Private foundations are flexible philanthropic vehicles, often created to promote family philanthropy. They do not usually undertake charitable work themselves, but instead support other charities that perform such work.
Private foundations have become more popular over the last 10 years, largely due to various changes to the Income Tax Act that have reduced certain obligations imposed on private foundations. The value of assets held by private foundations has increased from $17 billion to more than $25 billion since 2008.
The increase in popularity is also due to a greater awareness among advisors of the benefits of establishing private foundations. Here are some of those benefits.
1. Tax benefits
As registered charities, private foundations can issue donation receipts. A receipt is issued when a gift is made to the foundation, even though the foundation may hold onto the gift for several years (subject to certain rules).
A donor may claim a donation tax credit for total gifts in a year up to 75% of his or her net income. The credit is generally calculated by multiplying the total amount of gifts in the year by the highest marginal tax rate in the province. Effectively, the after-tax cost of a $100,000 gift ranges from $50,000 to $60,000, depending on where in Canada the donor lives. There are additional tax incentives for gifts of certain types of property. For example, on a gift of publicly traded shares, a donor is entitled to a donation receipt for the fair market value of the shares and any capital gain on the shares is eliminated.
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As well, since private foundations are exempt from tax, the income earned on the gift grows tax-free, which allows the foundation to make larger gifts to other charities.
2. Control over the foundation
The principal contributor to a private foundation can often control or influence the foundation and, as a result, is able to determine how gifts to the foundation will be invested and which charities will receive gifts. This allows the contributor to respond to changes to his or her charitable objectives, which may not otherwise be possible if the contributor had made the gifts directly to other charities.
3. Possibility for family involvement
Involving family members, such as children and grandchildren, in a private foundation may help to foster altruistic and philanthropic values. Family members may be involved with the foundation in a variety of ways. They may act as directors or trustees, assist with setting the charitable objectives of the foundation, including choosing the charities to receive funds, and also with its day-to-day operations. As well, the foundation can act as a repository for all family donations, which allows gifts to be made through one entity.
Foundations may be used to make donations without disclosing certain information about the underlying gift, which may be desirable where the gift is shares of a private company. Private foundations are often named after the principal contributor and certain information about the foundation is made public once it is a registered charity. It is often difficult for the foundation and its members to maintain total anonymity.
5. Lower costs
The costs of maintaining private foundations are declining due to recent changes to the Income Tax Act. As a result, private foundations are becoming increasingly cost-effective means of achieving charitable and non-charitable objectives.
The annual maintenance costs relate to the filing of annual information returns with the CRA. Additional costs arise if the foundation is a corporation, such as those relating to the filing of annual corporate returns, holding annual meetings, and passing resolutions.