Private family charitable foundations are a venerable yet expanding part of Canada’s philanthropy sector. This has come with the increase in high-net-worth giving and the tax and other advantages that such structures can bring to the bottom line.
It’s an area that Mark Blumberg knows well, as a charity lawyer and managing partner of Blumbergs Professional Corporation, a small law firm in Toronto that works on compliance issues for registered charities, non-profits and philanthropists.
Canadian Family Offices spoke with Blumberg about the issues that foundations can face, his thoughts on how family offices handle philanthropy and the need for private foundations to increase their donation payouts.
Tell me about your personal background and its influence on what you do.
I was born in South Africa and moved to Canada when I was 11. I’ve been interested in the disparities that we have in this world from a young age. I’ve done volunteering both locally and internationally, which has shaped my view of the importance of non-profits and charities.
How did you get into this field professionally?
When I became a lawyer, I was interested in helping the non-profits and charities I had been involved with make an impact. There were no courses in law school, and when I started as an articling student 30 years ago, it was a process of learning and understanding. I was fortunate that the managing partner of our law firm was my father, so I could spend time building up this practice area.
I understand there’s a lot of interest in family charitable foundations today. Why?
Yes, there has been an upsurge in family and private foundations. In part, this is because we have greater inequality in our society, with some people accumulating a lot of resources, and there is and always has been a desire by some people to share those resources.
Every person is different, and with some families, you have some members who are interested in the family business and others who are not as interested. But they may be interested in the family’s commitment to philanthropy or corporate social responsibility.
What issues are foundations facing these days?
Foundations are highly regulated vehicles. Many people compare them to a small businesses, but that’s misleading; they have a lot more regulation than most small businesses. They are more similar to a publicly listed company in terms of the ongoing obligations and the consequences for not having a proper compliance program in place. Unfortunately, some foundations find this out too late.
The biggest issue I see with many private foundations is their purposes are too narrow for their ambitious ideas. The good news is that purposes can be changed, with the approval of the Canada Revenue Agency (CRA). The bad news is that it takes about a year to make such a change, and the foundation will need to provide CRA with a detailed statement of activities. Therefore, it’s good to get onto it as soon as possible if the private foundation wants to change its purposes.
Unfortunately, when it comes to the regulation of charities, there is a lot of misinformation and dated information.
Another issue is that private foundations are not private. For example, who the foundation gives money to is listed on the annual return, the T3010, and many directors of private foundations don’t know this.
What mistakes do you see being made?
The top compliance issues that foundations need to avoid include:
• Operating outside your objects and purposes.
• Making gifts to non-qualified donees.
• Issuing receipts that aren’t accurate.
• Breach of trust for not complying with restricted gifts.
• Failure to file the T3010 annual return.
• Not having a proper Investment Policy Statement and complying with it, which can lead to director liability.
• Not complying with corporate law obligations.
• Not using good governance approaches.
• Not having adequate separation between the private foundation and the family business or family office.
• Not complying with disbursement quota obligations.
• Inappropriate use of social media by the foundation and/or directors in a ‘personal’ capacity.
A foundation is not a small business, as I noted, and it’s also not a bank account. It’s a highly regulated vehicle that has some significant tax benefits. Therefore, every foundation should have a compliance program in place so there are no misunderstandings about who’s responsible for what and what the rules are.
Where do you see opportunities and issues in the intersection between wealthy families and foundations?
For some, the biggest opportunity is not to have a private foundation with all the restrictions that it entails, and instead to have a fund within the business or in a non-profit corporation that’s not a registered charity, which can be much more flexible as to how it spends funds. For some, it is to have both.
Unfortunately, many families follow the path of setting up private foundations without thinking through their values and interests, and what the regulatory burden would be to implement programs related to those interests. The biggest mistake is committing a large amount of philanthropic capital and later realizing what they’d like to do cannot be done by a foundation or is cumbersome with a foundation.
The idea that a large foundation should give out 5 per cent per year is stale. With the huge needs we have, it’s important that foundations step up and gift more than that absolute minimum requirement set under the Income Tax Act.
It seems some foundations run on automatic. What are positives and downsides of that?
I guess the positive would be you could save money on administrative fees. On the downside, your reputation may be destroyed. You may also end up with significant CRA problems. A foundation cannot run on automatic. It should have trustees or board members who are paying attention to what’s going on, making decisions and documenting those decisions.
I understand charitable donations have been dropping in Canada, but growing among the wealthy.
Yes, this is absolutely true. Every year, we prepare Blumbergs’ Snapshot of the Canadian Charity Sector from T3010 data. We also prepare snapshots for private foundations, public foundations and charitable organizations. These show the amount of receipted donations have been increasing almost every year. It was $16.4 billion in 2015 and $23.4 billion in 2023. This is a reflection of the increasingly unequal society we live in.
Average people would donate more if, for example, we had free childcare, free university and salaries kept up with inflation. However, if people are having trouble paying their rent and can’t afford childcare, it’s hard to expect them to make substantial charitable donations.
What’s your view on how family offices handle philanthropy? How could things be done better?
Running a family office is complicated. You could be dealing with different generations and people who live in different countries and have different interests and levels of interest in philanthropy, as well as different ideas of risk and how to protect their reputation.
If wealth is created in Canada but the children and grandchildren live in the U.S., Europe or Latin America, the simple foundation model that worked for the founders may not be adequate for current needs.
Whereas succession planning is often strong when it comes to the business, it might not be as strong when it comes to the private foundation. Lots of risks are taken because people don’t understand the risk.
The amounts going to philanthropy from wealthy families is exponentially greater now than 10 years ago. A very big gift was $10 or $20 million; now it can be $100 million or $300 million.
Family offices have the problem of getting reliable advice in time to ensure that it is effective for the discussions they will be having. This is the same problem that banks and major investment firms have. Some do it better than others.
Unfortunately, when it comes to the regulation of charities, there is a lot of misinformation and dated information, so it’s very much a buyer-beware situation. Unfortunately, the government was doing a lot of capacity building 10 years ago in this area, but they’ve largely abandoned the field. We’ve created over 35 courses to try and fill the gap.
What’s the trend in the number of private charitable foundations in Canada and its relationship to the accumulation of wealth?
Private foundations are growing at a much greater rate than public foundations and charitable organizations. There are now 7,078 private foundations in Canada.
The amount of assets accumulated by private foundations is growing. Some may say this is a good thing, as these private foundations will have more assets that they will be able to use for philanthropy. However, if they’re only dribbling it out at a very low rate, then the cost of the donation incentive combined with the non-taxation of income may be too much for our governments in these times of greater need. My hope is that foundations will rise to the challenge and increase their payouts.
In our report, Blumbergs’ Private Foundation Snapshot 2023, we noted private foundations in Canada had $28.4 billion in total revenue and total expenditures of $7 billion. Most of that is not new donations but the increase in the value of investments, which is untaxed. The total assets of private foundations was about $107 billion in 2023.
Another trend is that the interest in international philanthropy is greater, but many private foundations have not taken the time to adjust their governing documents and put in place systems and procedures to allow for this change, so they are limited as to what they can do directly.
Do you see the impact that generational change is having on foundations?
Every family is different, and every family foundation is different. For some, bringing in a younger generation is additive and could be transformational in a positive way. I’ve seen a number of times a different story, in which a family that has some dysfunction thinks the private foundation is a solution to their family’s problems. It usually isn’t, it just exacerbates the situation and creates a lot of headaches for everyone concerned.
The world is different today, so it makes sense why a new generation might have a different focus or different priorities.
What do you see in the future for private charitable foundations?
We see, especially in the U.S., a lot of criticism of philanthropy and foundations. Some of it is warranted and some is not. Criticisms include what philanthropic resources are being focused on or how little philanthropic resources are being deployed. I think the criticisms of philanthropy are probably going to increase, as philanthropy has access to far more resources and is involved with some very sensitive societal issues. Also, with social media and anonymity, the world is becoming less educated and meaner.
The professionalization of private foundations will continue to increase. The problem is that, in many cases, people working in private foundations, who may be earning significantly more than those in charitable organizations, often lack skills related to running a private foundation or understanding the regulatory climate. The board members of foundations, who are the ultimate group that is responsible in many cases, don’t themselves know any better.
One thing I hear from umbrella organizations is you should look at what other foundations are doing, so that you have an idea of what you can do. This is probably the worst advice you could give anyone, because there are so many private foundations—including some very large private foundations—that are simply doing things incorrectly, and not complying with their legal obligations. In the vast majority of cases, this isn’t deliberate malfeasance; they don’t know better. If they knew better, they would do better.
Mary Gooderham is a writer, editor and communication advisor based in Ottawa. She leads Cohen Gooderham Communications and has worked as a journalist for more than 40 years at The Globe and Mail, as a recording officer at the International Monetary Fund and as a custom content creator for online and print media. She’s been a contributing writer at Canadian Family Offices for four years, focusing on investment strategy, trusts, philanthropy, women in finance and estate planning.
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