Today’s blog was written by Kate Stephens, Senior Trust Officer & Director with BMO Trust Company. Kate can be reached by email at Kate.Stephens@bmo.com.

With the recent passage of Giving Tuesday on November 30, charity is on the minds of many Canadians. One vehicle for planned charitable giving that has gained popularity in recent years is donor-advised funds (“DAFs”). A DAF is established when a donor makes a contribution to a foundation or financial institution and that contribution and the fund operates much like a trust fund in that the donor (like a settlor) does not retain legal ownership, and the attendant rights, over any property they place in the fund. However, the foundation or financial institution administering the property “provides administrative and investment assistance to the donor and gives the donor advisory privileges about how it should deal with the donated property.”[1]

From 2019 to April 2021, there has been a 43.6-per-cent year-over-year growth in the number of new donor-advised funds set up through the BMO Charitable Giving Program according to BMO Private Wealth’s head of Estate Planning and Philanthropic Advisory Services, Lydia Potocnik.[2] It’s easy to see why: among other benefits, a tax credit is available as soon as the donation is made; the donor retains a degree of control over how the DAF is distributed; the DAF requires far less administrative work from a donor than establishing a charitable foundation; and the DAF has the potential to create a long-lasting philanthropic legacy for the donor.

Additionally, there is a great deal of variation in how DAFs can be set up. Donors can choose that monies from the fund be paid to specific charities, or allow some flexibility so that monies can be directed more broadly to causes supported by the donor. Some donors may want limited involvement, while in some instances donors request that grant-seekers apply on an annual basis to receive a portion of DAF funds.[3]

However, there are some risks associated with DAFs, and they may not be right for all donors in all circumstances. Foundations, financial institutions, and donors should be wary of the potential reputational risk if DAF monies are given to charities or organizations that lack transparency, use a significant portion of donations for overhead, or support causes that do not align with the values of the foundation or financial institution administering the DAF.

Drafting lawyers should be careful about the language used in wills to direct gifts to DAFs established during the donor’s lifetime. In one B.C. case, the will directed that a sizeable gift to the Vancouver Foundation was “to be added to the capital of The Paul Sugar Palliative Support Foundation,” a DAF that had been established conditionally during the deceased’s lifetime.[4] Ultimately, the court decided that the gift was not meant to be part of a permanent DAF with only income going to the charity, but that all the funds were available to the charity at its discretion.

Finally, with the growing popularity of DAFs in Canada, the government has begun to look at a regulatory framework for DAFs. The 2019 Senate of Canada report Catalyst for Change: A Roadmap to a Stronger Charitable Sector noted concerns that DAFs do not provide funds to charities in a timely fashion, as they can carry on perpetually assuming they can generate enough income to meet the annual disbursement quota established by the CRA (currently at 3.5% of capital assets). So we may see regulations that are designed to limit how long a DAF can hold onto donated property without significant payouts.

Nonetheless, DAFs remain a beneficial and flexible tool for philanthropic-minded Canadians to contribute to charitable causes and leave a lasting legacy.

[1] Ian Murray, “Donor Advised Funds: What Can North America Learn From the Australian Approach?”, online: (2020) 6 CJCCL 8 at p. 263 <www.cjccl.ca>.

[2] Brenda Bouw, “Why donor-advised funds are surging in popularity”, The Globe and Mail (29 April 2021), online: <https://www.theglobeandmail.com/>.

[3] Devon Hurvid, “donor advised funds: what fundraisers should know”, Imagine Canada (24 April 2019), online: <https://imaginecanada.ca/en/360/donor-advised-funds-what-fundraisers-should-know>.

[4]The Paul Sugar Palliative Support Foundation v. Creighton Estate, 2017 BCSC 502 (CanLII).