Looking for a way to give back that involves more than writing a cheque? Consider setting up a charitable foundation: a permanent, income-earning endowment fund for philanthropic giving. Whether you choose a private or community foundation, your donation allows you to support specific social causes and monitor how your dollars are spent. Even better: when you give, you get a little back in the form of tax breaks.
Supporting foundations is a growing trend among entrepreneurs. “People are selling their businesses at an earlier age, and they have more money than they really need,” says Marvi Ricker, managing director of philanthropic services at BMO Harris Private Banking in Toronto. At a time when social programs are suffering from government cutbacks, “people are motivated to use the talent that they have for making money to solve other issues.”
Charitable foundations come in two flavors: public or community foundations, whereby donations are pooled and put in the hands of professional money managers; and private foundations, trusts or companies established in your name to support charities of your choice.
Keith Thomson couldn’t be happier with his decision to support a community foundation. “The more I heard about them, the more I thought, ‘This is incredible’,” says the 42-year-old VP of Assante Capital Management Ltd., a Toronto-based investment-services firm. “Low overhead, incredible flexibility, you get to set up a fund in your own name, but you don’t have the hassle of what’s involved in a private foundation. And you can be as involved with the giving as you want.”
At last count, there were 137 community foundations across Canada with $1.6 billion in combined assets. They support charities across the spectrum, including organizations devoted to healthcare, education and the environment.
Community foundations’ assets are pooled, and then separated in endowment funds. Donors can determine their own focus and degree of involvement. Want to take a hands-off approach? You can leave investment and disbursement decisions to the foundation’s hired administrators. However, you can also set up a donor-advised fund, whereby administrators direct your dollars to specific causes or charities according to your wishes.
Either way, administration will cost you. Operating fees typically run from 0.5% to 1.5% of assets per year, depending on the foundation. It’s a reasonable price to pay, says Joan Blight, senior consultant at Strategic Philanthropy Inc., a Winnipeg-based consultancy that helps individuals and businesses develop philanthropic programs, for expert advice on navigating the world of non-profits.
But you don’t have to invest millions: funds can be established with as little as $1,000. You can donate cash, securities or gifts in kind, such as real estate, mutual funds, bonds and even artwork. Since grants are made from interest earned in the fund, you know your donation will make a difference for a long time to come. Setting up a fund takes little more than a meeting to sign the paperwork.
Thomson started by donating $10,000 to the Toronto Community Foundation. Through subsequent donations, he has boosted his endowment to $130,000. “By the time I retire, I’d like to have a million dollars in there for myself and my family to be able to help the community,” he says. Thomson lets the foundation choose who receives grants. “They have the expertise to make sure the organizations we’re helping are running a tight shop, the income statements and the balance sheets are accurate, that they’re doing what they say they’re doing,” he says. “They’re the back office of my charitable-giving strategy.”
Want something closer to home? Choose a private foundation. “A private foundation is very personal, a bit like a fingerprint,” says Ricker. “You’re saying a lot about yourself and what you believe in.” You’ll enjoy complete control over how your assets are invested and what causes you support. Also, you can make a one-time donation or choose to fund it over time. But keep in mind you’ll bear responsibility for foundation administration, reporting, investment management and grant-making activities. To maintain its charitable status with the Canada Revenue Agency (CRA), your foundation must grant at least 4.5% of its assets per year.
To get started, you’ll need to incorporate your foundation and register your entity as a charity with the CRA. You’ll also need to recruit a board of directors and establish governing bylaws. The fact is, private foundations are complex to establish and administer; you’ll need legal and tax-planning advice up-front.
You’ll need big bucks up-front, too. Given annual disbursement requirements and ongoing administrative fees, private foundations make sense if you can invest at least $5 million, says Joan Blight. While some foundations exist on less, she says, this amount is a practical minimum.
Public or private, your gift provides a hefty tax benefit: you can claim a tax credit in the year of your donation for up to 75% of your net income for the year. If the donation exceeds 75%, then you can carry the excess forward for five years. In the year of your death, the tax credit for donations increases to 100% of net income and any excess can be carried back for one year. It’s a great way to manage your tax burden when income pours in, be it through inheritance, cashing out of stock or selling your business.
But community foundations have one additional advantage over private foundations: the capital gains inclusion rate on securities donated to community foundations is just 25%, compared with 50% for private foundations.
The tax benefits are one reason to start the process, but Ricker says successful foundations are built on true charitable intent: “You really have to want to make a difference, to give back to the community.”
Blight warns entrepreneurs to manage their expectations: “The not-for-profit world is a different culture.” Things may not happen as fast as you’re used to and outcomes aren’t always measured at the bottom line — but in social change.
© 2004 Susanne Baillie