This article is part of our February Special Report on Philanthropy in Canada. To see all the articles so far, click here.
When a Canadian registered charity is established, it may be designated as a charitable organization, public foundation or private foundation, depending on its governance structure, funding sources and operations. There are now more than 7,100 private foundations in Canada, and they continue to grow faster than any other type of registered charity. Although the practical differences between charity designations have narrowed over the past two decades, misunderstandings relating to the operation of a private foundation and the rules that govern them are widespread.
Most compliance problems with private foundations arise from lack of knowledge or outdated information. These misunderstandings often limit the effectiveness of private foundations or expose them to unnecessary regulatory risk. The following are some of the most common fallacies we encounter in practice.
Fallacy 1: Private foundations are only for the very wealthy.
Private foundations are often associated with high-profile wealthy philanthropists or large corporations, but many Canadian private foundations are established by individuals, families or corporations with relatively modest means. Many do not maintain permanent endowments and receive funds only when required.
Running any charity requires seriousness and diligence.
Private foundations are frequently used as a governance structure and liability-protection vehicle for charitable activity, rather than just as large asset-holding entities.
Fallacy 2: Private foundations are expensive and complicated to establish and operate.
The cost of establishing a private foundation depends on complexity. A simple grant-making foundation can often be established for $5,000–$7,000, with CRA registration typically taking four to six months. Foundations that conduct their own charitable activities—particularly internationally—require more planning and documentation.
While many private foundations are operationally straightforward, non-compliance is common when directors underestimate regulatory obligations. Running any charity requires seriousness and diligence.
Fallacy 3: Private foundations can only make gifts and cannot run programs.
Whether a private foundation can conduct its own charitable activities depends on its legal purposes (“charitable purposes”), not on its designation. Some foundations have charitable purposes that are intentionally restricted to making gifts to qualified donees, while others have charitable purposes that enable them to operate programs directly.
Private foundations can enjoy flexibility in allocating disbursements between gifts and activities from year to year, provided their purposes allow it. Foundations with narrow purposes can usually amend them to increase flexibility.
Fallacy 4: Private foundations cannot carry out foreign activities.
Canadian registered charities, including private foundations, may conduct charitable activities outside Canada if their charitable purposes permit and CRA requirements are met. Foundations limited to gifting to qualified donees can only fund qualified donees and are generally restricted to qualified donees such as Canadian registered charities, and a limited number of foreign universities listed with the CRA.
Foundations with broader purposes may conduct their own international activities in compliance with CRA rules. For practical guidance, see our directory on Global Giving.
Fallacy 5: Private foundations can only receive donations from the founding family.
Private foundations may generally fund-raise and accept donations from the public and issue official donation receipts, just like other registered charities. Some foundations choose to restrict outside donations for governance or accountability reasons, but this is a policy choice, not a legal requirement, and can usually be changed.
Fallacy 6: Private foundations cannot fund-raise.
There is no prohibition on fundraising by private foundations. The same fundraising rules apply to all registered charities, regardless of designation. Many private foundations fund-raise extensively, while others choose not to.
Fallacy 7: Private foundations can provide personal benefits to directors or family members such as for children’s weddings or gala tickets to directors.
Private foundations are strictly prohibited from providing undue private benefits, such as paying personal expenses, subsidizing family events or covering directors’ personal costs. These rules apply to all registered charities and are a frequent cause of compliance action by CRA.
Fallacy 8: Private foundations can carry on business activities.
Private foundations are prohibited from carrying on business activities. Charitable organizations and public foundations may conduct related business activities. A narrow statutory exception allows private foundations to invest in limited partnerships, following amendments to the Income Tax Act in 2015. Foundations seeking to engage in business activities may be able to restructure or be re-designated by CRA.
Fallacy 9: All directors of a private foundation must be family members.
Private foundations may have boards composed of family members, arm’s-length directors, or a mix of both. While a charity with mostly non-arm’s-length directors must be designated as a private foundation, a private foundation is not required to have a related board.
Most information is publicly available [and] private foundations offer little privacy or anonymity.
Many foundations now appoint independent directors to improve governance, reduce risk, and to increase the skill set and diversity of the board.
Fallacy 10: Private foundations cannot engage in political activities.
All registered charities may engage in nonpartisan public policy dialogue and development activities connected to their charitable purposes. Foundations restricted to having charitable purposes limited to making gifts to qualified donees may need to amend their purposes to engage directly in such activities.
Fallacy 11: Private foundations are private and anonymous.
Private foundations are not excluded from the same transparency requirements applicable to other registered charities. All registered charities must file an annual T3010 Registered Charity Information Return, and most information is publicly available. Private foundations offer little privacy or anonymity. Public access to charity data can be found through the CRA’s Charities Listing or through CharityData.ca.
Fallacy 12: Private foundations should receive official donation receipts for gifts.
When one Canadian registered charity gifts funds to another registered charity or any other qualified donee, no official donation receipt should be issued, as registered charities are tax-exempt.
Fallacy 13: A private foundation’s purposes cannot be changed.
Private foundations can usually amend their purposes and methods of operation, provided the new purposes remain charitable. This is often essential as a foundation evolves.
Fallacy 14: Private foundations must be named after donors.
Private foundations may use any compliant name, provided it is not misleading or confusing. Many choose mission-focused names rather than donor names.
Fallacy 15: Donations to private foundations must be endowed.
Since 2010, there is no longer a disbursement quota advantage to establishing permanent endowments. Over-restricting capital often undermines flexibility and impact and leads founders and others to huge disappointment. It is one of the biggest mistakes made in the private foundation area.
Fallacy 16: Private foundations take years to set up.
CRA processing times have improved significantly. A private foundation that is only going to make gifts to other registered charities or qualified donees can often be registered within four to six months after the application is filed with CRA. Longer timelines usually result from deficiencies in applications or governing documents.
Fallacy 17: Directors ultimately control the private foundation.
If a private foundation is incorporated, its members hold ultimate authority, including electing directors and approving changes to governing documents. Membership structure is therefore critical to the control of the private foundation.
Fallacy 18: Private foundations can be tightly integrated with families or for-profit corporations.
Private foundations must remain legally and operationally separate from non-qualified donees, including individuals and for-profit corporations. Failure to maintain separation has resulted in CRA revocations.
Fallacy 19: Giving gifts requires complex applications and agreements.
Many foundations rely on unnecessarily burdensome grant-making processes based on copying other foundations and misunderstandings of legal requirements. In many cases, giving gifts legally and ethically can be done with relatively simple systems.
Fallacy 20: Donor-advised funds and private foundations are the same.
Donor-advised funds and private foundations differ significantly in control, governance, investment authority, fees and flexibility. They are not interchangeable, though some donors use both.
Fallacy 21: ‘Our private foundation is set up as a trust and there is nothing we can do about that.’
Some older private foundations were established as trusts, which may expose trustees to personal liability. With CRA approval, many have successfully converted to being incorporated entities.
Conclusion
Private foundations are powerful but highly regulated charitable vehicles. It is best to establish them only if you really understand how they operate and can be used. Misunderstanding the rules can limit their effectiveness or create serious compliance risks, and proper legal advice before establishing or substantially funding a foundation is essential. While private foundations are not suitable for everyone, they remain an effective option for those seeking long-term strategic control over their philanthropy.
Mark Blumberg, Uma Karthigeyan and Caitlin Lee are lawyers at Blumbergs Professional Corporation in Toronto. To find out more about legal services that Blumbergs provides to Canadian charities and non-profits, please visit www.CanadianCharityLaw.ca, www.SmartGiving.ca, or www.CharityData.ca, email us at info@blumbergs.ca or call us at 416-361-1982.
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.
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