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Exploring the new paradigm of virtual philanthropy
by E. Blake Bromley
February 26, 1996; Canadian FundRaiser

The rage against government waste and inefficiency is now so great that it often appears that the greatest threat to charitable funding is responsible government spending. If charities want to receive donations from wealthy taxpayers frustrated with government waste, however, they must be effectively providing valid community services. Charities cannot tap into the tax revolt rage sweeping Canada simply by pointing the finger at Ottawa. Angry taxpayers are no happier about a charity using their resources ineffectively and wastefully than the government doing so. If charities are going to receive donations, they must convince donors to take one whole dollar of donation out of the donor's pocket rather than only fifty cents of tax. If a charity is not doing more for less, the donor will move on to another charity which meets more stringent criteria for meriting funding.
In the area of planned giving instruments, the self-interest of the donor moves beyond indirect tax benefits from the government to the direct receipt of hard cold cash from the charity. A donor decides as to whether he or she will contract for a charitable gift annuity largely based upon the financial return paid by the charity to the donor. In the United States, charitable remainder trusts have tax provisions which enable the donor/income beneficiary to effectively receive more income after the sale of appreciated property and for the rest of the donor's life than if no gift was made. While equivalent provisions specifically authorizing such a result do not exist in the Income Tax Act in Canada there is an increasing demand to find ways to achieve a comparable result under our tax laws. The self-interest in such a result is obvious although most donors are not willing to give away the capital interest upon death to achieve a higher income interest during their lives.
Virtual Philanthropy - a new paradigm
Collins English Dictionary defines virtual as "having the essence or effect but not the appearance or form". The new paradigm of charity will involve more and more of what I call virtual philanthropy, which has the altruistic essence and charitable effect of traditional philanthropy; but which is carried out in forms which are not recognized by an increasingly antiquated law of charity and do not appear to be charitable to either the doctrinally orthodox or Revenue Canada.
Donors who are tired of giving money to alleviate symptoms are often keen to reject the form of the traditional charity as well as specific organizations and programs. If they believe that the only effective charity is to teach job skills and create employment for the poor and disadvantaged, they will seek programs which accomplish those objectives, even though Revenue Canada and small businesses do have problems considering micro-enterprise development as being charitable. They will push the law of charity until it looks much more like the Preamble to the Statute of Elizabeth (see below) than renaissance philanthropy or the definitions in vogue during the relatively short modern period of history when there was a fully funded social safety net, and when charities were only to fund "services inadequately provided for by the State" and "gaps in the State benefit system".
Speaking at the first annual meeting of the Canadian Association of Gift Planners, Stephen Lewis argued very forcefully that charities must engage in more political advocacy in the future, as the sector could not provide all of the services which the government was downloading on to it (Canadian FundRaiser, August 29, 1994 ). This line of argument reflects his experience with charities in the United States while Ambassador to the United Nations, and his ideological orientation as a former New Democratic Party politician, but is not attractive to the donor who thinks the deficit is too big and that Ottawa does not effectively and efficiently use the many tax dollars which the donor unwillingly remits to Revenue Canada.
Most solutions will require significant government funding
The donor in the new paradigm wants to fund solutions rather than services. Ideological and fiscal concerns mean that the solutions are not simply more tax money. However, the donor is pragmatic enough to know that almost any solution will require significant government funding if it is to be implemented on a broad enough scale to accomplish fundamental change. The donor is also skeptical enough to know that any partnership with government is so unequal that it will almost certainly result in the donor's money being usurped by government.
Charities must become problem solvers rather than service providers
In the new paradigm, the strategy is to collaborate rather than enter into partnership with government. First, however, these donors often prefer to collaborate with charities in finding solutions. Charities wanting to receive significant funding from virtual philanthropists must position themselves as problem solvers more than service providers. The solutions will have the essence or effect of charity, but not its appearance or form.
The appearance and form of donations will change even more than the appearance and form of programs. The biggest change is the shift away from cash gifts to assets. The issues involved in trying to quantify tax motivation in cash gifts are difficult enough without adding the complications of tax planning involved in the disposal of assets. Sophisticated gift planning becomes entangled with estate planning simultaneously seeking to accomplish tax deferral and minimizing deemed dispositions upon death; tax saving from charitable gifts and wealth replacement through insurance; estate freezing and inter-generational transfers; income splitting and provision for a surviving spouse; and protection from creditors and matrimonial property disputes. The essence of philanthropy is usually there, and is often more generous and responsible when the gift takes place as part of a review of the entire estate.
Form and appearance of donations to change
In the new paradigm of charitable funding there will be much less emphasis on the form of the charitable donation and much more emphasis on the effect of a financial transaction which nets a charity a huge profit. As funding techniques pioneered by fundraising activity in international jurisdictions such as Hongkong (which has a negligible tax rate) are imported and refined in Canada, the form and appearance of donations will alter radically.
Don't be mesmerized by techniques and concepts
Those of us familiar with the computer world know the term virtual reality which Collins English Dictionary defines as "a computer-generated environment that, to the person experiencing it, closely resembles reality". One of the dangers of the brave new world of virtual philanthropy is that it can become merely virtual reality. We must be careful that we do not become so enamoured with all of the potential for change that we become mesmerized by techniques and concepts. Generating speculative models can become so spellbinding that we can mistake the hypothetical for reality.
Collaborating with the wealthy donor
Large donors often prefer to complete their complicated gift transactions with their private foundations. It is possible that a person's long term interests in leaving a permanent legacy to his or her financial success may be better achieved by careful dispotive planning than by asset retention. Charities which position themselves to help donors in creative tax-planned giving through private foundations will be the first to receive grants from those foundations. More importantly, such charities will be in a position to collaborate with the funder in testing and implementing new solutions. The objective is to take money from both the private purse and the public purse and meld them into a community purse which funds the best initiatives of our community organizations, donors and volunteers.
In my experience, the best way to combine tax planning from the donor's perspective and funding which is not driven by recognition and marketing concerns from the charity's perspective is to introduce the private foundation. A private foundation allows a donor to make a gift to charity according to a timetable which is tax-driven. It simultaneously enables the donor to retain control of the funds and delay distributing them until they find an operating charity which meets their criteria as a worthy recipient. Large donors frequently prefer organizing their philanthropic affairs in a private foundation, as it provides greater privacy without sacrificing significant technical advantages. Contrary to public opinion, large donors usually prefer anonymity rather than recognition. Most private foundations which I have set up have names other than the donor's name, as they wish to keep a low profile.
Privacy of a private foundation
Large donors prefer the privacy of dealing with their own foundation's trustees, who frequently are trusted family members and professional advisors. It is uncomfortable for both the donor and the recipient charity to involve the recipient charity's board in the minute detail of a tax-planned gift. Donors giving 10% of their private holding company to an operating charity know that its board is able to multiply the value of the donation receipt by ten and determine the total value of the holding company. The charity will be as embarrassed as the donor if a board member gossips about the details of the gift. Nor should the charity be anxious to be involved in the problems of determining the amount of the donation receipt for real estate and other assets which are hard to value. In fact, in my experience donors usually employ a more conservative value when dealing with their own private foundation than when the gift is to an arm's length operating charity which provides greater comfort when selecting a more aggressive valuation.
Another important advantage of the private foundation is that the donor can time the gift according to the relevant fiscal year-end without having to select the charity or purpose to which the money will ultimately be applied. When donors are only giving amounts of several thousand dollars to an individual charity, they are willing to write a cheque based upon the imperative of making the gift before the end of December. When an individual donation climbs to $50,000, however, the donor begins to wonder how the organization will spend the money. Although they believe in the charity, there is a concern that the money will disappear into some operating deficit. They will often want to know if the gift will be segregated into an endowment or applied to some considered project which the donor has discussed with the charity.
Major donors want to "enhance" the charity When donors make a donation in the five- and six-figure range, they want to believe that the gift is not just going to the charity's operating budget. The donor's mindset changes significantly when the gift is not merely out of the donors' income but reduces their capital. Donors giving out of capital want the gift to fundamentally impact the charity. For the best possible motivations, donors giving capital want to do something which will enhance the organization or enable it to go in a new direction. The donors are now "investing" in the charity and want to know that it has a clear mission which it carries out effectively.
Many charities are worried about the use of private foundations because it places another charity between them and the donors. This fear frequently betrays a belief that the charity "owns" the donors on its mailing list. They think that the donor's loyalty emanates from the issuance of the tax receipt for the donation. They do not realize that a private foundation not only creates the tax efficiency of the donation tax credit, but all income earned is tax exempt as well. The capital in the private foundation grows and compounds tax free, and the donors still have the 20% of taxable income tax credit available for personal donations. Although donors have irrevocably given away the property in terms of beneficial ownership and personal use, they still have control of the assets through the foundation. This means that they can still play the entrepreneurial game, but the profits must now go to charity instead of into their own pockets. This drawback is compensated for by the facts that they can play the game far more tax efficiently than before, and the profits are going to good causes.
In fact, private foundations can make fundraising easier. When charities approach individuals for a donation, there is actually a two-step thought process. The donors first must decide whether they are willing to reach into their pockets and make a donation. Then they must decide whether they want to make the donation to this particular charity. When charities approach a private foundation, the donor will not be personally poorer for having made the donation. Charities are therefore only dealing with the second step of convincing the foundation as to the worthiness of their project and organization.

Excerpt from the Preamble to An Acte to Redress the Misemployment of Landes, Goodes and Stockes of Money heretofore Given to Charitable Uses, 1601, 43 Elizabeth I, c. 4, (also known as the Statute of Charitable Uses, 1601).
"The relief of aged, impotent, and poor people; the maintenance of sick and maimed soldiers and mariners, schools of learning, free schools and scholars of universities; the repair of bridges, havens, causeways, churches, sea banks and highways; the education and preferment of orphans; the relief, stock or maintenance of houses of correction; marriages of poor maids; supportations, aid and help of young tradesmen, handicraftsmen and persons decayed; the relief or redemption of prisoners or captives and the aid or ease of any poor inhabitants concerning payments of fifteens, [A tax of one fifteenth formerly imposed upon personal property.] setting out of soldiers and other taxes."
Based on a presentation by E. Blake Bromley of Douglas, Symes and Brissenden of Vancouver BC, to the 1995 Annual Meeting of the Canadian Association of Gift Planners, Toronto, Ontario. Second of three parts. Would you like to read the first article in the series or the next article in the series?