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Battle of the Foundations

Charitable foundations are structures for long term, flexible and customized philanthropy. Both private and public foundations enable donors to make long term gifts and have various benefits, including, creating a lasting legacy, involving family members in the giving process, and charitable tax credits. These structures may be attractive for donors who are interested in creating gifts that will have a lasting impact on charitable causes which are important to a donor and his or her family.

When deciding which option to take, it’s important to understand the difference between public and private foundations.

A donor-advised fund (commonly referred to as a “DAF”) is a fund established with a public foundation.  A public foundation is comprised of DAFs from multiple donors, and a donor can contribute to an existing DAF or establish his or her own. There are various community foundations in Ontario and as well it is possible to set up a fund at many financial institutions.

A private foundation is established by a donor, generally with the help of professional advisors. A charitable trust or corporation is established or created and then an application for charitable status is made to the Canada Revenue Agency. Our recent Advisory, “Charitable Giving Through a Private Foundation,” provides an overview of the benefits and considerations in establishing, donating through and operating a private foundation.

Some of the advantages and disadvantages of these two giving vehicles are highlighted below.

Private Foundations

Advantages

  • The donor retains control over decision-making for the private foundation, including how foundation assets are invested, which charities are supported, amounts, and timing of distributions
  • The donor can be more involved in the operations of the private foundation (if established while he or she is alive)

Disadvantages

  • The donor is responsible for set-up and ongoing maintenance costs, as well as ongoing administration and tax compliance
  • Although there is a no minimum, there should be enough funds contributed to the private foundation to justify the costs and also to meet the annual disbursement quota of 3.5% without having to encroach on capital (typically, at a minimum $1,000,000)

Public Foundations

Advantages

  • The public foundation is responsible for the administration, investment and maintenance of the various DAFs
  • The donor can choose to be as involved as he or she desires
  • The donor does not have any direct tax compliance obligations

Disadvantages

  • The donor can advise on the charities that he or she wishes to support, but the public foundation has the ultimate control over the distribution of funds
  • Annual administrative fees

The type of philanthropic plan will be different for each donor and will depend on the donor’s personal and family objectives, financial circumstances and desired level of engagement and control. This blog only scratches the surface on the differences between these two types of foundations and some of the advantages and disadvantages of each.

If considering a more structured giving plan or your philanthropic objectives generally, it’s important to understand the different options, including the tax and non-tax benefits, and how it fits into your overall giving plan.

— Marly Peikes

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.
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