By Leanne Burton
A Donor Advised Fund (DAF) is a charitable giving vehicle that a donor can establish to make all of their gifts to charities over time. DAFs are touted for enabling flexible giving over one or many years as an alternative to setting up a private foundation. The gross value of DAFs within the charitable sector has grown significantly over the last 20 years, but is Canadian society benefitting? Unfortunately, we know very little about Canada’s DAF landscape, especially their net social, environmental, or economic impact. Before making normative judgements about DAF’s, we need to be making data-informed assessments of their public utility, but unfortunately, we do not have the data.
Steady growth, Insufficient data
To-date there is only one professionally commissioned report on the DAF landscape in Canada. Released in 2018 by Investor Economics (formerly Strategic Insights), the report attempts to shed light on an opaque yet growing DAF market. The data is gathered through a mosaic of formal and informal sources such as Canada Revenue Agency T3010 Filings, interviews, annual foundation reports and much more. Through this research, Investor Economics reported that at the end of 2016, Canadian DAF assets were estimated to be $3.2 billion. At the time, they assessed that community foundations held slightly over half of DAF assets in Canada, with assets estimated at $1.7 billion. DAF sponsoring foundations, such as financial institutions or their third-party DAF providers, were estimated to represent roughly $1.5 billion in assets. The average balance held in 10,700 Canadian DAFs at the end of 2016 was roughly $300,000 by their assessment. Their research also indicated that the DAF market had grown at a ten-year compound annual growth rate of 24.3 percent. Investor Economics predicted that the DAF market would double in the next decade, primarily due to an intergenerational wealth transfer estimated to be $1 trillion in personal assets from the ‘silent’ and ‘boomer’ generations, who are nearing the end of their life expectancy. While the market assessment and growth projections are indeed useful, they bring up critical questions. Given their research approach drawn from various sources, some regulated and some not, could the DAF market be more significant than initially estimated? If this intergeneration wealth transfer is coming, and considerable contributions to DAFs are expected, how will vulnerable Canadians benefit in a post-COVID economy?
The rise of DAFs as a charitable giving instrument
The DAF market has changed dramatically since the Vancouver Foundation’s genesis; the institution is rumoured to be responsible for Canada’s first DAF in 1946 (Vancouver Foundation, 1993). Over the succeeding six decades, DAFs grew in popularity with the expansion of community foundations across Canada, replicating the Vancouver Foundation model. Furthermore, there has been a surge in new DAFs in the past ten years through financial institutions; a phenomenon can be attributed to the 2006-7 Income Tax Act amendments, which eliminated capital gains tax on donations of securities to charitable organizations (Carters Professional Corporation, 2019). Financial institutions responded to this significant incentive to contribute to society by offering DAFs through their own legally incorporated foundations or third-party service providers. Today, all of the top five financial institutions in Canada offer donor-advised funds, two of which administer these through their incorporated foundations. The remaining uses external firms to manage their DAF programs. In tandem with the growth in DAFs, financial institutions have invested in the growth of wealth advisory services, including philanthropic advisory supports (Investment Executive, 2020). These conditions have led Investor Economics to predict that financial institutions will outpace community foundations in the DAF market share over the next five years. The private sector has successfully pursued DAFs and is about to dominate the market; what does this mean for vulnerable Canadians?
Can the past tell us anything about the future?
While DAF assets have steadily grown in Canada over the past ten years, Canadians’ well-being has not kept pace. The Canadian Well-being Index report shows that since the 2008 recession, the Canadian GDP grew by roughly 38 percent, while Canadians’ well-being only grew by 9.9 percent (Canadian Index of Wellbeing, 2016). The COVID-19 crisis is expected to have a devastating impact on food, job, and housing insecure Canadians. Marie-Claude Landry, Ad. E, Chief Commissioner of the Canadian Human Rights Commission, has stated that the pandemic has disproportionately affected vulnerable communities and is expected to worsen. She states, “the rights and needs of these people cannot be forgotten or ignored. As we face this challenge, we must stand together and support each other” (Canadian Human Rights Commission, 2020). As a hopeful practitioner of equity-enabling philanthropy, I am curious to know if and how DAFs can support vulnerable Canadians through this difficult time and beyond. Unfortunately, there is little data outside the estimated market size to support their public utility, which is a missed opportunity for these charitably tax receipted resources.
DAFs are more than their investment value
Beyond the value of assets under management in the DAF market, and arguably, more importantly, we need to understand the flow of funds from DAFs to the operating charities. The Canada Revenue Agency (CRA) requires all foundations to disburse an amount equal to 3.5 percent of its invested assets to qualified donees, known as the ‘disbursement quota’ (DQ). In the foundations’ T3010 filings, the CRA measures the DQ on the institutional level of all investments, which could include several asset categories such as DAFs, reserve funds, and nonprofit investments, making it difficult to distinguish one from the other. Furthermore, the DAF category can include funds of various restrictions of application and deployment horizon, attributes of which are essential to our understanding of the utility of DAFs today and tomorrow. Similarly, we need to have a better understanding of how and where the DAF assets are invested. Investments in extractive industries often have a high investment return rate. They are often socially, environmentally and economically destructive for Canada’s most marginalized communities, potentially producing a net negative impact on human well-being. Alternatively, some progressive forms of impact investing can produce net positive social impact, a practical and arguably ethically imperative means of putting charitable dollars to work while sitting in DAFs under predetermined restrictions. Virtually no institution is reporting on their DAF investments’ environmental, social, and economic impact, which is a missed opportunity to integrate charitable capital for net social benefit. Where do we go from here? We come together to gather reliable, consistent data to make data-informed assessments on the public utility of DAFs.
Open data leads to knowledge and optimal management
The Federal Government of Canada defines open Data as “structured data that is machine-readable, freely shared, used and built on without restrictions.” Open data of the DAF market would enable changemakers, academics, scholars, and analysts to begin assessing the public utility of DAFs. Through open data, we can gain a sector-wide understanding of the number and type of DAFs, their balances, restrictions, and disbursements to recipient charities and, eventually — the impact on Canadians’ well-being. Further, open data on DAF investments will allow for a greater understanding of the net environmental, social, and economic impact that DAF investments currently have and set benchmarks for improvement to maximize the utility of charitable capital.
Open data of tax-exempt DAF capital is critical. These resources have received tax exemptions because they were intended for the public benefit and should be handled with a higher degree of regulated transparency. In this current COVID economy, where many Canadians struggle to provide the necessities for themselves and their families, we need to think about charitable assets differently so that Canadians’ well-being recovers in pace with Canada’s GDP. As the physicist Lord Kelvin said in 1883, “What does not get measured does not get managed.”
Leanne Burton is Director, Partnership Development, MakeWay, has a Masters in Philanthropy and is a Nonprofit Leadership Candidate, Carleton University.