As governments cut back on their direct funding to charities they have offset this by offering individuals increased tax benefits for their charitable donations. The three main types of charities are charitable organizations, public foundations and private foundations. Of the 80,000 plus Canadian charities, charitable organizations represent 88 per cent, with public foundations and private foundations represent approximately seven per cent and five per cent, respectively.

Private Foundations

A private foundation is a philanthropic planning method for individuals and families. In many cases, private foundations reflect the values, beliefs and experiences of the individuals and families who have set them up. They may hold endowments and provide funds to operating charities.

Endowment Gifts

Normally, with an endowment gift, the original donation into the foundation is kept intact and the income is distributed to the charity or charities on an annual basis. Endowments are required to pay-out a minimum of 3.5 per cent per annum to charity. They are ideal for long-term planning and to help ensure a legacy is left.

Supporting Charities

Private foundations may ensure that donated money is used for maximum charitable benefits. Based on the structure, trustees and directors may conduct ongoing due diligence and ensure accountability. This ensures that the capital invested is done so prudently. Grants from the foundation can be directed to specific activities and the beneficiaries changed if the funds are not used effectively. Foundations allow more control over the individual's or family's public legacy.

Not for Everyone

According to the above statistics, foundations represent the smallest percentage of total charities. We anticipate that the number of private foundations will grow in the future. The following describes the typical individual who may be interested in pursuing a private foundation:

Individuals with significant net worth
Business owners and executives with philanthropic goals
Older clients without children
Individuals who plan to leave money to charity in their Will
Those who have an existing foundation in the family

Dollar Amounts

Set up and maintenance costs should be considered when designing any charitable plan. Individuals may find that establishing and registering a private foundation begins to look attractive with contributions above $150,000. Foundations closer to this amount should plan to have ongoing contributions to the foundation. Individuals wishing to establish an endowment should plan on contributing a minimum of $500,000 for a trust structure and over $1,000,000 through a corporate structure.

Advantages

There are several tangible and intangible benefits for setting up a private foundation. The following highlights both:

Tangible benefits:

Provides protection of charitable assets from legal challenges
Privacy
Ability to control donated assets
Tax savings
Ideal for advanced estate plans

Intangible benefits:

Enables individuals to establish a personal legacy that reflects values and beliefs
Public and community legacy
Provides a purpose for current wealth
Helps to ensure the continued support for the individual's charity

Tax Planning

A gift to an individual's private foundation is eligible for a charitable receipt, similar to a gift to a public charity. Foundations may be very useful for those individuals planning to sell their business. Certain assets, including listed securities, private equity, and real estate may involve additional planning. As an example, gifts of listed securities to private foundations do notcurrently qualify for the elimination of capital gains. The 2006 federal budget document acknowledges that this policy is likely to change within the next year to make the tax treatment equitable regardless of the category of the charitable beneficiary.

Before implementing any strategy noted in our columns we recommend that individuals consult with their professional advisors (insurance consultant, financial advisor, accountant and estate lawyer).