If you’re looking to build a philanthropic legacy through the money you’ve earned with all your hard work, then this article will be of great benefit to you. While it is noble to engage in any charitable endeavor, it would be prudent to look into the different ways one can do so.
Foundation & Charities Explained
Foundations are charitable organizations, which can be established as corporations and trusts. The primary aim of a foundation is to be a donor to charities that work towards achieving their mission.
Charitable organizations, on the other hand, do the work that is required to help build a better future. They primarily carry on their own charitable activities.
What Is A Charitable Organization?
Under Canadian law, a charitable organization is considered as such if it has more than 50% of its directors or trustees dealing with each other at arm's length. As for funding, charitable organizations receive donations from mostly arm’s length donors i.e. the public or other foundations supporting the cause.
What Is A Public Foundation?
A public foundation is governed by a board of directors at arm’s length. They can include community foundations, donor-advised foundations, and grant-seeking foundations. Public foundations can also be established as a corporation or trust that has charitable and philanthropic objectives.
Public foundations are obliged to donate more than 50% of their annual income to other qualified non-profits (which mostly comprise registered charities). Public foundations are also allowed to carry out some of their own charitable activities to raise funds for their cause.
What Is A Private Foundation?
Private foundations are controlled by a single donor or a single family, with the majority of directors at non-arm length. Similar to public foundations, private foundations are established as corporations or trusts.
Private foundations require that more than 50% of their funding comes from the individual (or individuals) controlling the foundation, or from such individuals who make up more than 50% of the directors or trustees.
Private foundations don’t need to raise money or make money. As such they enjoy a lot more freedom and can be perfect solutions for those looking to achieve philanthropic goals without ever being directly involved.
Differences Between A Foundation & Charity In Canada
The key difference between these different types of charitable organizations boils down to how much control the directors or trustees have on the activities of the organization and the distribution of funds.
When it comes to the disbursement of funds, charitable organizations are under no compulsion to make donations to other qualified charities. Their main function is to carry out their own charitable activities and initiatives. However, if they choose to donate to other organizations, they must ensure that such donation is less than 50% of their annual income.
In contrast, foundations are required by law to give more than 50% of their annual income to qualified charities. Foundations are also not under any stringent rules when it comes to conducting their own charitable activities.
There are also limitations in some cases on the related businesses that these organizations can engage in. Charitable organizations and public foundations can carry on related businesses, but private foundations are not allowed to. Breaching these rules can result in the charitable status of a private foundation being revoked.
Under Canadian law, public and private foundations are prohibited from incurring any debts other than those needed for operating expenses. Foundations are also prohibited from the purchase and sale of any investments or the administration of charitable activities. Such restrictions do not apply to charitable organizations.
Similarly, public and private foundations are also prohibited from acquiring control of any corporation. Charitable organizations, however, can do so through the use of specific mechanisms of the legal structure of ownership.
What to Consider Before Starting a Private Foundation in Canada?
Before anything else, a potential donor must have a firm understanding of their charitable goals. Once that has been achieved, you must see if you have the means to start a private foundation, as starting one can be quite costly.
A professional advisor, such as Eastport Financial Group Inc in Halifax, will be able to give you a full breakdown of costs including start-up costs, administrative overheads, government or regulatory fees, and any other related costs necessary to manage the endowment fund effectively.
If you’re wanting to keep your philanthropic efforts a secret, then public foundations may not be a good idea for you. As a private foundation, you will be required to report information such as board members, trustee details, details of grants made, and financial information. If these are concerns for you, then you would be better off just making donations to various causes anonymously from time to time.
Things To Keep In Mind When Setting Up A Foundation Or Charity In Canada
Due to stringent regulations, potential donors would need to be prepared to invest significant time into the private foundation. The requirement is not of time itself, but you’ll need to spend a lot of it to ensure that your board is acting in accordance with your instructions.
You will have to stay on top of things, such as whether funds are being invested and distributed properly, and make vital decisions to ensure the smooth functioning of the foundation. The time spent on the foundation is not going to yield any profit or compensation. You’d be doing this at your own expense.
Another important thing to note is that the donor is ultimately responsible for the maintenance of the fund, its growth, and the responsible distribution of funds. This is a significant risk, especially if you are a notable person.
In addition to acknowledging such a risk, it would also serve well to have a thorough understanding of the various tax laws applicable to private foundations and how they might impact the rest of your finances.
Always Consult With Financial Experts
Applying to set up a charity or foundation in Canada is not so straightforward. While donating to a public foundation or charitable organization is a great (and benevolent) way to pursue long-term philanthropic goals, it does have its ramifications.
As such, it is always best to consult with specialist financial advisors such as the ones at Eastport Financial. We primarily deal with advising wealthy Canadians, including how to safeguard their legacy through setting up legal charities and foundations that last generations. Give us a call today or visit our website to learn more.
