Should I start my own private foundation or charity?

working with money

Should I start a charity? This is a question that comes up all of the time. Let’s first address some nomenclature. When I worked for a community foundation, many donors called and asked to set up a foundation. I informed them that what they actually wanted was to set up a fund within the existing foundation. I used a parallel of a bank. They wanted to open up a bank account, not open a bank.

So (in Canada), why would someone actually want to set up their own charitable foundation? There are a lot of legal requirements (audited statements, annual general meetings, directors, policies, and procedures, etc.) that must be considered. But on the flip-side, you can direct the foundation’s investments as you see fit (as opposed to accepting an investment policy that you may or may not agree with), as well as having more control over how (and when) the disbursements are made.

Generally, I have suggested to donors that it is impractical to establish a charitable foundation with less than $3,000,000 in liquid assets. The reason is quite simple. At a 3.5% disbursement rate, this generates approximately $100,000 annually. There still needs to be legal fees, costs to run the foundation (rent, phone, computers, etc.) and at the end of the day, there needs to still be funds left to disburse to qualified recipients.

I have suggested to numerous donors that they use their local community foundation as an incubator of their funds. Most community foundations will let you park your funds with them and only charge a nominal fee for their administrative services. Additionally, most community foundations allow for the funds to be repatriated to another foundation (if the donor ever decides to start their own foundation) down the road. There are many fiduciary responsibilities that must be considered when starting your own foundation, so while you are learning the ropes, sometimes it’s easier to start with a community foundation that has well-established policies and procedures.

Now comes the other side of the coin — start a charity of your own or private foundation. This is usually a lengthy process (up to two years) as you have to apply for a charitable number from CRA. You would have to decide on your objects of incorporation, as well as gift policies, etc. Using legal counsel may expedite matters (but at a cost). CRA looks at each charity independently to ensure that all of the documentation is in order but never asks the sixty-four-thousand-dollar-question — is this new charity truly needed? Not to pick on cancer charities, but a quick search of cancer charities came up with 84 different registered charities with CRA!!! (This is only ones that have the word “cancer” in its title — there are undoubtedly dozens more.) There is a legal right to open a charity (assuming that your charity meets the legal requirements, etc.) but I would suggest that there is also a moral obligation to use donors’ funds effectively. Perhaps pooling efforts would result in a greater impact.

Donors basically just want to do good. How is it best serving the donor to have 84-plus cancer charities? Could the resources (and expenses) not be pooled for greater impact? If someone you know passes away from cancer, there are no less than eighty-four different charities that you can make an in memorial gift to. Confusing, no?

So, in conclusion, there are legal implications, as well as ethical to start a charity. A lot to be considered in any event…