Donor Advised Funds

You’ve built a successful business, have more than enough money to retire comfortably and provide for your family, and are looking for different way to donate to charity.  You’ve heard about Donor Advised Funds but are not sure why and how they would benefit you.  Below I’ll describe how Donor Advised Funds can work for you.

A Donor-Advised Fund is a type of charitable giving vehicle that allows you to contribute to a fund, receive immediate tax benefits, and then recommend how money should be distributed to charitable organizations over time. Donor Advised Funds combine the flexibility of private foundations with the simplicity of a donor-managed fund, offering an efficient way for donors to manage their charitable giving.

In Canada, donor-advised funds have become an increasingly popular option for philanthropists looking for a streamlined way to donate to multiple charities, while also gaining tax advantages and maintaining a level of control over their donations. Let’s touch on some pros of Donor Advised Funds:

Key Advantages

Immediate Tax Benefits: Donor Advised Funds allow donors to receive an immediate tax deduction for their contributions, even if they don’t immediately distribute all the funds to charities. This provides significant flexibility when managing your charitable giving strategy

Control and Flexibility:  Donors maintain a high degree of control over how money is distributed.  Money can be gifted to multiple charities, specific projects, and even anonymously. Money can be parked in the donor advised fund over time which can allow you to do more research into what cause you’d like to support.

Simple Set up: Setting up and managing a DAF is relatively simple compared to establishing a private foundation. The sponsoring organization (for example) Canada Gives, handles all the administrative details, including compliance with CRA.

Impact Over Time: Money invested inside a Donor Advised fund can grow, increasing the amount available for future gifts. This can help amplify a future gift to future generations,.

Cost-Effective Alternative to Private Foundations: Donor Advised Funds provide a cost-effective way to achieve many of the benefits of a private foundation without the and legal complexities and administrative paperwork. 

Donor Advised Funds in Action

We’ll take Sven- he’s 63 years old, and married with 3 kids. He owns a successful forestry business and has a holding company with investments worth $2M. There investments have grown over time, with a gain of $1 million. Sven wants wanted to make a charitable contribution and is looking for options.

 If Sven sells the investment portfolio, it would trigger a $1 million capital gain, resulting in $360,000 owed in taxes.  Sven establishes a Donor Advised Fund (DAF) with a community foundation at no cost to his family. He donates the entire $2 million in appreciated securities to the DAF, completely mitigating the $360,000 capital gains tax.

 The shares are sold at the market price, generating a charitable receipt for $2 million. This receipt could offset up to 75 percent of his net taxable income, saving him $1 million in taxes which he could use now or over five years, which would also allow the triggering of any other capital gains tax from other assets.

 Additionally, the $1 million gain from the donation creates a Capital Dividend Account (CDA) credit, enabling Sven to withdraw that amount tax-free from his company, saving a further $470,000 of tax.

The money inside the donor advised fund can now be invested, and Sven has complete control over who to gift the money to now, and in the future.

In Summary, Donor Advised funds provide Immediate Tax Benefits, Control and Flexibility, Simple Set up, Cost Effectiveness, and Impact over time.When we create financial plans for clients, we often work with your trusted lawyers and accountant to ensure the right strategy gets put in place.  Please reach out, if you think this could be of help to you.