Why a private foundation is often costlier to run than a DAF

For the many wealthy Canadians who decide they want to give back in a more organized manner—often to enhance the impact of their philanthropy or because they want to involve the next generation in the process—they’ll eventually face a choice of how best to structure their charitable giving. While there are many options, it usually comes down to a decision between a private foundation or a Donor Advised Fund (DAF). Both can deliver immense value to philanthropists, but there are some common misconceptions. It is important to understand the differences to see what the best fit might be for you and your family

So, why the misunderstandings? First, it’s important to understand that not all DAFs are the same. While all of the underlying public foundations that offer DAF programs must comply with CRA rules and the Income Tax Act, a donor’s experience and opportunity to make choices can vary depending on policies they put in place. There are many financial institutions who now offer DAF programs and also manage the charitable assets in-house; as well as community foundations all across Canada whose underlying charitable purpose is to support their own community of charities. They will have different fee structures and different policies on granting frequency and amounts, among other features.

In contrast, Canada Gives is an independent DAF in the not-for-profit sector. Our mandate is to facilitate each individual donor’s giving goals and activities, and to assist them in disbursing as much money into the charitable sector as possible—supporting both immediate and long-term program needs.

The (major) differences between private foundations and DAFs

Now, some philanthropists go the private foundation route because they believe it gives them more control, allowing them to directly fund and in some cases even operate charitable programs (assuming the foundation’s legal structure allows for it) if those initiatives are approved by the Canada Revenue Agency.

This is not an option with DAFs, which are set up to fund other charities rather than carry on their own charitable activities. And, true to their name, a DAF allows philanthropists to make donor recommendations instead of providing direct donation instructions. But it’s important to note that as long as the recommended recipient is a qualified donee in good standing with CRA, Canada Gives will never deny an account holder’s grant recommendation.

What’s often overlooked is the time and cost to run a private foundation. To start, and depending on the complexity, a private foundation—which can be structured as either a trust or a corporation—usually costs a minimum of around $5,000 in lawyer’s fees to establish and can take six months to a year to work through the necessary administrative paperwork and CRA approvals before it can begin operating. If a lawyer isn’t involved in preparing the private foundation’s application for charitable status under the CRA’s Charities Directorate, the application could easily be rejected because of the agency’s highly specific registration requirements. To qualify as a charity under CRA rules, a private foundation must have a direct charitable purpose in at least one of four areas: alleviating poverty, providing tangible religious or community benefits, or advancing education in some way. Clearing this qualification hurdle and satisfying the CRA’s many other registration criteria takes considerable expertise.

In addition, a private foundation’s financial records must be properly managed; all donations must be processed by the foundation, including issuing donation tax receipts, vetting charities and issuing individual grants, tracking grant receipts and more.  Unless the individual or family manages these administrative responsibilities themselves, they will need to be outsourced to third parties who will charge their professional services fees accordingly.

Not-so-private foundations

But the area of greatest importance is the governance of a private foundation. A board of directors or trustees must be established and are responsible for the annual reporting to the CRA, as well as hold meetings and keep minutes, develop policies and by-laws and manage and monitor the investments (usually within a managed investment portfolio).

The most surprising aspect of a private foundation, however, is how they are not truly private.  The foundation’s financial details are posted to the CRA website every year and are publicly accessible.

By comparison, a Donor Advised fund at Canada Gives takes less than a day and costs nothing to set up, while we handle all CRA reporting, grant processing and management of all legal obligations. And our Foundation account holders can request their grants to charities are made anonymously, or with full donor recognition.

The DAF advantage

Overall, our philanthropists say they prefer our Foundation accounts over a private foundation structure because it frees their time to focus on giving instead of administration. Importantly, many are themselves professionals, executives or entrepreneurs whose time is both limited and valuable. Countless hours spent running a private foundation is time not spent managing their businesses, and thus growing the wealth they can eventually give to charity.

The savings they can glean from a Canada Gives Foundation account is substantial—more so when you consider that it also provides them an opportunity to share the meaning and benefits of philanthropy with their children, grandchildren or extended families.

In other words, the direct and indirect expenses of running a private foundation are considerable and sometimes even cost-prohibitive. It’s not surprising that more and more Canadian philanthropists are choosing DAFs to structure and fund their generosity.

The Canada Gives Team