Making the most of strategic philanthropy

Whether it’s at the grocery store, a special event or a solicitation over the phone or in the mail, according to the most recent Canada Revenue Agency data available, Canadians make charitable gifts totalling over $9 billion a year. You’re likely one of them.

When I broach the subject with my more affluent clients, many are excited about giving back and making an impact by incorporating philanthropy into their financial plan but most assume the only way to do so effectively is by creating a private foundation.

This type of strategic philanthropic instrument can be an effective way to reduce income tax, eliminate capital gains and reduce potential taxes on your estate when you pass on. But foundations can be complex to set up and, with ongoing reporting and advisory board requirements as well as constant solicitations from charities, they can be time-consuming and expensive to run.

A worthwhile alternative to foundations

Donor-advised funds are an alternative worth considering as part of your wealth management and charitable giving planning. These funds are registered charities that serve much the same tax-beneficial purpose as a foundation but they’re relatively inexpensive to create and, easily managed by your advisor, much less of a headache to operate. And, because they’re so cost-effective, more of the gift capital you contribute to the fund can go to the charities you’re passionate about.

Donor-advised funds are beginning to get a lot of attention — and consideration by investors looking to do good. According to a recent report, the value of donor-advised fund assets in Canada grew at a compound annual rate of more than 14% between 2016 and 2018 to $5.7 billion, with a 35% increase in the number of donor-advised funds set up during that period.

The main benefit of a donor-advised fund is, of course, tax deductibility in the year you contribute to the fund. It’s worth pointing out, however, that the value of the deduction you receive is based on the asset’s current value. That means, for instance, that if you had a $10,000 investment that grew to $20,000, you could donate $20,000 in kind to your donor-advised fund, get a $20,000 tax donation receipt and never pay capital gains on the investment, helping you reduce your tax exposure in two ways.

While your donor-advised fund is required to pay out at least 3 ½% of the fund’s value each year to charities, with a high tax-free return, the fund can continue to exist in perpetuity, even if you choose to never or only occasionally make additional tax-beneficial donations to the fund.

Your advisor can walk you through all you need to know

If you’re looking for a way to mitigate or reduce your taxes while helping charities that are meaningful to you, or you’re thinking about creating a legacy now or after your death, your advisor can provide you with all the details and assistance in creating your own donor-advised fund.