For the last several years, an increasing number of wealthy Canadians have been turning to donor-advised funds (DAFs) to facilitate their charitable giving. This approach, which allows donors to make a tax-deductible charitable gift, while having a third-party organization manage the investing and administration process, is an easy and inexpensive way to leave a philanthropic legacy.
According to a report by fundraising consultants KCI and the Canadian Association of Gift Planners (CAGP) Foundation, there were 122,275 DAFs in Canada in 2021. Yet, despite the fact that the DAF structure has existed since 1952, many people are still only learning about this concept now.
“It’s a reflection of the aging population,” says Karen Sparks, Director of Philanthropic Advisory Services with BMO Private Wealth, about the increase in DAFs. “As Canadians age, they tend to give larger amounts to charity, and a DAF may be a better option for some individuals than creating a private foundation.” It is important to consider the benefits of both structures as they each offer unique benefits for creating a philanthropic legacy.
So, what exactly is a DAF and what do you need to know about setting one up? Here’s what you need to know.
Understanding the donor-advised fund
For decades, most high-net-worth individuals have given large gifts through their own private foundations. This structure comes with legal startup costs as well as ongoing administrative expenses. A private foundation is its own corporation or trust structure registered with the Canada Revenue Agency as a charity and has a governing body and legal documents to guide it. Most foundations require a professional investment advisor, accountant and legal counsel to operate and remain compliant. Some larger foundations may even have paid staff.
A DAF is essentially a charitable investment account held within a public foundation where you contribute assets and you control the grants made to charitable causes. Because the DAF account is held within a registered charity, donors get a tax receipt for their contributions. Friends, family, and anyone else can donate to the DAF and receive a tax receipt, too.
“A DAF is a philanthropic structure,” says Sparks. “It allows you to take a portion of your net worth and devote it to philanthropy. You set it aside so it can grow tax-free while allowing you to grant those funds to charities and potentially give even more over time.”
Setting up a DAF
Anyone who wants to start a DAF should speak with their financial advisor, says Sparks, as they can recommend which organization to use. Many financial institutions, including BMO, offer these philanthropic advisory services. Your advisor can help figure out what you can afford to give, whether now or later through your estate, and which assets can be used for giving, such as securities, a life insurance policy or cash.
To determine which organization to work with, you’ll want to ask a few key questions. For instance, find out if there are any restrictions around giving. While DAFs can currently only gift to qualified donees, which includes any registered Canadian charity, some may impose an annual disbursement of, say, a percentage of assets under management, while others may not.
While the point of the DAF is to give to charity, there may be times, such as when you’re starting to build up assets, when you won’t want to reduce the fund, so it’s an important factor to consider. “It’s totally up to the clients as to what they want to do,” says Sparks about BMO’s offering. “We have clients who have yet to make a grant because they are growing their DAF, and we have clients who grant regularly. On aggregate, though, BMO clients give out about 12% per year from the BMO Charitable Giving Program.”
Investment matters
Another consideration is around how the financial institution invests your money. As the donor you can work with your investment professional, to influence the asset allocation of the DAF, though it must conform with the public foundation’s own investment parameters. “It’s a pretty broad mandate,” says Sparks, “but the maximum amount you can put in equities is 80%, and there are some restrictions on how much can be concentrated in any one stock.”
Although it’s possible to set up a DAF that will ultimately be funded from your estate, if you want to set one up now, during your lifetime, you’ll want to see if there’s a minimum investment. In most cases, you will have to contribute something since you’ll want that money to grow over time. At BMO, for instance, you can create your down DAF with a minimum contribution of $25,000, notes Sparks. Most clients choose to only grant the interest gains to charities, but others do dip into the principal. “It’s totally up to the client to determine what their granting strategy looks like,” she says. “Once you put money in the DAF, you can’t get it back, it has to be used for charitable purposes.”
When it comes to choosing how charities receive donations, there’s flexibility there, too. Some donors will develop a strategic granting process that may involve family members, while others will simply direct money to a charity to use as they see fit. “Either way works, and both provide clients with tremendous satisfaction with their giving,” says Sparks.
As Canadians age and consider philanthropy, the DAF’s popularity is on the rise. Sparks shares that since 2021, BMO’s DAF program has grown by 500%. “The structure provided by a DAF makes it easy to take charitable giving to that next level while also being thoughtful and impactful in your giving,” she says.
If you become one of the thousands of Canadians to set up a DAF, Sparks has one last piece of advice: create a legacy granting plan to ensure the funds within the DAF last and are granted to causes you support after you’re gone. “If you are not able to name a successor, that is, someone you trust to make granting decisions on your behalf after you pass, it’s important to document legacy granting instructions so your charitable dollars are working in ways you intended,” she explains. “We don’t want money to languish inside of the DAF because it isn't being granted.”
