Decoding the differences between donor advised funds and private foundations
When entrepreneurs decide to embrace philanthropy, the options for giving can be confusing. In fact, most don’t know where to start.
Because they hear of well-heeled friends whose families maintain a private foundation, they assume that’s the best option. While a private foundation has a certain appeal, the downsides can be significant.
First, a private foundation can take anywhere from a month to a year to establish and requires the services of a lawyer and an accountant. They will manage a multiple-step process that includes establishing a trust or not-for-profit corporation, then registering that corporation as a charity. Doing so incurs significant legal, accounting and trustee fees.
It doesn’t end there. A private foundationnecessitates establishing and managing a board of directors or a board of trustees. Those trusted individuals must hold annual meetings and record minutes, develop policies and by-laws and manage investments held within the foundation. They are liable for the foundation’s proper administration and governance and can face Canada Revenue Agency fines for non-compliance or mismanagement.
In addition, many entrepreneurs are surprised to learn that the administration of a private foundation is not turnkey. It requires the processing of donations, proper tax receipting, maintaining banking and bookkeeping records, handling grant processing and grant receipt tracking. In addition, private foundations need to file an annual information return to CRA, while also completing annual (audited) financial statements. That financial information is then posted on the CRA website and is widely available to the public and accessible to the entire non-profit sector.
The alternative is to use a donor-advised fund (DAF) to manage your donations and provide funding to charities. Upon completion of a single form, a DAF can be activated immediately, usually in less than a day. These funds require no administration, no annual reporting to CRA, carry no legal responsibilities and allow donors to make grants to charities anonymously or with full recognition.
Now, experienced business owners may dismiss a DAF structure as being too good to be true. Not so. Think of a DAF as an account designed to hold an irrevocable donation. It’s administered by the sponsoring organization, which can be a registered charity such as Canada Gives, ora financial institutions such as one of the big banks. These tools are specifically structured to make giving easier. Good indeed, but definitely not too good to be true.
Even better, philanthropists obtain an immediate tax credit for the full value of their donation—a major benefit in the wake of the sale of a business or an estate transfer that produces a hefty capital gain, for example—while the sponsoring organization handles the administration.
All a generous entrepreneur needs to do at that point is choose the charities they wish to support and how they want to disburse their gift each year (assuming they don’t make a large, lump-sum donation). Different sponsoring organizations will have varying rules as to how gifts can be managed, so do your research before deciding which service provider is right for you. Just understand that you have options when it comes to giving back.
Choosing the right foundation structure for your gift will help maximize the joy of philanthropy, without the administrative headaches.
Denise Castonguay is the Executive Director and CEO of Canada Gives, a federally registered charity,committed to helping philanthropists across Canada to build and grow high-impact foundations. For more information, visit www.canadagives.ca