As leaves descend from the trees in earnest, a new season is upon us – no, not fall, but rather what’s known as “the giving season,” which is highlighted by National Philanthropy Day on November 15, and Giving Tuesday on December 3. Whether there’s a specific cause that’s near to your heart or you want to share your wealth with those who need it, Canadian charities could certainly use your support.
According to CanadaHelps’ 2024 Giving Report, the total amount donated to charity in 2023 was only marginally higher than in 2022 – $430.3 million versus $429.8 million. What’s more, one in five Canadians are now looking to charities to meet basic needs like food and shelter. However, figuring out where and how much to donate can be overwhelming.
“We have 86,000 charities registered in Canada, plus there are another 4,000 qualified donees, like amateur athletic organizations and international universities,” says Karen Sparks, Director of Philanthropic Advisory Services with BMO Private Wealth. “A donor-advised fund gives you the immediate tax receipt, the time to plan your gifts for greatest impact and the ability to involve the next generation in philanthropy, if appropriate.”
One way to make giving more manageable, especially for higher net-worth individuals, is to set up and then give through a donor-advised fund (DAF). Unlike a foundation – which can take six or more months to establish, requires at least $5,000 in set-up costs, and the founding donors or paid staff to manage the administration, governance, and operational requirements of the foundation – a DAF can be up and running in a few days with founding donors focusing their time on making strategic granting recommendations. At BMO Private Wealth clients only need $25,000 to open a DAF and a charitable receipt is issued for the amount transferred into the fund.
Here are a few tips for anyone looking to set up a DAF as we head into the giving season.
- Know the deadlines
Given the time it takes to establish a foundation, it’s too late to create one for the 2024 taxation year. You can, however, set up and fund a new DAF account until December 6 with BMO Private Wealth and remain eligible for a 2024 tax receipt. Anything opened after this date is done on a “best efforts” basis by your BMO Private Wealth professional.
- Understanding investing rules
Each charity may have its own investment policy statement, but there are rules everyone must follow. For instance, the portfolio must be diversified because the public foundation that disburses funds – in the case of BMO’s Charitable Giving Program, Gift Funds Canada –has a fiduciary responsibility to follow the prudent investor rule under the Ontario Trustee Act. A DAF can allocate up to 80% of its money to equities, with no one stock accounting for either 10% of the portfolio, or 15% of the equity portion of the portfolio. The maximum for alternative investments, which could include hedge-fund-like investments, is 25% of the portfolio. In addition, equities included in a DAF must be mid-to-large companies, while the majority of the fixed income allocation must be in investment-grade securities.
- Tax considerations
If you own a business, or have an investment holding company, you might also give money to charity from your corporation. Good news: you can donate those funds to your DAF, and with the recent increase to the capital gains inclusion rate, donating publicly-traded appreciated securities from a corporation, is now even more compelling as no tax is paid on the unrealized capital gain. However, it’s important to note that a personal donation has a slightly different tax treatment than a corporate donation. “Personal donations are a non-refundable tax credit,” says Sparks. “It doesn’t reduce your income, but it does reduce the tax dollars paid.” In contrast, a corporate donation reduces the company’s taxable income and is most beneficial when the corporation is paying tax at the highest rate.
- Life insurance
One growing trend in charitable giving is to donate to a DAF with a life insurance policy. There are two main options here: you can make the DAF the beneficiary of the policy or make it the owner and the beneficiary. In both cases, the DAF would get the proceeds of the policy after you pass away, while your estate would get the tax receipt for the donation (in the former case only). However, in the latter case, you’ll get a tax credit for every premium you pay. The premiums can also be funded with appreciated securities. Also, if you gift an already fully paid permanent life insurance policy, you would get a tax receipt for the fair market value of the policy, as determined by an actuarial calculation. “There are a lot of interesting things going on with the growth of life insurance as a way to magnify your charitable giving,” says Danielle Robinson, Director of Philanthropic Advisory Services at BMO Private Wealth.
- Name your successors
If you have children or others named in your Will, it’s important to officially designate them as successors when you open a DAF. In fact, you can name your teenaged kids as successors to ensure they’re able to continue choosing the charities that your DAF will grant to. The good news is that if you haven’t yet named a successor and want to, you can do so at a later date through a letter of authorization. Alternatively, if you don’t want to name anyone as a successor, you can also communicate your legacy intentions for your DAF by listing the types of charities you would prefer to support for as long as your DAF continues to exist, like food banks or cancer foundations.
Ultimately, setting up a DAF is a great way to stretch your charitable giving further and truly build a philanthropic legacy. “We like to call it the give it, grow it, grant it model,” notes Robinson. “If you’re already making some large charitable donations of securities to other operating charities, it might be a good time to consider a DAF.”
For more information on how to make philanthropy part of your wealth plan, speak with your BMO financial professional.
