Donor Advised Funds are registered charities in Canada that allow a donor to donate to the charity but the donor retains the ability to recommend which registered charities or qualified donees will receive the funds.

Donor Advised Funds or DAFs have become far more common in both Canada and the US.

One of the selling points provided by the DAFs is that they are more private than a private foundation.   Private foundations typically are not that private.  The names of the directors of the private foundation are on CRA’s website and each gift from the private foundation to another charity is disclosed as well on the CRA’s website.

If there is a DAF with 500 funds and the DAF gives funds to a particular registered charity the public will probably not be able to work out in almost all cases who the original donor to the DAF was.  If you are a person who is quite wealthy and you don’t want people to know that you are wealthy and that you also love opera then using a DAF may be helpful to keep that out of the public’s view.

On the other hand, this technique also works well for Neo-Nazis, or people who would never think of themselves as Neo-Nazis, but they don’t want any more visible minorities coming to Canada!

There was a recent US article entitled “Nation’s Biggest Charity Is Funding Influential White Nationalist Group: A charitable nonprofit linked to Fidelity Investments has donated at least $100,000 to the New Century Foundation, the organization behind white nationalist publication American Renaissance, since mid-2015.”

In the article, it discusses the largest DAF in the US ie. Fidelity Charitable which took in over $10 billion last year and how some of those funds went to pretty extreme groups.  You can read the article.

The article also references a campaign called “Hate Is Not Charitable Campaign” which notes that “Donors Trust, Fidelity Charitable Gift Fund, Schwab Charitable Fund, and Vanguard Charitable between 2014 and 2017 contributed nearly $11 million to 34 organizations” which could be considered to be hate groups.

Some DAFs have explicit policies that forbid grants for hateful activities, although I don’t think most DAFs in Canada or the US have those policies.   In Canada, most due diligence is simply checking that the charity is a registered charity with CRA and trying to prevent private benefits such as donor/advisor sending money to a school to pay for their kid’s tuition.   Not much more.

Some DAFs work with donors that they or their affiliated corporations have had a lot of experience with and perhaps are in their small community.  There is a strong relationship between the DAF and the donor and this can in some cases reduce the likelihood that the donor will play games with the DAF.   Other DAFs are prepared to easily set up accounts with people that they have had almost no contact with and know little about.   This can create problems in some cases when donors may not understand the rules or perhaps are actively trying to get around the rules.  When you incentivize donations such that wealthy people get a 70% tax benefit in Canada, you also incentive in some cases unethical wealthy people (if you can believe that such people exist!) to manipulate the system for their own personal advantage and there may be no public benefit.

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.  Perhaps CRA will one day start asking more questions. There are DAFs that try to be very transparent with their funds and how much each fund is giving out and to whom – but that is not the average level of transparency that I have seen.  A good example of a transparent report comes from the Calgary Foundation. (at around page 32-55)  If there are other examples you have seen of very transparent DAFs in Canada do let me know.

Many DAFs will need to up their game in terms of due diligence or face problems both from the public criticizing them or CRA taking regulatory action if some of the grants violate the requirements of the Income Tax Act.

When a DAF is affiliated with a major corporation or financial institution, not some small independent no-name operation, this can result in reputational or legal problems for the affiliated corporation.  When the public sees that XYZ DAF has given money to an extremist group, most people don’t know what a DAF is, and they may think it is like XYZ corporation itself making a gift to the extremist group and it may hurt the reputation of XYZ corporation.  On the other hand, those who understand DAFs will note that the funds belong to the DAF charity and not to the donor who is only ostensibly recommending a charity and it is the DAF making the donation to the extremist group – and the DAF charity, therefore, deserves to be criticized for funding an extremist group.

As people are more closely monitoring the work of DAFs it is important that DAFs act responsibly.  While DAFs can offer important services, there are also some significant concerns raised about the impact of DAFs and it is best that DAFs get a handle on this issue as soon as possible.

 

While this story is very concerning the response from Fidelity Charitable was a total unmitigated disaster.  They turned an embarrassing story into a potential future nightmare for themselves and it could undermine the whole donor-advised fund sector.

In an article “Fidelity charitable fund bankrolls “hate groups,” critics say” there is a quote:

The Fidelity spokesperson told CBS MoneyWatch it is up to the 200,000 clients of its donor-advised charitable fund to say where the donations should go.

“As an independent charity that is cause-neutral, it is not Fidelity Charitable’s role to dictate what their values should be. Each of our individual donors has the right to decide which IRS-qualified charities they choose to support,” the Fidelity spokesperson said. [my emphasis]

 

Fidelity did not say that the donor advisors can recommend which charities the funds will go to but each donor/advisor “has the right to decide which IRS-qualified charities they choose to support”.   If a Canadian DAF made such a statement the CRA might shut them down or more importantly deny all official donation receipts issued by the DAF.   I wonder if the IRS will deny donations to Fidelity Charitable as it does not sound like a charitable gift if the “donor” is still controlling it.   This reminds of all those memes and twitter profiles of “you only had one job”.   The most important rule when you have a DAF is that the donor is not controlling or directing the funds but only making recommendations.  Very sad.

Back to Canada.   With the weakening of charity law under the Liberal government you are now going to have charities that are doing 100% non-partisan political work – for example, charities that are focussed on limiting severely immigration to this country, charities that are for economic freedom and believe wealthy people should pay a 5% flat tax, charities that will push for wealthy people to be able to avoid all taxation if they donate enough, and other topics.  DAFs provide the perfect vehicle for some donors who are “pillars of their community” to remain pillars of their communities while recommending grants to fringe or hate groups.

There are a number of efforts afoot to try and further undermine the tools that CRA has to prevent the misuse of charities.   Be aware.   In the US, the IRS Tax-exempt area has lost a lot of its resources, processed lots of charitable applications with almost no oversight and hence you have a large number of very problematic charities entering the US charity ecosystem.

In Canada, CRA still maintains vigourous checks on new charity applications however there are thousands of dormant charities that could be taken over by unsavoury individuals.   Also, CRA only audits less than 1% of charities per year and therefore because a charity is a registered charity does not mean that it is complying with the Income Tax Act or other charity law requirements.  The charity may have been registered in 1967 and never audited once by CRA!

Most large DAFs that I have seen in Canada try to be responsible and I am hoping that they will get ahead of this issue of funding “hate groups” as clearly some US DAFs have not.  They will also never say that a DAF advisor “has the right to decide” on how funds are distributed.  I am still in shock by the statement from the Fidelity Charitable spokesperson.

We recently prepared an online course of DAFs at Donor Advised Funds (DAFs) In Canada: Understanding this important and often misunderstood philanthropic vehicle.  If you run a DAF or plan to put large amounts of funds in a DAF it helps to understand the vehicle, its advantages and disadvantages, public perception and concerns with DAFs and when a DAF can be very useful.

If you are thinking of establishing a DAF or currently are running a DAF it is important to obtain legal advice on the operations of the DAF to minimize potential compliance and reputational concerns.