Donor-advised Funds

Canadians are increasingly turning to structured giving vehicles, such as donor-advised funds (DAFs)…

Canadian donors able to make relatively large and strategic donations are increasingly turning to structured giving vehicles, such as a donor-advised fund (DAF). DAFs provide an intersection between wealth management and philanthropy and are increasingly viewed by asset managers and advisors as a necessary part of the wealth management tool box. As such, there is an urgent need to raise the level of awareness about the benefits and challenges of this fast-emerging side of philanthropy. To meet the needs of its clients, Investor Economics has released a comprehensive report on the market for DAFs and the prospects for the future.

A primer

A DAF is an account within a private or public foundation. To establish a DAF, a donor makes an irrevocable gift to the foundation and, in exchange, receives a tax receipt along with administrative and investment services. The funds are subsequently granted by the foundation, often over time, to operating charities on the advice of the donor.

Since DAFs are not standardized through regulation, each sponsoring foundation, such as the foundation established by the TD Bank, has the ability to establish its own terms and conditions with respect to minimum contributions, minimum balances, investment options and fees.

The Current Situation

DAFs are generally favoured by affluent donors who seek flexibility on various levels but who may not have an ability or interest in establishing a private foundation.

In 2016 there were 5,566 private foundations in Canada with total assets of $41 billion and an average asset level of $7.4 million. By comparison, total assets held in donor advised funds at the end of 2016 were estimated to be $3.2 billion. The average balance held in the estimated 10,700 Canadian DAF accounts at the end of that year was approximately $300,000. Our research indicates that assets held in DAFs have been growing at approximately 10% per annum in recent years.

The 2007 change to federal tax regulations which eliminated capital gains tax on donated publicly-listed securities, as well as the demographics of wealth, are major drivers of growth in the use of DAFs. 

Outlook for Donor Advised Funds

Given the increased awareness of DAFs, the trends in the creation and ownership of wealth in Canada, the $1 trillion transfer of wealth projected for the next two decades, and the increasingly active role in retail philanthropy being played by financial institutions, financial advisors and community foundations, we anticipate that assets held in DAFs, and the flow of grants from DAFs to charities, will continue to increase over the medium term. It would not be unreasonable to expect total DAF assets to reach $6.5 billion by the end of 2023.