Many Canadians who have done well in life want to share their good fortune. They choose to do this in different ways—by volunteering their time, speaking out in support of a cause and by donating to their favourite charities.

In the case of donations, some wealthier families choose to create a private foundation to organize and focus their charitable activities. In fact, there are over five thousand private foundations in Canada and the number is growing.

But remember: This is a decision that involves a lot more than just money. Running a private foundation requires a commitment of time and energy.

First, let’s look at what a private foundation is.

A private foundation is a corporation or a trust that is a registered charity.  It is controlled by a single donor or a family through a board where a majority of directors are not at arm’s length. This is why these foundations are often referred to as family foundations.

Private foundations are tax exempt and can issue official donation tax receipts. While a foundation must operate exclusively for charitable purposes, it can use its funds to operate its own charitable programs or make donations to other registered charities.

The advantages of setting up a private foundation

Now, why would you want to set up a private foundation? What are the advantages?

As I mentioned earlier, a foundation allows you to focus your giving on a cause you are passionate about. In doing so, the foundation can also take donations from non-family members and conduct fund-raising activities.

Family members such as your spouse and children can get involved as donors, trustees or directors and even as employees of the foundation.

Another thing that people like about a foundation is they are directly involved in how their money is invested and disbursed. Control over the foundation provides flexibility in the event your charitable objectives change, or new needs arise to which you would like to respond.

A foundation gives you the possibility of creating a lasting legacy, one that will continue supporting a cherished cause after your death. It can be named for you or your family, or you can use a completely unrelated name for it.

And, of course, there are the tax savings. Thanks to charitable donation tax credits, for every dollar you give to a registered charity, you get back around 50 cents—depending on your province of residence and marginal tax rate.

You can claim tax credits on donations up to 75% of your net income in the year the donation is made. And unused portions of your donations can be carried forward for up to five years.

You have the flexibility to make donations to a private foundation at times that best suit your tax and estate-planning objectives. In addition, you can make donations and enjoy the tax benefits without having to immediately select the charity or the program to receive that gift.

The disadvantages

So those are the pros. Now let’s talk about the cons.

One of the biggest disadvantages is the costs involved. First, it costs money to set up a foundation, notably for legal and accounting fees.

Then, there are the ongoing expenses for such things as tax filings, preparation of audited financial statements, issuing of tax receipts and investment management.

Beyond this, there are other administrative headaches involved in ongoing compliance and the day-to-day operations of the foundation.

You also have to be ready to accept a certain lack of privacy. That’s because the Canadian Revenue Agency discloses to the public information about your foundation, including its annual financial statements.

Finally, your children and other family members may not share your passion for the cause you support. They may not want to participate in governance or the administration of your foundation. And they may not want to carry it on after your death.Active Fund,

Look before you leap

Setting up a private foundation is an important decision in the life of your family. You should make sure to look at it from every angle with experienced advisors and be ready to make substantial donations to justify the costs and headaches.

You should also look at the alternatives. One very popular one is a donor-advised fund with a public foundation, such as a community foundation. These funds allow you to enjoy many of the benefits of a private foundation and avoid many of the downsides.

I commend you for wanting to share your good fortune. Just make sure you do it in a way that allows you to maximize your giving and minimize unwanted expense and stress for you and your family.