What to Consider Before Establishing a Private Family Foundation

Written by Bloom Investment Counsel, Inc. on April 22, 2024. Posted in Philanthropy.

There are many ways you might have ended up with wealth in excess of your needs. Maybe you have experienced a liquidity event such as an inheritance or sale of a family business, or you have retired with more savings than you need to support your desired retirement lifestyle.

However you have come to this excess wealth, you may want to set up a philanthropic program to donate some of your excess savings to charity. One of the ways to do that is to establish a private family foundation.

What is a Private Family Foundation?

A private family foundation is one of three types of registered charities in Canada. Family foundations can be established either as trusts or corporations with the latter being the most common.

The main difference between a family foundation and a charity is how it is funded or operated. Private foundations are funded by an endowment from a family or individual. A charity is funded by many individuals, foundations, and organizations.

Private foundations do not usually solicit donations, but charities do. Charities also do charitable work that private foundations do not directly participate in.

A private foundation’s main purpose is to fund the goals of charities that are in line with its philanthropic interests.

Establishing a Private Family Foundation

First, get professional help to make sure that you follow all the requirements to set up a private family foundation. With legal help, you will need to establish a legal entity in the form of a trust or corporation.

Once the legal entity is established, the next step is to apply for charitable registration through the Canada Revenue Agency (CRA). If you do not register your foundation as a charity, then the foundation will have to pay income tax and will not be able to issue tax receipts for any donations received. Most foundations in Canada are registered as charities.

The CRA will determine the designation of the charity as a charitable organization, public foundation, or private foundation. The decision is based on factors such as the source of funding, the relationship between trustees and directors, and the intended goals of the foundation.

The Benefits and Drawbacks

When establishing a family foundation, you need to weigh the pros and cons of this decision to determine if it is the right choice for you. Below are some of the benefits and drawbacks of establishing and maintaining a private family foundation.

The Benefits

Direct Control: You have control over all aspects of your private foundation and how it is managed, ensuring that your charitable directions are followed exactly as you wish.
Investment Management: You oversee how the assets of the family foundation are invested to maximize potential future growth.
Legacy: Establishing a family foundation and involving the next generation will help sustain your philanthropic desires after your passing.

The Drawbacks

Effort: Establishing a family foundation involves much more than merely writing a cheque to a charity and then receiving a tax receipt.
Administrative Responsibilities: Starting a family foundation requires increased decision-making, governance, administration, and record-keeping compared to simply making a charitable donation.
Costs: There are considerable start-up and ongoing costs associated with legal and accounting services, tax filings, audited financial statements, investment management, regulatory compliance, and ongoing operations.
CRA Reporting: The CRA requires all foundations to report on their annual operations, including details of people involved in the foundations’ operations, board members, trustees, contributors, grants, etc. and these reports are publicly available on the CRA website which may not appeal to all those parties involved..

Obtain Professional Advice

At the beginning of your philanthropic planning, you should seek the advice of a professional to determine if establishing a private family foundation is the best charitable route for you.

If it is indeed the best course for you to take, then you will need to work with several experts to establish your own private family foundation and fully realize your philanthropic goals.

Investing Your Charitable Foundation with Bloom

Since 1985 Bloom Investment Counsel, Inc. has been providing investment management services to a range of clients including foundations. Bloom provides customized, actively managed portfolios investing in dividend paying stocks providing income that can be used, if desired, as a source for a foundation’s mandatory annual disbursements to its charities of choice. For more information please contact us at 416–861–9941 or by emailing info@bloominvestmentcounsel.com.

This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.