Can donor-advised funds save Canada’s social impact sector?

When Alice MacKay died in 1943, she left behind $1,000 – a small fortune – scrimped and saved from a secretarial job in Vancouver. Her generosity came with explicit instructions. This money was to be carefully invested. Any earned interest would go towards helping homeless women escape poverty.

Was MacKay’s last act of generosity the first donor-advised fund?

As the story goes, ten prominent Vancouver businessmen, impressed by MacKay’s generosity, contributed $10,000 each and started the Vancouver Foundation. Her gift was nowhere near the size of the towering endowments made by the Rockefellers or other wealthy industrialists, but it bore remarkable similarities. It was money a donor set aside for a particular cause, managed by a third party. “One can argue that this was a donor advised fund,” says Craig Hikida, the foundation’s vice-president of donor services.

Nearly eighty years later, the Vancouver Foundation has around 600 different donor-advised funds under its management. And while Hikida doesn’t see a difference between them and a traditional endowment, the Canadian social impact sector has been embroiled in debate over the use of donor-advised funds. COVID-19 is only raising the stakes. Social impact organizations are more urgently needed than ever even as their revenue streams dry up.

Donor-advised funds (DAFs) are controversial. While experts and foundation executives say they represent one of the fastest growing charitable tools for social good in Canada, DAFs are poorly regulated by the Canada Revenue Agency and haunted by accusations of opacity. Yet they may be quite useful during the COVID-19 pandemic as funding sources for social impact organizations either dry up or are needed in unexpected ways. Ironically, DAFs, for all of their faults, aren’t all that different from those towering endowments. They simply offer donors the illusion of greater control over their giving — and that could mean more money for social impact organizations on the front line of the greatest crisis Canada has seen in a generation.

In brief, a DAF is created when a donor gifts capital through a registered charity, usually a foundation. Any money put into this fund then becomes the legal responsibility of this ‘DAF charity’. According to a Charters law firm primer on DAFs, the initial donor is “given the unique role of being able to periodically make non-binding recommendations to the DAF charity concerning the distribution of assets from the DAF over to other registered charities.” This usually happens annually, the primer says, although it can happen more frequently. What’s most important is that the ultimate legal authority over the fund rests with the DAF charity, not the donor, although the primer says DAF charities will “generally follow” the advice of their donors.

Canadian community foundations have leveraged the flexibility and responsiveness of DAFs as the COVID-19 pandemic spread across Canada. Darren Pries-Klassen, CEO of Abundance Canada, says that unlike a traditional endowment, a DAF doesn’t require a court order to change its mandate. It simply requires a meeting with the DAF holder and a signature. Pries-Klassen says there’s nothing wrong with the steady long-term approach taken by old school endowments, whereby a cause or series of organizations are funded over the course of generations. However, we’re living in a pandemic that no one anticipated a year ago. “Endowments are not able to respond to that shifting need, whereas donor advised funds are beautifully positioned to respond to the changing needs because of what COVID has done to the charitable sector.”

When COVID-19 struck, donors to the Winnipeg Foundation’s 300 different DAFs rolled up their sleeves and pitched in. Some funded local arts organizations unable to hold performances because of public gathering restrictions. Others supported local food security organizations. Mary Beth Taylor, the foundation’s director of donor engagement, says the collaboration between responsive donors and the foundation helped redirect more funding to Winnipeg – a total of $9 million – at a time of great need. “We were able to grant a lot more because we were working together with our donor advisors,” she says. “We were talking to them about what they had available to direct to organizations and shared with them some of the applications that we’d received from organizations that they…cared about.”

“We were able to grant a lot more because we were working together with our donor advisors.”

This philanthropic relationship became symbiotic. Donors themselves wanted to choose where they could give their money but didn’t necessarily have an on-the-ground understanding of the most urgent needs in a given community. “They were looking to us for community knowledge,” Taylor says. And in return, DAFs provide donors a proximity that family foundations might not. “They wanted to do it based on the causes that matter to them,” says Janeen Webb, vice-president of donor engagement at the Calgary Foundation, an organization with just under 1,400 DAFs under management. “And when you make philanthropy so deeply personal and when you apply a multi-generational lens to that philanthropy, it’s a powerful narrative.”

DAFs also offer, on the surface at least, the chance for communities to have a greater say in philanthropy directed at their concerns. MakeWay, a Vancouver-based organization, launched two $300,000 rapid response funds to support remote communities and reinforce social initiatives across Canada. It waived all reporting requirements. Leanne Burton, MakeWay’s director of partnership development, says DAFs are intended to give as much power to a particular community as possible. “In terms of foundations, we fund the most Indigenous-led work in Canada,” she says, “and that’s largely because of DAFs and because of trust-based philanthropy. We don’t want to work with communities where we are directing their activities and their outcomes and creating a lot of bureaucracy around what they do.”

That said, there is a colonial aspect to how MakeWay must sign off on Indigenous funding requests, another case of settlers approving philanthropy intended for Indigenous communities. Having DAF charities sign off is required by law — DAF assets are their legal responsibility, not the recipient or the original donor. Still, Burton says MakeWay is doing what it can to put as much power over its 115 DAF funds into the hands of the communities that need them. “[We’re] trying to get away from the colonial, paternalistic approach to philanthropy,” she explains.

DAFs nonetheless suffer from a number of transparency problems. There were around 10,000 DAFs in Canada in 2016, each holding an average of about $330,000. Just over half are held by community foundations. However, they are quite difficult to track. According to Mark Blumberg, a Canadian charity lawyer, the CRA requires registered charities to report their total assets every year – but the tax forms in question don’t require them to actually spell out how much they hold in DAFs compared to their endowments or other holdings. “Unfortunately because the CRA doesn’t ask any questions about DAFs, we actually don’t have a good idea as to how many there are, when they started, how they’ve grown,” Blumberg says. By comparison, there is a fair amount of data on the total assets of Canadian registered charities. Imagine Canada data from 2019 found the sector holds around $84 billion in total assets, including both traditional endowments and DAFs.

“Unfortunately because the CRA doesn’t ask any questions about DAFs, we actually don’t have a good idea as to how many there are, when they started, how they’ve grown.”

Because the CRA doesn’t track the number of DAFs held by Canadian charities, it can’t ensure a DAF is actually distributing its assets each year. To make matters worse, Blumberg says the asset disbursement quota – a requirement for foundations to donate at least 3.5 percent of its assets to charity each year – doesn’t apply to DAFs specifically. It only applies to the foundations that hold them. In other words, there are ways for DAFs to sit on assets while generating lucrative tax breaks (as high as 75 percent) for wealthy donors. “They’re able to use this DAF vehicle to make that big donation, receive the tax benefits of it immediately, and then let it sit there, growing tax-free in perpetuity, until they want to distribute those funds,” says Adam Saifer, a postdoctoral researcher. He is also a member of Resource Movement, a self-described community of young people looking to redistribute power and resources to marginalized groups.

Foundations who hold DAFs are very aware of the controversy surrounding them. “It’s not that donors are intentionally parking the money,” Hikida explains. In his experience, philanthropy is not usually a donor’s full-time job. “It’s the side gig.” The Vancouver Foundation reminds donors each year if they haven’t disbursed 100 percent of their assets to charity, he says, and so far, that’s been enough. But this only became a formal policy in 2019 at the foundation’s last major board meeting.

There are also concerns around how DAFs have been used to give to charities that are dodgy at best and discriminatory at worst. Perhaps the most high-profile case involved the Fidelity Investments Charitable Gift Fund, the largest DAF holder in the United States. One of its donors used the fund to give over $100,000 U.S. to the New Century Foundation, a white nationalist think tank, since 2016. A donor also gave over $330,000 to the Family Research Council, a virulently anti-gay organization that lobbies against same-sex marriage rights. Because DAFs in the U.S. aren’t required to disclose their donors, it isn’t clear who exactly cut the cheque for these organizations.

There are also concerns around how DAFs have been used to give to charities that are dodgy at best and discriminatory at worst.

When asked about these donations on behalf of Fidelity clients, a spokesperson told CBS News “it is not Fidelity Charitable’s role to dictate what their values should be.” The spokesperson went on to say that its patrons had the right to give to any organization approved by American tax authorities. In a blog post about the Fidelity situation, Blumberg says this response should have raised red flags at the IRS. “If a Canadian DAF made such a statement the CRA might shut them down or more importantly deny all official donation receipts issued by the DAF,” he wrote. He argued that an organization giving donors this degree of freedom is an abdication of their legal responsibilities. 

Several senior foundation officials told Future of Good that U.S. regulations for DAFs are much looser than Canada’s. “We have a different structure and a different level of due diligence,” says Mary Beth Taylor, director of donor engagement at the Winnipeg Foundation. Her organization reports back to its board regularly on the status of its DAFs. At the Calgary Foundation, details on all of its 1,400 DAFs are disclosed in the organization’s annual report – including all of their assets and the organizations they donated to in the previous year. 

However, Blumberg says the ‘due diligence’ the CRA conducts on Canadian DAFs is simply checking to see whether they’re donating to a qualified donee and that a donation is not offering any sort of private benefit to a donor — for instance, giving to a school to pay for their student’s tuition. And at least one Canadian DAF holder holds the same view as Fidelity Charitable when it comes to giving to discriminatory organizations. 

Ronald Kelly, CEO of Gift Funds Canada, says it isn’t up to their organization to decide whether or not their donees should give to a particular cause – even if that cause happens to be opposed to same-sex marriage or access to abortion. “We provide no filter,” he says. “If the organization that they wish to support is a qualified donee…our role is to expand capacity for the sector.” 

Ultimately, Saifer says, DAFs represent many of the issues plaguing philanthropy itself – a perception of opacity, a lack of accountability, and the question of whether funds are providing enough to charity in the first place. Except unlike endowments or other more traditional forms of philanthropy, DAFs simply aren’t as transparent. They aren’t as heavily scrutinized. They aren’t tracked. And their efficacy is in question, even as their importance within the Canadian social impact sector grows during the pandemic.

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