a donor can claim donation tax credits of up to 75% of the donor’s net income in the year of the donation.
- These credits can be carried forward up to five years
3. When a donor donates a publicly traded security, there is a deemed disposition for income tax purposes. Special tax rules deem the taxable gain on the disposition to be zero when donated to a regulated charity.
4. Most donors invest money in the foundation and use the investment returns to fund their charitable giving. To keep charitable status, foundations must distribute at least 3.5% of their funds to charity every year.
Structuring of a Private Foundation
A private foundation can be established as either a trust or a not-for-profit corporation. Incorporating a foundation affords the board members with limited liability for the activities of the foundation, providing them with a certain level of protection if legal issues arouse. Corporations have higher operating costs but can be a good option for large foundations when employee operators can deal with complex investing activities.
The other option for establishing a foundation is setting it up through a trust. There are two ways to set up a trust. You can register as a fiduciary trust, which is set up through your will and allows your foundation to be registered with the CRA upon your death, or you can register as an inter vivos trust. An inter vivos trust is set up and settled while the donor is still living. A trust tends to be a more flexible document and is typically associated with lower cost of operation.
Whether to set up as a trust or corporation is entirely dependent on the donor’s personal situation, and should be discussed with a legal professional and your financial advisor.
Foundations are heavily regulated, and must be used for their intended purposes. Donors should consider the following when setting up a foundation:
1. The Foundation Must be Used for Charitable Purposes
The foundation must state the goals and objectives of their charitable giving, by law they must fall in one of the following categories:
- Poverty relief
- Certain other purposes that are beneficial to the community as a whole.
2. No Personal Benefit
With the exceptional of reasonable salaries for employees of the foundation, no board member, settlers, or trustees may receive any benefit from the foundation.
3. No Business
In Canada, a Private Foundation is prohibited from carrying out any business activities. Foundations are restricted to charitable giving.
Private foundations are not allowed to carry any debt, with the exception of some operating expenses.
John and Jane have been active donors in their communities for many years. They regularly donate to charities and want to continue their patterns of giving even when they are no longer living. They would like for their children to learn about charitable giving and would like them to be involved with the donated funds so that they can keep John and Janes legacy alive.
John and Jane should work with their lawyer and financial advisor to complete the following process:
- Work with their lawyer to create a Private Foundation
- With the help of their financial advisor, John and Jane will contribute qualifying assets to their foundation. They contributions will be tax deductible to them; within limits.
- John and Jane will appoint a board of trustees. This will include them and their adult children, providing them the family involvement they desired.
- The board will periodically distribute funds to qualifying charities in their community.
By setting up a Private Foundation, John and Jane have accomplished all of their goals. They will continue to have control over the assets in their foundation, and can receive the tax benefits of contributing. By choosing to donate through a private foundation, they have assured that their assets can grow in a tax advantaged environment, and they can maximize their giving.
John and Jane will appoint themselves and their children as board members so that the activities of the foundation can be a family effort; and they will have the opportunity to teach their children about charitable giving. Since foundations can continue in perpetuity, the children will have the ability to keep John and Janes legacy alive through the foundation for many years after their deaths.
Setting up a Private Foundation can be a great way for you and your family to give back to your community. There are many benefits to establishing a foundation, and if philanthropy isn’t important to you, it can be an effective estate and tax planning tool.