Generous Canadians looking for maximum impact in their giving are turning increasingly to donor-advised funds.
“A donor-advised fund is a personal charitable account. It’s a vessel that enables an individual or a family to make donations over a lifetime,” says Lydia Potocnik, head of estate planning and philanthropic advisory services for BMO Private Wealth.
Setting up a donor-advised fund can be done with the help of a financial advisor, a family office, financial institution or a charitable organization that will receive the funds. The donor contributes to a foundation that’s recognized as a registered charity by the Canada Revenue Agency. The CRA keeps a list of the charities it recognizes on its website.
The recipient organization then issues a tax receipt for the initial donation. After that, the money in the fund is invested and gains are sheltered from tax; the donor later directs where grants from the fund will be made.
Tax benefits provided by donor-advised funds are similar to those for a private foundation controlled by an individual or a family; the difference is that the public foundation that receives the donor-advised funds takes care of the administration, distributing funds as the donor directs.
“A donor-advised fund can be very appealing for people who want to give back and are in a position to do it,” says Bibi Patel, vice president at the Ottawa Community Foundation. “Setting up one can be triggered by an event such as the sale of a business or a bequest, where someone has come into a sizable sum of money.”
These funds have grown to almost $6 billion and are on track to reach $10 billion by the end of 2026.Investor Economics
Sometimes donors set up donor-advised funds in December to help with tax planning, Patel adds.
“They realize that it’s the end of the tax year and they want to make a donation but they don’t know yet where they want the money to be directed. They can contribute to the fund, get a tax receipt and decide later where they want to direct the funds,” she says.
Donors direct their contributions to different intermediaries, depending on the type of fund to which they are donating. For example, clients of BMO Nesbitt Burns would work with their investment advisor, Potocnik says.
These clients would set up their donor program through the BMO Charitable Giving Program, which is administered by the Charitable Gift Funds Canada Foundation (also known as Gift Funds Canada), a CRA-registered charity.
Donors who contribute directly to an organization such as the Ottawa Community Foundation would direct the use of their funds through an advisor designated by the organization. An advisor can manage the investments held by a donor-advised fund, but it’s still up to the donors to decide who should receive the funds.
The threshold for setting up a donor-advised fund can vary. BMO requires a minimum initial contribution of $100,000 for a donor-advised fund, but Patel says the Ottawa Community Foundation offers programs that let contributors begin their donor-advised funding program for as little as $5,000.
“We want the opportunity to be available to as many people as possible,” Patel says.
Donors can contribute cash or in-kind donations such as publicly listed securities, or they can make deferred contributions by naming a donor-assisted fund as the beneficiary of a registered retirement savings plan (RRSP), registered retired income fund (RRIF), a tax-free savings account (TFSA) or a life insurance policy.
Donor-advised funds usually charge a fee for administering contributions; BMO’s fees, for example, start at 0.85 percent for the first $100,000 and decline for larger contributions.
Is a donor-advised fund for you? Many Canadians seem to think so. Investor Economics, a Toronto-based research firm, reported that the value of Canadian donor-advised funds grew between 2016 and 2018 at a compound annual rate of 14.3 percent. Also during that period, the number of donor-advised funds grew by 35 percent.
“As a result of the involvement of major banks, mutual fund companies and dealers, not to mention community foundations, assets in these funds have grown to almost $6 billion and are on track to reach $10 billion by the end of 2026,” the research group said in its most recent report. “At the same time, annual grants to operating charities have reached almost $1 billion a year, and this activity has picked up since the beginning of the pandemic.”
As Patel observes, a donor-advised fund can be a good option for someone who has come into a lot of money, intends to be generous but has not yet decided where to direct this generosity and would like charities, not the tax department, to receive the funds.
The real worth of a donor-advised fund is what it brings to the giver, Potocnik says. “It’s a way to make that step from simply donating money to true philanthropy.”