Donor-Advised Funds - a new report

publication date: Oct 30, 2018
 | 
author/source: Keith Sjogren, Karen Hudson, and Katherine Dalziel

Canadian donors able to consider relatively large and more 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 there is an urgent need for greater levels of awareness about the benefits and challenges of this fast-emerging side of philanthropy.

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 receipt for tax purposes along with administrative and investment services. The funds are subsequently granted, often over time, by the foundation to selected and qualified donees on the advice of the donor.

Since DAFs are not standardized through regulation, each sponsoring foundation has the ability to establish its own terms and conditions with respect to minimum contributions, minimum balances, investment options, and various types of fees.

The Current Situation

DAFs, which have been available in Canada since 1952, 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. DAF account holders are generally existing supporters of charities, over 50 years old and often in receipt of a settlement from a liquidity event or a lump sum associated with employment.

As a point of reference, 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. The Canadian total is close to that of DAFs in the United Kingdom but dwarfed by the US$85 billion in total DAF assets reported in the United States. It is the case, however, that the average balances in Canada and the United States are similar.

Community foundations hold slightly over half of DAF assets in Canada with total assets estimated at $1.7 billion. Other national sponsoring foundations are estimated to have $1.5 billion in assets. Our research, which will be published in a report by the end of October 2018, 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 recognized as being major drivers of growth in the use of DAFs and the establishment of a number foundations specifically for the purpose of hosting such funds.

Outlook for Donor Advised Funds

Given the increased awareness of DAFs, the trends in the creation and ownership of wealth in Canada, the significant transfer of wealth projected for the next two decades and the increasingly active role in retail philanthropy being played by financial institutions and community foundations, we anticipate that assets held in DAFs and the flow of grants from DAFs 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.

Investor Economics, a Strategic Insight business, is about to release a comprehensive report on the market for DAFs and the prospects for the future. The authors of this new study are Keith Sjogren, Managing Director at Investor Economics, Karen Hudson, Consultant at the same firm, and Katherine Dalziel, a student in the Master of Philanthropy and Nonprofit Leadership program at Carleton University in Ottawa. Keith, by the way, is the Chair of the Advisory Committee that supports that program. Any charity or institution looking to purchase the report should contact Keith at keith.sjogren@strategic-i.com or at 647 943 1637. The report will be available at the end of October 2018.



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