Donor-advised funds allow donors to make a charitable contribution and receive a tax receipt as soon as the fund is established.ljubaphoto/AFP/Getty Images
Making a large charitable donation is a big decision. For those who know they want to give, but haven’t quite decided how to do so, experts say a donor-advised fund could have the flexibility they’re looking for.
Donor-advised funds allow donors to make a charitable contribution and receive a tax receipt as soon as the fund is established, while being able to recommend which charities will then receive support. They can contribute to the fund as often as they like after the initial donation and also have input on the timing of grants.
Devoid of the overhead complications that can come with setting up a charitable foundation or the weight of making a one-time donation, donor-advised funds in Canada are steadily increasing in popularity against the backdrop of the great wealth transfer that is now under way.
The largest transfer of generational wealth in Canadian history is expected to take place over the next two decades, according to Chartered Professional Accountants Canada. The umbrella organization for accountants predicts $1-trillion will be handed down from baby boomers to their Gen X and millennial heirs between now and 2026 alone – and charitable trusts such as donor-advised funds are likely to be a part of this transfer.
According to a 2023 report by the Canadian Association of Gift Planners and philanthropic consulting company KCI, there are about 20,500 donor-advised funds in Canada, and about 3,800 of those were opened between 2019 and 2021. At the end of 2021, total assets held in donor-advised funds in Canada were $8.5-billion. The transfer of wealth between generations is a factor for this steady growth in assets, the report says.
Mary Hagernman, senior portfolio manager, wealth adviser and financial planner with the Mary Hagerman Group at Raymond James, said she often brings up donor-advised funds in conversations with clients who are looking to give.
“I tell them they have the opportunity to give back in a tax-efficient and creative way, that can also be something they share with their family, helps them create a legacy and makes them feel good,” she said.
The first step in setting up a donor-advised fund is deciding where to open it, Ms. Hagerman said. Examples of places where a fund could be opened include foundations affiliated with financial institutions, or community and public foundations.
The donor names the fund and its advisers. A fund can also be opened by joint donors. For example, during the pandemic, Ms. Hagerman said she and her husband, who’s a physician, set up a donor-advised fund to support health and wellness-related causes.
Next, the donor or donors need to make their initial donations, which will have to amount to the minimum set by the foundation, she said. Finally, the donors receive a charitable tax receipt.
“Then, the donor can make any sort of recommendations they want for where the donations are made and at what pace,” Ms. Hagerman said.
Once money is put into a donor-advised fund, it can only go toward charities that meet the Canadian Revenue Agency’s qualifications and can’t be taken back out, Ms. Hagerman said. Charitable tax receipts are only issued when money is put into a fund, not when it’s then distributed to a charity, she added.
Donors can ask other people to contribute to their fund, but only the person giving the money gets a tax receipt.
St.John McCloskey, a tax lawyer with Clark Wilson LLP, said it’s important to keep in mind the loss of control that comes with a donor-advised fund. While it’s rare that a foundation wouldn’t honour the recommendations of a donor, the fund is advised ‐ not directed ‐ by the donor.
As a legacy, Mr. McCloskey said donor-advised funds are a fairly simple way for someone to give during and after their life. And if they change their mind about the causes they want to support, their fund can often be adapted to do so, depending on where they set it up, he added.
“If you want to ensure that the money that you set aside continues to do good, a donor-advised fund is a really good option.”
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