Is a family foundation right for you?

Once believed to be the domain of only the very wealthy, private foundations are getting a common touch as more and more Canadians discover a great way to give.

Foundation-based philanthropy is on the rise in Canada. Perhaps it’s the influence of high-profile philanthropists such as Bill and Melinda Gates and Seymour Schulich. Or maybe it’s because of recent changes in the tax rules that make giving to a private foundation more attractive. Whatever the reason, the most recent statistics indicate that the number of grant-making private foundations in Canada is up by about 75% since 2001.

According to Holger Kluge, a T.E. Wealth client, who, along with his wife, established a family foundation five years ago, the attraction of giving through a private foundation comes from:

– the opportunity for more focused giving

– the ability to involve the whole family including children

– the considerable tax advantages

“Some 25 years ago a client introduced me to the concept of a private foundation. The gentleman, who was among the world’s wealthiest, decided to give two-thirds of his fortune to his children and one-third to establish a foundation focused on education and healthcare. His purpose was to teach his children about giving back to society and this made a deep impression on me,” explains Holger. While interested in the concept, he believed that this type of giving was reserved for the rich and famous. It wasn’t until his T.E. Wealth consultant, Valerie Pippy, a Senior Vice President in the Toronto and St. John’s offices, approached Holger and his wife about the idea of forming a private foundation that he realized that he could use this approach with his own family.

By definition, a private foundation is well suited to a family situation. According to Canada Revenue Agency, a private foundation is a corporation or trust that is a registered charity where 50% or more of its directors or trustees do not deal with each other at arm’s length, and/or more than 50% of the capital is contributed by a person or group of persons not dealing with each other at arm’s length.

Attractive tax benefits

In the 2007 Federal Budget, changes were introduced that gave the same beneficial tax treatment to the donation of shares to a private foundation that existed for shares donated to other registered charities. And as Valerie Pippy points out, these changes have generated much more interest in private foundations. “An individual with a significant capital gains liability as a result of appreciation in shares or accumulating stock options, can donate the securities to their private foundation, eliminating the tax liability and realizing additional tax savings,” explains Valerie. For example, suppose you purchased 1,000 shares of a company 10 years ago at a price of $10 a share. Today, the share price is $50. If you sell the shares, you will have a capital gain of $40 per share or $40,000. Although only half of the gain is taxable, you can still end up with a tax bill of $9,200, assuming a 46% tax rate. Give those shares to charity, and the capital gains tax is eliminated. What’s more, you get a tax credit for the $50,000 charitable donation, worth $23,000.*

Brings the family together

Marcy Ages, Consultant at T.E. Wealth in Toronto, points out that you can set up a viable private foundation with an initial gift of $50,000, far less than most people think. In her experience, people are drawn to the foundation-based giving because they want to get more directly involved in deciding how their money will be used. “Many people find that a family foundation keeps the family connected, especially when adult children live far from home and it’s a great way to pass their values on to the next generation,” says Marcy.

That has certainly been Holger Kluge’s experience. He and his wife decided to give their foundation a broader focus, hoping to get their adult children and their families interested in carrying the foundation on into the next generation. To date the experience of running a family foundation has exceeded his expectations. “We decided to get our children’s families involved in the annual selection of the charities we would support. They took this task to heart, seriously researching many worthwhile causes and narrowing the list to a few exceptional charities. Then they presented the case for each one to the foundation’s board for approval. It has been a great experience for everyone involved.”

Help available

If you think you’d like running your own private foundation, be sure to talk to your T.E. Wealth consultant. He or she can run through the pros and cons of setting up a foundation and the associated costs. You’ll want to give some thoughtful consideration to the focus or purpose of your foundation, whether your family be involved and who will be involved in the decision-making. If you decide to go ahead, your T.E. Wealth consultant can assist you with all aspects of running your foundation – helping with the legal work required for set up, preparing the foundation’s annual income tax return, assisting with managing the foundation’s assets and helping the family continue the foundation after the parents are gone. “I’ve had nothing but positive feedback from clients when we’ve helped them set up a foundation. The rewards of giving in this fashion go well beyond the substantial tax benefits,” says Valerie. Holger Kluge couldn’t agree more.

* Assumes the $200 donation threshold is passed and the full 46% tax credit is earned.

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These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.

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