This is the second half of a two part article. If you would like to read part one please click here.
When a Canadian registered charity is established, it can be set up as a (i) charitable organization, (ii) public foundation or (iii) private foundation, depending upon its structure, source of funding and operation. There are approximately 5,500 private foundations in Canada. Private foundations have been growing at a higher rate than any other type of Canadian registered charity. Although there are some differences between a private foundation in comparison to charitable organizations and public foundations, over the last two decades those differences have diminished.
That being said, it is quite common in our practice to hear that there is confusion and misunderstanding relating to the operation of a private foundation and the rules that govern it.
Here is the second half of our list of some of the top fallacies we see about Canadian private foundations:
10. Private foundations cannot conduct political activities.
All Canadian registered charities, regardless of their designation, have the ability to engage in non-partisan political activities that are related to their objects, as long as the charity devotes substantially all of its resources to charitable activities. In general, a private foundation can spend 10% or less of its resources on political activities. The scope of a private foundation’s ability to conduct political activities will depend on the size and expenditures of the foundation and the scope of its objects. CRA has a valuable guide on Political Activities for Canadian registered charities. If a private foundation wants to have great impact, it should carefully consider possible involvement in non-partisan political activities. This brief video from the Maytree Foundation is quite useful in that regard.
11. Private foundations are ‘private’.
CRA requires that all Canadian registered charities complete a Form T3010 – Registered Charity Information Return on an annual basis. Most information contained in the T3010 and its schedules (which includes financial information of the charity) is publicly available on the CRA’s web site. Private foundations are not excluded from this transparency requirement. If you really want privacy and anonymity there are other better options than private foundations such as working directly with a charitable organization or public foundation or establishing a donor advised funds.
12. When a private foundation makes a gift to a registered charity it should receive an official donation receipt.
This is incorrect. When a Canadian registered charity (irrespective of its designation) provides funds to another Canadian registered charity or other qualified donee it does not receive an official donation receipt. It simply does not need one as the donor charity is tax exempt and therefore could not use the official donation receipt as it will not have taxable income. A private foundation should ensure that, when making a gift to a charity, the charity is currently registered with the Canada Revenue Agency and the private foundation should note the BN number and the amount of the donation so that it can accurately complete its T3010 filing. It is inappropriate for a private foundation to request an official donation receipt and it is inappropriate for another Canadian registered charity to provide a private foundation with such receipt. A charity can provide an acknowledgement or business receipt to the private foundation if it so desires. Additional helpful information about receipting can be found in Blumbergs’ Receipting Kit.
13. Once a private foundation is established and approved by the Canada Revenue Agency it cannot change its objects or methods of operation.
This is a common myth. Private foundations, just like other charities, typically can make changes to both their objects and methods of operation. If your private foundation is going to change its objects it will require CRA pre-approval for such a change. It is a good idea to speak to a charity lawyer familiar with CRA requirements and expectations in order to assist you with this process. The process can take between 6 and 9 months depending upon the CRA backlog and the jurisdiction in which the foundation is established.
14. A private foundation is named after the main donor.
Private foundations, just like other charities, can use any name as long as it is not confusing and does not violate certain prescribed rules. While some private foundations have a family’s name attached to it, many private foundations use a name that focuses on its mission.
15. A donation to a private foundation needs to be endowed.
Definitely not. Before 2010, if a donor contributed for example $100,000 to a private foundation and received an official donation receipt for the contribution, the foundation was required to spend $80,000 the following year on charitable activities or gifts to qualified donees. This was referred to as the “80/20 rule”. If you wanted to avoid such a result, you would make a “10-year gift” to the foundation which meant that the capital needed to be endowed for at least 10 years with generally only the income being spent each year. Some 10-year gifts were only restricted for 10 years and others were perpetual endowments. In 2010, the Income Tax Act was amended to remove the 80/20 rule referenced above. Therefore, there is now no reason when contributing to a private foundation to use 10-year gifts or to endow capital in the foundation even if you want to keep the funds in the foundation for the long term. Some foundations may wish their board to self-restrict funds, but creating a perpetual endowment can often undermine the value, flexibility and impact of the charitable funds in a private foundation.
Obtaining charitable status as a private foundation is a privilege, which comes with many obligations and responsibilities. It is important that private foundations understand their regulatory obligations and comply with the rules. An important part of understanding the regulatory system is also understanding these fallacies which can, in some cases, significantly impede a private foundation’s activities and effectiveness.
The reasons for so many fallacies would require another article. However one reason may be that there are certain interest groups who sometimes promote their own philanthropic products by painting an inaccurate picture of private foundations. As some authors recently noted:
In the North American environment, community foundations and commercially sponsored foundations have criticized private foundations in order to market donor advised funds. Casting private foundations as the straw man to sell another philanthropic option is unfortunate, and occasionally quite misleading. In many cases, the donor who is considering a donor-advised fund should not be considering a private foundation. The scale, structure and responsibility are different, despite certain functional similarities.
If you are planning on establishing a private foundation, it is best to obtain appropriate legal and practical advice before you donate large amounts of money in a way that could significantly hinder the effectiveness of your philanthropic work. The same argument can be made when it comes to depositing large amounts of money in a donor advised fund. I have seen many donors provide large contributions to donor advised funds, not fully understand all the terms and conditions and then a few years later become extremely disappointed that they cannot do what they now want to do. Private foundations are not appropriate for everyone and it is best to establish them only if you really understand how they operate and can be used.
For those who want to have a great degree of control over their philanthropic funds and strategy, private foundations provide a useful vehicle. For Canadians who don’t have children or who have more wealth than they wish to provide for their children, private foundations may be a useful tool for dividing your wealth between family and public causes that you care about. There are certainly very generous tax incentives for donating to a private foundation; however, those tax incentives can be achieved through other mechanisms and a private foundation is certainly not the best approach for many philanthropists. If you are going to establish a private foundation, make sure you obtain appropriate advice from counsel who is knowledgeable about the area.
Mark Blumberg, Kate Robertson and Lynn Gluckman are lawyers at Blumberg Segal LLP in Toronto, Ontario. To find out more about legal services that Blumbergs provides to Canadian charities and non-profits please visit www.canadiancharitylaw.ca or www.globalphilanthropy.ca
This article is for information purposes only. It is not intended to be legal advice. You should not act or abstain from acting based upon such information without first consulting a legal professional.