A donor-advised fund (DAF) is seen as a way to encourage a culture of philanthropy, as it offers a tax-efficient way for individuals to distribute their wealth to charitable causes of their choice. In recent years, we have seen more and more Canadians turning to donor-advised funds as a means of charitable giving. In fact, a recent study by Investor Economics showed that between 2016 and 2018, there was a 35% increase in the number of donor-advised funds set up at various foundations across Canada. But what exactly are donor-advised funds, and how do they work?
A DAF is similar to a private foundation in that it gives the donor the flexibility to be strategic in their giving. However, while private foundations are typically reserved for the ultra-rich, a DAF only requires an initial contribution of as little as $5000, making it a low-cost and convenient option for those that feel the overhead and burden of setting up a private foundation is too great. For this reason, many wealthy individuals have also now turned to DAFs, as an alternative to incurring the costs and time associated with establishing their own foundations.
How does it work?
Essentially, a taxpayer opens an account with the DAF, and makes an up-front contribution. The money in this account can then be invested according to the direction of the donor- giving them the freedom to advise on which, when, and how often charities will receive the donation. Although the funds are not disbursed all at once, this donation qualifies for an immediate charitable contribution tax deduction. One of the main advantages of a DAF is that it allows you to receive the full tax deduction right away, even though the funds may not be released for years– allowing for investment returns to compound tax-free, so they can make larger charitable contributions in the future.
Another benefit of the donor-advised fund is that it can be used as a way to avoid paying large capital gains tax upon the sale of an asset. Instead of selling the asset and incurring long-term capital gains, you can donate all or part of the investment to the DAF. You would then receive a charitable contribution deduction equal to the current market value of the asset, and would not be required to pay taxes on the capital gain.
A donor-advised fund provides individuals with the ability to meet both their financial and their philanthropic goals while creating a meaningful and lasting legacy. It allows you to plan the same way you do for contributions for retirement, insurance, and many other financial aspects of your life and has thus become a critical component of an integrated wealth management strategy.
To learn more about how to set up a donor-advised fund, contact one of our advisors here today.
