All About Estates

Foundations with Donor Advised Funds

The current Special Senate Committee on the Charitable Sector seems to be quite interested in “donor advised funds” or DAFs. In particular, members of the Committee are suggesting that the Income Tax Act should be changed to require individual funds to have minimum disbursement quotas and separate regulatory reporting. This policy trial balloon is worth debating. If for no other reason than a lot of Canadians now have their philanthropic and estate plans centred on foundations with donor advised funds.

DAFs are growing

The question is arising now because foundations with donor advised funds are one of the fastest growing charitable sub-sectors in Canada. A recent proprietary report published by financial industry research firm Investor Economics/Strategic Insight tells a story of growth.

“The total assets held in Canadian DAFs at the end of 2016 were estimated to be $3.2 billion. Community foundations currently hold slightly over half of DAF assets in Canada, with assets estimated at $1.7 billion, an amount equal to approximately one third of total community foundation assets. Other national sponsoring foundations, such as those associated with financial institutions, are estimated to have $1.5 billion in assets. The average balance held in the estimated 10,700 Canadian DAFs at the end 2016 was approximately $300,000.”

DAFs aren’t generic

A donor advised fund, or DAF, is a charitable structure that enables a donor to make a gift and then provide advice about future charitable uses of the fund, most commonly grants. But that is where the commonality ends. DAFs are creatures of the foundations that host and own them. Each foundation has its own policies and culture. Hence, DAFs vary by value, terms, the granting flexibility, charitable purposes, investment options, acceptable donations, and degrees of philanthropic sophistication. Donor advised funds aren’t generic entities.

DAFs aren’t independent

DAFs also aren’t independent entities controlled by donors. And this is where the policy proposal being mulled is wrong-headed. Donor advised funds can’t and don’t exist on their own. There is no such type of charity called a “donor advised fund” in Canada. There are only foundations — primarily public foundations — that hold donor advised funds. And those foundations have a single organizational disbursement quota based on overall assets. And, if the Investor Economics report is trustworthy, the average disbursement rate in 2016 for foundations exclusively with DAFs was 16.9% of assets.

The underlying structure and mission of the approximately 250 Canadian foundations with donor advised funds vary greatly. They include community foundations, Jewish community foundations (yup, it’s a separate category), Christian foundations, neutral foundations associated with financial institutions, and even foundations that are aligned with major operating charities. If there was a new reporting requirement, what type of foundation counts as a DAF?

Good governance is an obligation

I am in favour of higher compliance demands of foundations, not regulatory divide and conquer.  A more sensible regulatory approach is to test the compliance and governance of foundations with donor advised funds using the existing rules. A common practice, for example, is for the host foundation to require funds with liquid assets to grant at least 3.5% of assets each year. Charitable purposes must be consistently demonstrated.

The Senate Committee’s policy chatter is a challenge being issued to all Canadian foundations with donor advised funds. And if it’s not taken seriously by foundation boards of directors, the audit division of CRA’s Charities Directorate will have an obligation to step in. The long-term future of these foundations, which donors are supporting through their estate plans, depends on strong ongoing governance and succession planning.

About Malcolm Burrows
Malcolm is a philanthropic advisor with 25+ years of experience. He is head, philanthropic advisory services at Scotia Wealth Management and founder of Aqueduct Foundation. malcolm.burrows@scotiawealth.com

8 Comments

  1. Charles O'Neil

    November 15, 2018 - 2:28 pm
    Reply

    Thank you , Malcolm. A thoughtful piece, as usual. My concern is that much of the literature produced by the DAF foundations seems to focus on the growing amounts that they hold, rather than the amounts distributed to operating charities and their foundations each year. To me, the latter is the true measure of charitable activity that is subsidized by all Canadians through the charitable tax credit. Until the DAF industry, if I may call it that, understands this, the Senate committee is right to question the need for separate disbursement quotas for DAF’s.

  2. Malcolm Burrows

    November 15, 2018 - 3:17 pm
    Reply

    Charles, I agree completely. We need to focus on grants out and not just the investment war chest. If anything, there should be a wider debate on increasing the disbursement quota from 3.5% of market value to 4.5% (the old level) or even 5.0%. Thanks for contributing to the debate.

  3. Mike Todd

    November 15, 2018 - 3:35 pm
    Reply

    Good piece Malcolm, and thanks for leading the charge on this. My fear is a lot of the rhetoric from the US debate on DAFs (where there is effectively no disbursement quote) is making its way into Canadian discussion without the appropriate fact-checking. I’d hate to see the Canadian baby get thrown out with the American bath water.

  4. Ratna Omidvar

    November 15, 2018 - 4:51 pm
    Reply

    Thank you Malcolm for this. I appreciate you weighing in on our policy “chatter”. Much to chew over.

    • Malcolm Burrows

      November 15, 2018 - 8:09 pm
      Reply

      Senator Omidvar – And we greatly appreciate your engagement in the sector and leadership of the Senate Committee. Malcolm

  5. Lorne Jackson

    November 15, 2018 - 6:20 pm
    Reply

    Thank you Malcolm for bringing this forward. I agree with your last comment about the need to consider increasing the disbursement quota. As President of the Canadian National Christian Foundation our Board a few years ago decided to be a foundation of DAF’s where we encourage the donors to be generous in there gifting out to charity. This year for example year to date CNCF has given out over 44% of its assets to charity. This has been typical for us for years and yet our assets still continue to grow albeit slower but we are pleased to see the charities benefitting .

    • Malcolm Burrows

      November 15, 2018 - 8:08 pm
      Reply

      Lorne – Thanks for your voice on the topic and your urgency around charitable purposes. One of the great paradoxes of foundations that encourage high-conviction granting is more dollars are donated.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.