Eleven more fallacies about private foundations in Canada

Article content

In November we described some of the misconceptions people have about private foundations in Canada. Now we offer a few more.

Most of the confusion relating to the compliance requirements and regulation of these registered charities is due to a lack of knowledge or out-of-date information and not attempts at deliberate malfeasance. Our firm works with many private foundations to help them understand the regulatory framework and also the flexibilities that are available in the operations of private foundations.

Here are 11 more fallacies we see about Canadian private foundations:

Myth: Private foundations are ‘private.’

The Canada Revenue Agency 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, information on the directors and information on all grants made by the private foundation) is publicly available on CRA’s website. 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 with and donating directly to charitable organizations or public foundations or establishing a donor advised fund at a community foundation or a commercial donor advised fund charity. If you are not familiar with donor advised funds you might find our course on DAFs helpful.

Myth: 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 should not be issued an official donation receipt because the donor, being exempt from income tax, does not need the receipt. 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 a receipt. A charity can provide an acknowledgement or business receipt to the private foundation if it so desires or the private foundation requests it. Additional helpful information about receipting can be found in Blumbergs’ Receipting Kit and our course on receipting.

Myth: 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 registered 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 generally require CRA pre-approval for such a change. It is a good idea to speak to a charity lawyer familiar with CRA requirements to assist you with this process. The process can take 4 to 6 months depending on the complexity of the objects and activities, but CRA has been processing these requests at record speeds. You might find our article on changing charitable objects helpful.

Myth: 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 family names attached to them, it’s common for a private foundation to use a name that focuses on its mission.

Myth: A donation to a private foundation must be endowed.

Definitely not. Before 2010, if a donor contributed $100,000, for example, 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 (Canada) was amended to remove the 80/20 rule. Consequently, 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 boards 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.

Myth: Private foundations take a long time to set up.

While there have been delays over the last few decades at the CRA when it comes to all types of charity applications, CRA is processing charity application far more quickly than over the last decade. In some cases, private foundations have been established in less than 3 months, although we typically advise they will take 4 to 6 months. A private foundation that is only making grants to other registered charities or qualified donees can be established far more quickly than a charity conducting its own charitable activities.

Myth: The directors of the private foundation control the foundation

For incorporated foundations it is actually the members who have the ultimate control over the foundation, because they elect the directors and can make major changes, such as to the governing documents. While the directors of a private foundation have an important role, they can be replaced if the membership decides to install a different group. So the real control of a private foundation is typically in the hands of the members and not the board.

Myth: A private foundation can be tightly integrated with a family or for-profit corporation and it is like having another bank account.

A private foundation needs to be separate from non-qualified donees such as individuals, NPOs or for-profit corporations. The private foundation should be separately established. Typically, with new foundations it is incorporated under the Canada Not-for-profit Corporations Act (“CNCA”). The private foundation should have its own books and records and separate bank account, and everything must be kept sufficiently separate from any non-qualified donees. If there is any confusion between the private foundation and the non-qualified donees such as for-profit entities or non-profits, then CRA can revoke the charitable status of the private foundation. CRA has recently revoked a number of charities for not being sufficiently separate from non-qualified donees.

Myth: When we give funds to a registered charity, our private foundation needs to have an elaborate application process and lengthy grant agreements.

Many private foundations have put into practice certain processes, sometimes over decades and based on their experience and knowledge. Sometimes their processes can be cumbersome, burdensome, unnecessarily complicated and based on an incorrect understanding of their legal obligations. This results in wasted resources of the private foundation and also wasted resources on the part of grantees and prospective grantees. If you total up time spent by these grantees and prospective grantees, with some private foundations, it may be more than the amount actually granted. Obviously, this is not how the system is supposed to work.

Sometimes the objects of a private foundation are inadequate for their needs, but if the private foundation has an ability to make gifts to registered charities or qualified donees, then there usually are simple and straightforward ways to make grants. There is a movement called “trust-based philanthropy” that has a lot of important suggestions for how funders can more efficiently and effectively fund registered charities. We work with many private foundations on training and systems to improve grantmaking and to focus on the private foundation’s real compliance.

Myth: A donor advised fund and a private foundation are the same.

Both a donor advised fund (DAF) and a private foundation can issue an official donation receipt. That is where the similarities generally end.

With a private foundation, you can control the organization, but that is not typically the case with the DAF. With a private foundation you can determine within the legal limits of a charity how to invest the funds, but DAFs often provide very limited opportunities to invest funds. With a private foundation your board can determine where funds will go, but with a DAF you can only recommend that the funds go to another registered charity or qualified donee. With a private foundation you are in control of your costs, but with a DAF, the DAF decides on the fees you will be paying them.

There are many advantages to having a private foundation or a DAF, but they are certainly not the same thing. They also are not mutually exclusive, in that a person can have both a private foundation and a DAF, and many of our larger clients do. Also, as time moves on the private foundation or DAF may no longer suit your needs, and we have worked with private foundations that wish to wind down to a DAF and also DAF funds that are granted out to a newly established private foundation.

Myth: Our private foundation is set up as a trust and there is nothing we can do about that.

In the past, although far less today, some private foundations were established as trusts, rather than incorporated entities. While this may not in some circumstances be a problem, in other cases it can result in personal liability for the trustees. We have assisted a number of private foundations, with CRA approval, to move from being established as trusts to being incorporated entities. You will then be able to maintain your registered charity status but also obtain the limited liability protection of an incorporated non-profit corporation.

A few reminders

Obtaining charitable status as a private foundation is a privilege that 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 being aware of these fallacies, which can, in some cases, significantly impede a private foundation’s activities and effectiveness.

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. The same argument can be made when it comes to depositing large amounts of money in a DAF. We have seen many donors provide large contributions to donor advised funds without fully understanding all the funds’ terms and conditions, and then a few years later become extremely disappointed that they cannot do what they now want to do with the funds.

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.

Those who are considering establishing a private foundation may find this course to be helpful. For corporations that wish to establish a corporate foundation, this course may be more appropriate.

For those running existing private foundations we have a full day course on foundation compliance requirements.

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 in this area. More importantly if you have a private foundation that you are responsible for, make sure that it is compliant with its legal requirements.

Mark Blumberg, Lynn Gluckman and Uma Karthigeyan are lawyers at Blumberg Segal LLP in Toronto, Canada. To find out more about legal services that Blumbergs provides to Canadian charities and non-profits please visit Canadiancharitylaw.ca or CanadianCharityLaw.ca or SmartGiving.ca or CharityData.ca or email us or call us at 416-361-1982. This article is adopted from an article titled Top Fallacies About Private Foundations in Canada by Mark Blumberg, Kate Robertson and Lynn Gluckman (April 11, 2016) and Top Fallacies About Private Foundations in 2019 by Mark Blumberg, Lynn Gluckman and Taylor Teasdale.

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.