Many clients appreciate advice on tax-effective charitable giving, and one strategy that’s worth considering is the use of “donor-advised funds.”

The concept underlying a donor-advised fund is quite simple, says Susan Manwaring, lawyer and head of the charities and not-for-profit practice group at Toronto-based Miller Thomson LLP. A gift is made to a public foundation, which then segregates the donation into an account. The foundation then tracks the income earned on the account and the gifts made from it.

“One of the key attractions of donor-advised funds for clients is that the foundation will invite the donor to make recommendations on how the annual disbursements are to be made,” Manwaring says. “These recommendations can change over time. Generally, a donor is asked annually to recommend which charities the donor would like to support with funds in the donor’s account.”

Giving to donor-advised funds represents a new option in addition to the traditional patterns of philanthropy in Canada, Manwaring says. Charitable giving has usually involved donors making annual donations to a specific charity, or giving larger gifts through bequests or their private foundations, she says.

An increasing number of Canadians are now following a trend that began in the U.S. in the early 1990s. The biggest player south of the 49th parallel has been Fidelity Investments, which launched a donor-advised fund known as Fidelity Charitable Gift Fund in 1991. That fund has made more than one million grants worth a total of US$5 billion among 88,000 organizations.

In Canada, says Manwaring, donor-advised funds have been traditionally offered by community foundations, which establish and administer the funds with the idea of making disbursements to support local causes.

However, there has been very little marketing to the public of donor-advised funds as a giving option. That may change with the Private Giving Foundation — a public foundation established by TD Waterhouse Canada Inc. to offer donor-advised funds. (For more information, visit www.tdwaterhouse.ca/privategiving/.)

TD launched the foundation in October 2004 and, to date, no other financial institution
in Canada has followed suit. The foundation has taken in about $16 million in donations since opening.

Jo-Anne Ryan, executive director of the Private Giving Foundation in Toronto, points out that her organization has a broader focus than any given community foundation.
Any registered charity in Canada — there are about 80,000 — would qualify as a target for a donation made through the foundation.

There is also a key difference between her organization and most private foundations, she says. Private foundations are usually set up by clients who intend to donate millions. But through the Private Giving Foundation, clients can start with $10,000.

Donor-advised funds can be attractive to clients for two key reasons. First, they don’t involve the time and administrative cost involved in setting up a private foundation, yet donor-clients still have influence over how their donations are used. Philanthropic clients have traditionally used private foundations as a means of controlling the disbursement of their donations. However, says Ryan, usually the founders sit on the boards of their private foundations: “They assume the fiduciary responsibility of running the foundation, which can be a lot of work.”

The second reason donor-advised funds can be attractive to a client is they are offered by public foundations, which results in an “enhanced tax benefit” for client-donors, says Manwaring.

There have been recent changes to the Income Tax Act dealing with individuals who donate publicly traded securities to a public foundation. When the client donates the stock, there is a “deemed disposition” and only 25% of any capital gain is taxed. This contrasts with donating publicly traded securities to a private foundation, in which case 50% of the capital gain is taxable.

Enhanced tax benefit

The development of donor-advised funds simultaneously with the change in taxation of publicly traded securities has inspired many clients who have been sitting on stock to sell it, declare the taxable capital gain and get a charitable receipt, says Ryan.
Otherwise, she says, they would continue to hold the stock. “Now they can start building a legacy of giving,” she says.

Her organization has disbursed about $735,000 to the charitable sector so far this year.
“A lot of that was from people who were sitting on stock for years,” she says.

The enhanced tax benefit for donating to public foundations attracts clients who will already be getting tax credits for making charitable donations, says Manwaring.

@page_break@Although clients recommend which charities should benefit from their contributions to donor-advised funds, they should be aware that in order for their donations to qualify as gifts under income tax law, they must transfer all ownership rights of the donation, so the foundation operating the donor-advised fund retains control over all of its decisions, including investing and grant-making.

This coincides with the duty of a foundation’s board of directors to pursue a “prudent investment” policy, as mandated by provincial trustee legislation. It means the foundation must review all donor recommendations and ensure they are appropriate.

For example, all of the recipient charities must be reviewed to ensure they are valid, qualified donees — entities that are registered and entitled to receive gifts under the federal Income Tax Act.

Donor-clients should be mindful of the fees involved in donor-advised funds. It is important to ask donor-advised fund organizations to detail their investment and fund-management costs.

On a broader scale, says Ryan, it’s important for advisors to suggest to their clients that they incorporate charitable giving into their overall planning. Some surveys show clients have stronger relationships with advisors who can talk about charitable giving, she says: “Talking about donor-advised funds is one opportunity to do that.” IE