Why Starting a Family Foundation in Canada is a Decision for the Whole Family
Making long-term charitable giving a family priority can be both rewarding and challenging.
Oftentimes when a donor comes into a large sum of money, either through the sale of a business or an inheritance, the donor sees it as an opportunity to set up their charitable legacy with the intention of their family continuing the support after their death.
This type of family philanthropy can also be used as a way to foster a sense of giving for future generations and to teach the more technical aspects of philanthropy; from making investment decisions and choosing areas to support, to understanding how philanthropy over time can impact the world in positive ways.
For high net worth individuals, establishing a family foundation is a common first thought, but before diving into this giving option, there are a few considerations to keep in mind.
What is a Family Foundation
A family foundation, also known as a private foundation, is one of three types of charities recognized by the Canada Revenue Agency (CRA) along with charitable organizations and public foundations.
Family foundations can be established as either trusts or corporations—the latter form being most common. Like other types of charities, a private foundation benefits from appealing tax advantages depending on the donor’s province of residence, which might include income tax exemptions and the ability to issue receipts to donors for income tax purposes.
Family foundations are typically managed by related family members, working as trustees or on the board of directors—unlike charitable organizations and public foundations which generally have more than 50 per cent of their directors, trustees or officials dealing with each other at arm’s length.
Family foundations typically receive most of their funding from one person or a group of related people, unlike charitable organizations and public foundations, which generally receive their funding from a variety of arm’s length parties.
Family Foundation Drawbacks
According to the Canada Revenue Agency, there were 5,738 private foundations as of March 31, 2018, a number that seems to grow steadily over time. But, unlike cutting a cheque for a charity and walking away with a tax receipt, starting a foundation in Canada requires a lot of decision-making, governance, administration and upkeep to ensure the giving goes on for decades.
For instance, there are considerable start up costs including legal and accounting fees, ongoing tax filing, preparation of audited financial statements, issuing of tax receipts, investment management and keeping up with regulatory compliance—not to mention the day-to-day operations.
A common assumption is that family or private foundations are in fact, ‘private.’ However, this is not the case. The CRA requires all charitable foundations to report on their annual operations including details such as, all people involved in the organization including board members, trustees, and employees, contributions, grants etc. The CRA makes these reports available to the public on the CRA website.
As with any family venture, there is also the need to agree on where to give support, which can be difficult as family priorities can change over time. A donor’s children and other family members may not share the same passion for the cause in which to support and may not want to participate in the administration and governance of the family foundation. This can jeopardize the legacy of the foundation, which is often part of a donor’s reasoning for establishing it in the first place.
For these reasons, setting up a family foundation is an important decision in the life of a family.
Explore your options
Families who are in the fortunate position to consider long-term philanthropic planning, may be pleased to know there are other options that allow them to support a charitable cause that is close to their heart without the administrative and legal burden of running a foundation.
A Donor Advised Fund (DAF), for example, is a charitable giving vehicle established at an organization recognized by the CRA as a charity. It enables donors to make a charitable contribution without specifying the charities that will ultimately benefit from their gift right away and the funds can grow tax-free. The donor receives an immediate donation receipt and can recommend grants from the fund to their preferred charitable causes over time. As well, families seeking privacy have the option to make their gift anonymous to the public, enabling a donor and their family to make giving a family decision now and in the future with anonymity if they so choose.
Seek professional advice
A great first step for any donor and their family is to seek financial and legal advice as part of their philanthropic planning. This important step can help donors understand the pros and cons of different giving options, such as a private foundation versus a donor advised fund and how to choose the right tool for their unique situation.
A knowledgeable professional at a reputable charitable organization, such as Gift Funds Canada, can assist donors and advisors with just about any complex gift or giving strategy.
Setting up a family foundation is an important decision for a donor and their family. In some cases, a family foundation won’t be the right giving strategy. However, understanding the drawbacks of starting a foundation, knowing the available giving options, and seeking professional advice will ensure donors and their families to choose the right approach for their family philanthropy, now and in the future.