As more Canadians build or inherit their wealth, many are donating a portion of it to good causes. Statistics Canada says total donations claimed on tax returns rose for the third consecutive year in 2019, the latest figures available, to $10.3 billion, up 3.6 per cent from a year earlier. It also saw a notable increase in the number of donors making large donations.
Since then, the pandemic has spurred many Canadians to donate money to various causes either directly or through charitable foundations.
There are two main vehicles for Canadians seeking to make significant donations through a foundation structure, rather than directly to a charitable organization: a foundation which administers donor advised funds (DAF), or a private family foundation. Each structure can be fulfilling and tax-effective but have major differences depending on the individual’s or family’s philanthropic goals.
A private foundation is a corporation or trust registered with the Canada Revenue Agency (CRA) as a registered charity. It’s typically established and controlled by a single donor or family members who want to be directly involved in the administration and governance of the funds being donated. Private foundations can be expensive and complex to set up and maintain as well as to administer. Also, there is less anonymity given the disclosure requirements with the CRA.
Private foundations are required to satisfy detailed filings requirements which then become public information accessible to anyone. That information may mean disclosing activities outside of Canada, compensation of any employees, whether artwork or life insurance policies or other non-cash items were gifted and the names of all directors and trustees, for example.
A DAF is a fund administered by a charity created to manage donations on behalf of organizations, families or individuals. The charity that establishes the DAF can be either a public foundation, private foundation or charitable organization. The donor can recommend grants to the charity from their DAF to the donor’s preferred organizations and causes over time. A DAF is less work than a private family foundation because the administration, investment and maintenance are the responsibility of the charity managing the DAF.
The donors, if they prefer, could remain anonymous to the registered charities receiving a grant from their donated funds.
DAFs are becoming increasingly popular across North America as an efficient way for individuals, families, and corporations, to manage their philanthropy without investing the time and energy to operate their own private foundation. Toronto-based research firm Investor Economics says the value of donor-advised funds in Canada grew at a compound annual rate of 14.3 per cent between 2016 and 2018, to $5.7-billion from $4.4-billion. Investor Economics also projects the value of donor-advised funds to grow to about $10-billion by 2026.
Philanthropists interested in their own private foundations or DAFs need to understand the differences and how they work, both functionally and legally, to avoid unexpected problems or challenges in the future and ensure their intended registered charities receive the funds.
For instance, both DAFs and private family foundations provide flexibility and influence over granting. However, it’s slightly different with DAFs; donors can advise and offer input regarding how their donation is granted but the foundation makes all final DAF granting decisions. This is important for DAF donations to be recognized as a gift by law. By establishing a private foundation, the donor has more control over which registered charities receive the donation amount.
Under the federal Income Tax Act, a disbursement quota is imposed on all registered charities, including private and public foundations that have a DAF program. The disbursement quota is the minimum calculated amount a registered charity is required to spend each year on its own charitable programs or on gifts to qualified donees. In general, the disbursement quota is currently 3.5% of the charity’s property. The disbursement quota is there to help ensure that a minimum amount is being granted by the charity in a timely enough manner and the charity is not just “sitting on” the donated funds.
Taxation implications to consider
When it comes to taxes, both the foundations that manage the DAFs and private foundations are registered as charities under the federal Income Tax Act, which means they are able to issue official tax receipts to donors. This also ensures charitable entities are exempt from paying tax on their annual income.
While there are generally no limitations on the size of a donation that can be made, there may be certain minimum amounts required to fund a DAF at a foundation. However, for income tax purposes, the amount of charitable donations that may be claimed by an individual as a non-refundable tax credit in any given year is limited to 75% of net income (the limit increases to 100% in the year of death and excess amounts can be carried back and applied to 100% of income in the year preceding death). Corporations can claim a tax deduction for donations up to 75% of their net income for tax purposes.
Unused donations may be carried forward for five years. The CRA also allows spouses and common-law partners to combine their receipts and allow one person to claim the charitable donations in their tax return in order to maximize the tax credits.
Traditionally, donations have been made in the form of cash. Depending on their specific policies, foundations with a DAF program may be willing to accept other in-kind donations, such as insurance policies, artwork or shares of either publicly-traded or private corporations. There may be enhanced tax benefits to consider when making a gift of assets other than cash. For example, when shares of publicly-traded securities are gifted to a DAF or private foundation, the donor receives a tax receipt equal to the fair market value of the shares and the capital gain that would otherwise be realized on the disposition of the shares is eliminated.
Regardless of the structure used, a charitable foundation is considered by many Canadians to be an effective vehicle to meet their charitable goals and objectives. Before choosing a structure, donors are advised to consult with financial and legal advisors with the knowledge and experience in this important and growing area of wealth planning.
Many financial institutions, such as Gluskin Sheff, have in-house DAFs or partnerships with independent charities. Read more on the Gluskin Sheff Foundation for Philanthropy.