(August 18. 2020) As the COVID 19 pandemic brought the charitable sector to its knees, the debate about the growth of donor advised funds — the fastest growing philanthropic vehicle in Canada — has intensified.
In its letter to the Federal government urging a $10B stabilization package, the Emergency Coalition of Canadian Charities put it bluntly,
“The COVID-19 crisis and the resulting economic fallout is threatening to quickly destroy Canada’s charitable sector. Without immediate support from the Government of Canada, most Canadian charities will be forced to lay off substantial numbers of employees, will no longer be able to support vulnerable people and communities, and many will face a significant likelihood of total and permanent closure.”
A donor advised fund (DAF) is an account established when a donor makes an irrevocable donation to the foundation that houses DAFS. DAFS accounts can be held at a variety of institutions, including community foundations and financial institutions.
Jo-Anne Ryan, Vice President, Philanthropy Advisory Services at TD Wealth and Executive Director of the Private Giving Foundation (PGF), pioneered the use of DAFs at financial institutions in Canada and says they are a huge boon to the charitable sector, pointing to the $400M distributed to qualified donees since the Foundation was created in 2004.
The donor to the DAF – which could be the accountholder or a third party donor – receives a donation receipt upon making the donation. On aggregate, the foundation which holds the DAF must disburse a minimum of 3.5% of the average balance over the previous two years, but there is no annual disbursement quota for individual fund holders (although some DAF programs do implement disbursement quotas at the account level, this is not a legislative or regulatory requirement.)
“We’re not promoting permanent endowments,” says Ryan. “We’re usually granting at about 15-20% per year overall.”
In 2018, the rapid growth of donor advised funds in Canada drew the attention of the Special Senate Committee on the Charitable Sector. According to independent Senator and Committee Deputy Chair Ratna Omidvar – who points out that growth of the DAF sector is a positive development for the charity sector overall – there is a need to “consider the public policy implications of rapid growth in the DAF (sector).” Right now, Omidvar suggests, the DAF sector is operating “without the required transparency, and without any particular time limits on [DAF] disbursements and without any particular disbursement quota per DAF.”
In his sworn testimony to the Special Senate Committee on the Charitable Sector in 2018, lawyer and charity law expert Mark Blumberg echoed that although in general fund managers “encourage people to push out 3.5 or 5 per cent or more per year.” He adds, anecdotally, “there are stories of some people who put money in and who have been assured they will never have to spend any of the money because there isn’t a disbursement requirement on each of the funds.”
At a time when the sector is reeling from the effects of the coronavirus pandemic, the possibility that donation receipted funds intended for charitable giving are not being disbursed, even at minimum levels, has many high profile sector leaders calling for aggressive disbursement from foundations and DAFs alike.
In a recent blog, Hilary Pearson, former CEO of Philanthropic Foundations of Canada,
“I agree with those who maintain that this is the time for extraordinary giving. in 2020/2021, and maybe longer, granting MUCH more than the minimum disbursement if a foundation, and definitely more if you advise a DAF, is a MUST.
DAFs are appealing to donors for many reasons. They are easier to set up and administer than a private foundation. Gifts do not have to be made from the DAF right away, offering the donor time to think about and plan for charitable gifts. Assets held in DAFs are not publicly disclosed, and donations can be made anonymously via the sponsoring fund.
Keith Sjögren, Managing Director of Investor Economics, which provides research and advisory services to the financial services industry in Canada, and who also testified to the Special Senate Committee on the Charitable Sector echoes the benefits of DAFs.
“I don’t believe DAFs siphon off money from charities. The granting rates of DAFs are higher than private foundations,” he says.
At the end of 2016, an estimated $3.2 billion were held in DAFs in Canada: approximately $1.7 billion by community foundations. Other sponsoring foundations, such as those associated with financial service institutions and financial firms, were estimated to have approximately $1.5 billion in assets.
According to Sjögren, DAF assets are projected to reach as much as $7 billion CAD in Canada by the end of 2023, at least half of which is expected to be held by financial institutions.
As large as these numbers are, they are dwarfed in comparison to those of our neighbours to the south. The growth in donor advised funds is such that, by 2015, four of America’s 10 wealthiest charities were donor-advised funds, and the next year, Fidelity surpassed the United Way to become America’s largest charity. In its latest report, the National Philanthropic Trust Report on Donor Advised Funds pegged assets in donor advised funds in the US at $121.42 billion in 2018.
Boston College Law School Professor Ray Madoff, who also testified at the Special Senate Committee on the Charitable Sector said the very structure of donor advised funds, means that,
“the donor is under no obligation, and no incentive, to ever make charitable distributions from his donor-advised fund. This failure to require payout means that donor-advised funds have effectively severed the ties between charitable tax benefits and benefits to charities.”
DAFs may report disbursing in the double digits, but averages by their nature gloss over disparities. If one fund holder is aggressively disbursing from a DAF, while others are hitting the average or not disbursing at all, it may seem as though disbursements are well above the 3.5% floor. And although DAF charities are required to disburse 3.5% of assets on aggregate, and some DAF programs do apply the annual disbursement quota at the account level, there is no regulatory disbursement quota for individual fund holders.
But it’s rare for a fund holder not to make a disbursement in any given year, says Jo-Anne Ryan. And when it happens, there’s usually good reason.
“Sometimes people will want to wait until a project comes to fruition at a particular charity or they’re planning a larger gift,” she says.
Ryan says that at Private Giving Foundation, available through TD, relationship managers follow up consistently with donor-advisors when they see that disbursements aren’t being made in a given year.
Kevin Goldthorp, President and CEO of Sick Kids Foundation, which has its own donor advised fund, The Sick Kids Charitable Giving Fund, also points to oversight mechanisms to ensure DAFs don’t become stranded.
“We’re vigilant at the account level to ensure that funds are being used in accordance with donor wishes and tax laws. We’re always mindful that the money is meant to be spent.”
Yet concerns about DAF transparency and disbursement quotas, particularly in the current moment, continue to be raised.
In the United States, nearly 300 philanthropists and foundation leaders called on Congress to increase disbursement amounts from foundations to 10% and DAFs for the first time, also at 10%, at least temporarily, to release more funds to the charitable sector.
Although the total disbursement for DAF foundations as a whole is reported on the T3010 return, the breakdown of DAF accounts is not. Various community foundations, however, do break down those funds that are considered donor-advised funds, but there are no standardized reporting requirements.
It might seem a simple matter to uncover the facts about DAFS. Who are these DAF holders in Canada? What charities do they give to and how much? How much is sitting undisbursed? It turns out, it’s impossible for anyone, from seasoned insider to curious average citizen, to get a clear understanding of assets held in DAFs, disbursement rates or other key information, because this type of disclosure is not required by the CRA.
“Unfortunately, as CRA asks no questions on the T3010 registered charity Information Return about DAFs, whether a charity has some donor-advised funds, how many funds, how much money or other assets are in those funds and how much is disbursed from each fund – we have no idea how many charities in Canada have DAFs and how much money is involved,” says Mark Blumberg in a recent blog.
It’s an information void that makes it impossible to answer a number of serious questions about DAFs, including whether they are actually growing the philanthropic pie or diverting dollars from operating charities, and to demonstrate whether disbursement quotas are being met at individual account levels. It can also make it impossible to discover the funding of illegal activities, such as last year’s high profile case involving Fidelity Charitable in the US, when it was revealed that a DAF under their management was funding a white-nationalist-group. Screening out these types of activities is the responsibility of the sponsoring charity board’s due diligence in complying with the requirement that DAFs can only fund qualified donees that are in good standing. However, a lack of publicly available information about donees prevents external validation that such due diligence is indeed taking place.
This opacity also prevents delving into other questions, like whether DAF funds may be flowing primarily to larger, high profile charities, like hospitals and educational institutions, because of a bias in favor of such charities by the DAF program, either due to brand recognition or a lack of other information.
There is some publicly available information on disbursements to donees: TD’s Private Giving Foundation for example publishes its financial statements on its website. The most recent, for 2018, includes a selected list of the 1800 charities to which disbursements were made that year. Donation amounts are not included.
Concentration of philanthropic dollars is another concern: although DAFs have often been touted as “the poor man’s foundation” and a way to “democratize giving” there’s currently no empirical evidence to support these early claims. There is a question about whether higher entry points for establishing DAF accounts outside of community foundations may seem to be restricted to a smaller group of more affluent donors.
But as Ray Madoff points out the shroud of secrecy isn’t because of bad people, it’s because of bad policy. Sjögren agrees.
“DAF sponsoring foundations are not secretive – there is no transparency because the regulator hasn’t required it. I personally wouldn’t be opposed to DAF sponsors reporting assets held in DAFs. In being transparent, people would see that granting rates are high, anonymous donations are tiny, and it would probably help the sector,” she says.
Some, including Madoff, have argued that there’s an inherent conflict of interest between the fund manager, who’s earning a revenue stream from assets under management, and the fund donor who presumably wants to make gifts to charity. Isn’t it in the fund manager’s best interests to keep those funds under management and earn fees, rather than give them away to charity?
It could appear that way, says Sjögren. “There’s an admission by a lot of people that there could be a potential for a conflict.”
Given their projected growth trajectory, some argue now is the time to get a handle on some of the concerns associated with the growth of donor advised funds. Proposed solutions include introducing a disbursement quota for each individual donor-advised fund, imposing a “reasonable payout term” (e.g., 5 or 10 years),and delaying some of the tax incentives available to donors until the funds are distributed to a charity.
Others, like “Decolonizing Wealth” author Edgar Villanueva, propose a more fundamental reckoning:
“As traditionally structured, DAFs operate under the assumption that the presumably white, wealthy donor knows what’s best; their structure is premised on this same donor being trusted to hold millions of dollars privately and untaxed, imparting “charity” when and where they see fit, with zero requirements for accountability and transparency. DAFs also reinforce the ideological belief that as a whole, this class of donors is best equipped to solve social problems rather than pay taxes to the government to fill public, transparent (or at least more transparent than DAFs) coffers.”
In its report Catalyst for Change: A Road Map to a Stronger Charitable Sector the Government of Canada included in its recommendations an instruction to the Advisory Committee on the Charitable Sector to consider means of ensuring that donations do not languish in donor-advised funds, but are instead used to fund charitable activities in a timely fashion.
New PBO data on Canada’s 1%: Do we need a wealth tax? – June 18, 2020
“A 10%, 5-year DQ adds billions to the charity economy” – June 9, 2020