November 2024
Jeremy Nelson, CPA, CA
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The Donor-Advised Fund is a vehicle that allows individuals to make a charitable contribution, receive a tax credit, and then recommend grants from the Fund over time to their favourite charities.
Charitable giving can be an impactful and rewarding way for individuals and families to use their wealth to make a social impact. Making annual donations to charitable organization can be a meaningful way to help registered charities, and in return benefit from the tax credits that exist to facilitate and encourage this type of giving.
Still, some individuals and families choose to conduct their giving in other ways that align better with their circumstances and/or philanthropic goals. Charitable giving can be an effective tax management and estate planning tool and can take various forms, including the establishment of a charitable trust, the creation of a private family foundation, or the use of a Donor Advised Fund.
What is a Donor-Advised Fund?
A Donor-Advised Fund (DAF) is a type of charitable giving vehicle, established when a fund is created within a DAF Holding Charity. A DAF Holding Charity is a registered charitable foundation which exists to hold, administer and govern the donated assets of various funds that consist of the contributions of individual donors or groups of donors.
As the name implies, Donor Advised Funds receive the non-binding suggestions - or advice - of donors regarding the distribution of assets to qualified donees or grantee organizations, but it is important to note that once donated, all assets are the sole property of the DAF Holding Charity. The gift by the donor is irrevocable, and the donor receives a charitable donation receipt from the DAF Holding Charity in exchange for the gift.
While the mechanics of DAFs can sound rigid and restricted, in practice they function (and have functioned for over 70 years in Canada) as practical alternative for donors who do not have the time, ability, or resources to operate their own private trusts or foundations. The costs to establish and maintain a DAF with a DAF Holding Charity can amount to a fraction of what might be required to operate a separate charitable entity and can be established with much smaller initial donations.
Like in charitable foundations or trusts, the donations that flow into DAFs that are not paid out immediately are able to be invested and managed by professional asset managers in order to grow and support more strategic, long-term giving strategies.
Because of the potential effectiveness as a tax planning tool, the relative ease of set up and administration, and the broadened access to and understanding of DAFs, their popularity has steadily increased in Canada. In 2021 a Canadian Association of Giving Practitioners survey found that DAF assets under management were approximately $8.5B and the average granting rate was 9.8% (almost 3x the minimum disbursement quota mandated by CRA) and in absolute terms total grants were measured at $922M.
When to consider a DAF
Significant tax events (sale of a business or other asset) can often give rise to the discussion about maximizing the tax benefits associated with charitable giving in those high-income years. A detailed financial planning exercise with your financial advisor often leads to discussions about estate planning and the idea of legacy giving wherein a DAF might make sense, either from a tax efficiency standpoint, or in terms of optimizing the impact of the giving. If you are talking with family members about the idea of multi-generational giving, engaging family members in philanthropy through DAFs can be an effective way to establish a giving legacy.
There is no single best approach to charitable giving. DAFs, when compared to private foundations or trusts, offer the advantages of ease of setup and management which comes at the cost of some degree of control. Choosing to establish a DAF as opposed to, say, making a large, one-time direct donation really comes down to differences in timing and whether to make an immediate versus a longer-term, strategic charitable impact.
Talk with your financial advisor and your loved ones to come up with a charitable giving strategy as part of the ongoing financial planning process and work together to choose the budget, timing and giving vehicle that allows you to meet your philanthropic goals.
Author:
Jeremy Nelson, CPA, CA is a Relationship Manager with Louisbourg Investments. Comments or questions may be submitted to Jeremy at jeremy.nelson@louisbourg.net, or he may be reached at (506) 269-2343.
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This writing is for general information purposes only and is not intended to provide legal, accounting, tax or personalized financial advice. If you are not sure how to proceed with a request for further information, seek help from a professional. Any opinions expressed are my own and may not necessarily reflect those of Louisbourg Investments.
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