Donor-Advised Funds:  Smarter Giving With Greater Flexibility

Charitable giving often starts informally, but as the amounts grow, it can make sense to put more structure around it.  Historically, families wanting a more organized approach to philanthropy might have established their own charitable foundation. For some, that still makes sense. Increasingly, however, donor-advised funds have become an attractive alternative because they can provide many of the benefits of a private foundation with less cost, administration and complexity.

What is a donor-advised fund?

A donor-advised fund, or DAF, is a charitable account established with a registered Canadian charity or public foundation.

The donor contributes cash, publicly traded securities or, depending on the provider, other assets to the fund. Because the contribution is an irrevocable charitable gift, the donor generally receives a charitable donation receipt when the contribution is made.

The assets can then remain invested within the DAF and be granted to charities over time. The donor recommends which registered charities should receive grants, while the sponsoring charity retains ultimate authority over distributions.

One of the key advantages is that this separates when you make the charitable donation for tax purposes from when you decide which charities ultimately receive the money.

How might a DAF work in practice?

Consider someone who normally gives $30,000 to $50,000 a year to charity but has an unusually high-income year because of the sale of a business, a large capital gain or another liquidity event.

Rather than simply increasing donations to operating charities that year, the donor might contribute $200,000 to a DAF. The charitable donation receipt is generated in the year the contribution is made, subject to the normal tax rules, while the money can be invested and distributed to charities gradually over future years.  This can make charitable giving more deliberate and allow a family to set aside a pool of capital specifically for philanthropy.

Donating appreciated securities

DAFs can be particularly useful for investors who own publicly traded securities with significant unrealized gains. Under current Canadian tax rules, qualifying publicly listed securities donated directly to a qualified donee can generally be donated without triggering the normal capital gain that would arise on a sale. The donor can also generally receive a charitable donation receipt based on the eligible value of the gift.

For someone already intending to make a charitable donation, donating appreciated securities rather than selling them and donating cash can therefore be substantially more tax-efficient.

A DAF can make this easier. Instead of transferring securities separately to several charities, an investor may be able to make one contribution to the DAF and subsequently recommend grants to multiple organizations.

Significant charitable gifts should, of course, be coordinated with the donor’s tax and legal advisors.

Keeping charitable assets invested

Money contributed to a DAF does not necessarily have to sit in cash while the donor decides where it should ultimately go. Depending on the provider and size of the account, the assets can be invested with a longer-term strategy. Investment income and capital gains earned within a DAF or charitable foundation are generally not subject to income tax in the same way they would be in a personal taxable account, allowing more of the investment return to remain available for charitable purposes.

For larger charitable pools, one possible approach is to preserve the original capital over time and use some or all of the investment returns to fund annual charitable distributions. This can help create a more enduring philanthropic program rather than a series of one-time gifts.

For Bridgeport clients, we can work with DAF providers that permit an outside investment advisor to manage the underlying portfolio. Where permitted, Bridgeport can continue managing those assets, subject to the investment policies of the DAF sponsor.

A way to involve the next generation

A long-term charitable pool can also provide a useful way to involve children and grandchildren in family decision-making. Family members can help evaluate charities, discuss priorities and recommend how annual grants should be allocated. This can create a practical forum for teaching younger generations about stewardship, responsibility and the family’s values.

For families with a significant operating business, this can be particularly valuable. Not every child or grandchild will necessarily work in the family business, but philanthropy can provide another constructive way for family members to work together around a common purpose. Over time, the charitable fund can become a family institution in its own right, without the complexity of operating a standalone foundation.

DAF or private foundation?

A private charitable foundation provides another way for a family to formalize its philanthropy.

With a DAF, the donor is effectively operating a charitable account within an existing registered charity. The sponsoring organization handles charitable registration, donation receipts, tax filings, record keeping and much of the administration.

With a private foundation, the family establishes and operates its own registered charity. That provides greater independence, but also greater responsibility, including governance, financial records, annual CRA filings and ongoing regulatory compliance.

There is also a somewhat counterintuitive difference when it comes to privacy. A family’s own private foundation is a registered charity and is subject to public reporting requirements. Certain financial and governance information can therefore become publicly available.

A DAF can offer greater practical privacy because the fund sits within the sponsoring charity rather than existing as a separate registered charity in the family’s name. Depending on the provider and how grants are structured, donors may also have greater flexibility around whether their name is disclosed to recipient charities. For families that prefer to keep their philanthropy relatively low-profile (and perhaps avoid a steady stream of unsolicited funding requests) that can be a meaningful advantage.

A private foundation may still be the better structure where the assets are substantial, several generations will be involved, or the family wants its own board, name and governance process.

A DAF is generally simpler. The trade-off is less control: the sponsoring charity legally owns the assets and must approve grants, and providers may impose administrative fees or restrictions on investments and distributions.

The Bridgeport Perspective

We think of DAFs as occupying an attractive middle ground between making charitable donations individually each year and establishing a full private foundation.

For someone giving relatively modest amounts, simply donating directly to charities may be easier. At the other extreme, a family committing many millions of dollars to philanthropy and wanting to create a lasting institution may have good reasons to establish its own foundation.

Between those two extremes, a donor-advised fund can be a very effective tool. It can allow a family to make a large charitable contribution when the timing is financially or tax-efficient, invest the assets for the longer term, involve children and grandchildren in charitable decisions and make grants over many years without having to operate a separate charitable organization.

Where appropriate, Bridgeport can work with a client’s tax and legal advisors and a suitable DAF provider to determine how the structure fits within the family’s overall plan and, where permitted, continue managing the assets set aside for future charitable giving.

Important note: This article is for general information only and should not be relied upon as tax, legal, accounting or financial planning advice.