Donor-advised funds growing rapidly

The Canada Revenue Agency isn’t exactly Santa Claus, but federal tax changes that eliminated the capital gains tax on donated securities have kicked the season’s spirit of giving into high gear. In particular, donor-advised charitable giving funds are growing at a torrid pace this holiday season.

TD Waterhouse’s Private Giving Foundation — the first donor-advised fund launched by a Canadian financial institution — has grown considerably since its inception in 2004. The fund now manages $60 million in assets, up from $43.5 million last year. It has donated more than $4 million to charities since its inception.

Jo-Anne Ryan, vice-president of philanthropic advisory services for TD Waterhouse, attributes most of this growth to tax changes that allow clients to donate securities, which won’t be subject to a capital gains tax. In fact, TD says 80% of its donations are publicly traded securities.

Clients are donating securities to the Private Giving Foundation, which is run as an independent public charity with its own board of directors. The foundation liquidates the security and gives an income tax receipt. The liquidated donation is then invested in the TD Balanced Income Fund at a reduced annual MER of 1%.

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The donor then gets to decide which CRA-approved charities will receive distributions. The fund is set up to provide annual distributions of 5% each year. On a $10,000 donation, a donor ideally has $500 to give annually to his or her preferred cause.

“Since the foundation was launched three years ago, we’ve seen a marked trend towards strategic philanthropy,” Ryan says. “More Canadians are planning their contributions in the same way they plan their investment portfolios. They want a return on investment. In this case, the ‘return’ is deeper engagement with their favourite charities and the knowledge that their giving is having a long-term impact.”

RBC Dominion Securities Charitable Gift Program, a similar donor-advised fund program set up through the Charitable Gift Funds Foundation of Canada is also having a banner year, particularly in the past month. The holiday season is always strong for giving and the deadline for donors to qualify for 2007 tax-issued receipts is the end of the year.

“We made more money last week than all of last year. The assets in our charitable giving foundation are set to double. The fund was just shy of $20 million at the end of 2006. Our expectation is by the end of 2007 the fund will be just short of $50 million if things keep going the way they are,” says Anthony Maiorino, vice-president of wealth management services for RBC Dominion Securities.

As well as the increasing awareness of a donor fund’s tax advantages, the rise in donor options has contributed to this growth, says Maiorino. RBC offers 22 different fund mandates the client can direct the foundation to invest in, including some socially responsible investments options like the RBC Jantzi Balanced Fund SRI, which it added a few months ago.

“All of the products we have would be characterized as traditional balanced type of investments,” he says. “Our goal is to grow the investment so it will pay for the fees, pay for the granting and hopefully in good years provide excess returns in the fund.”

The types of securities donated are limited to standard common stock. A growing number of affluent clients are donating options to decrease their tax burden.

Ryan says options are taxed at the same rate as capital gains but are considered income. By donating options, the donor eliminates all the tax on the option benefit (the difference between the strike price and the exercised price). To receive the tax deduction, clients must donate the option within the same calendar year as it was exercised. It must also be donated within 30 days of being exercised.

According to RBC Dominion Securities, you can configure the donations of options so the tax deduction on the donated options can completely offset the tax on the option benefits of those the client decides to keep for him- or herself.

Maiorino says option donation is only really being done by a minority of clients right now. “We don’t have a lot of option donating. We have had some option donations — and some quite large ones,” Maiorino says. “We are seeing a lot more donations of appreciated securities than we are of our option. From our perspective, the majority of granting we’ve seen has been driven by tax. Whether that is as a result of donating appreciated securities or options, it has been driven by tax needs, or trying to generate a tax receipt.”

Both TD and RBC say the majority of their sales are being driven through their advisor networks. Probably not surprising since the mutual funds where the donations are invested are reported as fund sales to the Investment Funds Institute of Canada by the fund provider. Depending on the dealer, advisors can keep their client assets in the donor-advised fund on their books of business.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(12/12/07)

Mark Noble