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Frank Giustra

Michael Falco/The Globe and Mail

A private foundation formed by mining financier Frank Giustra, who has won wide acclaim for his philanthropic work, has run afoul of federal tax authorities for violating investment rules governing charities.

In a rare move, the Canada Revenue Agency has hit Mr. Giustra's Radcliffe Foundation with a $147,000 penalty for "excessive corporate holdings."

It's only the second charity in Canada to be penalized by the CRA at all, and it's the first private foundation to be found offside of special investment regulations introduced in 2007 that limit the size of a stake that a charity can hold in a company.

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The CRA sent Radcliffe and Mr. Giustra a notice last year alleging the foundation had violated the rules through its holding in Vancouver-based Sky Ridge Resources Ltd. According to the CRA, Radcliffe and other entities controlled by Mr. Giustra held 48.8 per cent of Sky Ridge. That put the foundation and Mr. Giustra 28.8 percentage points over the legal limit of 20 per cent. The CRA imposed the $147,000 penalty and made it public this week.

"It's a new rule they brought in that if you own over a certain percentage of a company they would penalize you for it," said Mr. Giustra, who is known for large donations to various charitable causes and working with the Bill Clinton Foundation. "It's no big deal."

The CRA's action signals a new toughness on private foundations by federal tax officials, who have long worried about potential abuse by these charities. One potential problem is an investor buying a block of shares in a company, donating the stock to a private foundation but maintaining voting control over the shares all while getting a tax receipt for the donation.

Private foundations have been growing in popularity because they are relatively easy to set up and they offer donors greater control over their charitable giving. There are roughly 4,900 private foundations in Canada and they hold about $12-billion in total assets.

As a rule, private foundations are defined as charities where 50 per cent or more of the initial money comes from an individual or a family and where the directors are not at arm's length from each other or the principal donor.

By contrast, public foundations such as the Vancouver Foundation or Toronto Community Foundation have unrelated directors and donations that come from a wide variety of donors.

Mr. Giustra set up the Radcliffe Foundation in 1998, and it has $63.3-million in assets, according to its most recent annual filing with the CRA. Its board includes Mr. Giustra, his brother Enrico Giustra and three unrelated directors.

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The foundation provides grants to many charities such as the Christian Leaders Foundation, The Clinton Giustra Sustainable Growth Initiative and the Greater Vancouver Food Bank Society, according to CRA filings.

Unlike most other private foundations, Radcliffe is an active investor and frequently makes investments along with Mr. Giustra.

For example, last month Vancouver-based Cannon Point Resources Ltd. announced that Radcliffe and a company owned by Mr. Giustra had each purchased 7.5 million shares along with warrants for another two million. In total, Mr. Giustra owned 14.8 per cent of Cannon Point through the company and the foundation.

The federal government's uneasiness about these foundations has meant that for a long time many donations to these foundations were not given the same tax relief as gifts to public foundations. That has changed and most donations are now treated equally. But in 2007 the government introduced rules restricting how private foundations invest.

Under the rules, private foundations generally cannot hold more than 2 per cent of the shares of a public or private company. In addition, the foundation and all "relevant persons," meaning people not at arm's length from the foundation, cannot hold more than 20 per cent of the shares in a company.

If a foundation exceeds the limits it must sell the excess stock or face a penalty, which is based on the value of the extra shares. The CRA could also revoke the foundation's charitable status.

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A spokesman for Mr. Giustra said the foundation has paid the penalty by way of a grant to another charity, which is allowed under the CRA rules.

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