It’s Time for Private Foundations to Start Paying a Fairer Share

Private charitable foundations are emerging as a fiscal threat, with their wealth and numbers growing. The assets of private foundations in the US have increased by 50% since the pandemic and reached $1.5 trillion in 2024. In contrast, an estimated $2.9 trillion to $3.4 trillion—approximately 10% to 12% of GDP—was held in low or no-tax countries.

Foundations worldwide enjoy increasingly generous tax incentives, a lack of transparency, and lax regulations, allowing trillions of dollars to multiply tax-free, to the detriment of urgent societal needs. While Form 990 in the US and Form T3010 in Canada provide some level of transparency, the information it contains is often complex and not always easily understood or accessible to the public.

To improve fairness and efficiency of the tax system, governments should increase the percentage that private charitable foundations must distribute, which is a mere 5% today in US and Canada.

Governments also should gradually reduce the tax incentives to founders. A global tax on foundation investment income, such as one in the US, is also an option, although the US’ rate is insufficient to be truly effective.

Private foundations come in various forms and names worldwide, but their tax structures typically consist of a tax break for the founder, a tax exemption for the foundation, and minimal obligations for charitable redistribution.

In the US, the tax on net investment income paid by private foundations serves as an example. Introduced at a 4% tax rate by the Tax Reform Act of 1969, it fell to 2% under the Revenue Act of 1978, with the possibility of a further reduction to a 1% rate for private foundations that could show they made a certain average percentage payout.

The Taxpayer Certainty and Disaster Tax Relief Act of 2019 adjusted the rate further to a flat 1.39%, without the possibility of further reduction. This reform also reduced the incentive for some foundations to distribute funds beyond their minimum distribution requirements.

In Canada, where the tax system for foundations is one of the most generous, donations made by individuals can benefit from a tax credit of up to 53.3% of the donation’s value; the foundation is tax-exempt and must allocate 5% of its assets to charitable purposes. In Canada, it takes more than three decades for the value of charitable activities carried out by foundations to surpass the tax benefits received by the foundation and its founder.

For donations of publicly traded securities, this delay extends to a century, because in addition to the charitable tax deduction or credit, the donor also benefits from an exemption on capital gains tax. Donations of publicly traded securities are especially common in Canada: Since 2020, more than $6 billion in securities have been donated.

Public finances are harmed by this arrangement, as it takes more than three decades for the charity provided by a foundation to offset the tax incentives granted to both the foundation and its founder. For donations of publicly traded shares, which account for 12% of total donations, this delay extends to a century, as the donor not only receives the charitable tax credit but also benefits from an exemption on capital gains tax.

The $1.5 trillion in private foundations should raise equal, if not greater, concern. In addition to offering tax benefits comparable to, and sometimes even more advantageous than, those of tax havens, the current tax system allows private charitable foundations to gain excessive control over social issues that should fall under the responsibility of the state.

No international organization or expert has assessed the total wealth locked in foundations worldwide. In G7 countries alone, this wealth is estimated at around $2 trillion, potentially reaching $3 trillion globally.

While citizens might celebrate this wealth being directed at charity, the reality is that they benefit only partially, as it is preserved in perpetuity according to the donor’s wishes. The Chagnon Foundation in Canada began with a tax-deductible donation of $1.4 billion. Twenty years later, its assets have grown to CA$2.1 billion ($1.5 billion).

The MasterCard Foundation, established in 2005, is now holding nearly $42 billion. It benefited from a “charity pause” of 15 years due to a special arrangement with the Canada Revenue Agency. From 2007 to 2021, the Mastercard Foundation allocated an average of 2.68% of its assets to charitable initiatives, while its total value grew by an impressive 1,600%.

As inequalities deepen, charity has never been more crucial, and it requires an effective tax system to thrive. Yet foundations embody a profound and insidious fiscal disaster, and thus far, no meaningful reform seems forthcoming.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Brigitte Alepin is an author, filmmaker, and tax professor at the Université du Québec en Outaouais.

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