North of the Border: How Donor-Advised Funds Work in Canada

Mike Todd, Founder, Transform Philanthropy

For those familiar with the American philanthropic landscape, the donor-advised fund (DAF) is a well-established and powerful tool for strategic giving. But how does this model translate in Canada? While the fundamental concept is very similar—an irrevocable contribution to a sponsoring organization followed by non-binding grant recommendations—the Canadian DAF ecosystem has its own distinct characteristics.

Understanding these differences is key to appreciating how philanthropy functions within Canada’s unique regulatory and cultural context. Let’s briefly explore what defines the Canadian DAF model.

A Foundation-Centric Model with Flexible Fund Structures

A critical starting point is the legal structure. In Canada, a DAF is a fund held within a registered charity, typically a public foundation. The assets are owned and controlled by the foundation, not the donor. The donor, now acting as a “DAF advisor,” provides recommendations on granting, but the foundation has the final authority. Sounds familiar, I know. I sometimes refer to a DAF as a “notional account” held by a foundation. As far as the Canada Revenue Agency (the Canadian equivalent of the IRS) is concerned, individual DAF accounts are not currently regulated separately; the foundation is regulated as a whole, DAF program included.

This foundation-centric model supports a variety of fund types that offer donors significant flexibility:

Spend-Down DAFs: Interestingly, these are the most common type in Canada. Unlike a perpetual endowment model, many Canadian donors prefer to grant out both the capital and investment returns until the fund is depleted, focusing on immediate impact.
Endowed DAFs: These operate similarly to a private foundation, aiming to preserve capital in perpetuity and grant out the investment income.
Flow-Through DAFs: Designed for immediate deployment, these funds are set up to distribute all capital to qualified donees within a short timeframe. Often a DAF is utilized to facilitate an immediate gift of complex assets.
Legacy DAFs: Often funded through a bequest or life insurance policy, these funds are designed to perpetuate a donor’s giving beyond their lifetime.

This range of options allows Canadian donors to precisely align their DAF structure with their specific philanthropic timeline and goals. Canadian DAF sponsors are becoming increasingly flexible, and many foundations will allow the donor to “mix and match” these types as they desire, and as the fund and donor evolves.

The Disbursement Quota: A Foundation-Level Metric

One of the subtle but key structural differences from the U.S. system is the application of the disbursement quota (DQ)—Canada’s version of an annual payout requirement.

Here, the DQ is applied at the foundation level, not at the individual fund level. The current DQ requires public foundations to disburse 5% on the value of assets not used directly in charitable activities or administration. Crucially, this means there is no legal requirement for a specific DAF account to grant out a certain amount each year.

In practice, however, the sector is highly active. Recent reports estimate that in 2023, DAF grants in Canada totaled over $1.2 billion to more than 20,000 charities, representing an impressive effective distribution rate of approximately 10%—far exceeding the regulatory minimum. When establishing a DAF, donors should understand the sponsoring foundation’s specific policies, as many choose to apply the 5% DQ at the individual fund level for consistency and transparency.

Investment Governance: The Prudent Investor Rule

For those accustomed to donors having a direct say in their DAF’s investments, the Canadian approach is a little more restrictive. Provincial Trustee Acts obligate charity boards to act as prudent investors and maintain fiduciary control. This means the DAF advisor cannot direct investments.

However, many Canadian foundations have developed models to incorporate donor input. A common practice allows the DAF advisor to recommend a specific, approved investment manager to the foundation’s board. The board then contracts with that manager and maintains oversight, ensuring compliance with its Investment Policy Statement. This structure balances donor involvement with the foundation’s legal responsibility. Practically speaking, a DAF donor may be able to continue working with their own trusted advisor on “their” DAF.

Operational Nuances: Anonymity, Pledges, and Eligible Grants

Daily operations also feature important distinctions:

Anonymity: While possible, anonymous granting is less common in Canada. Foundations are increasingly encouraging transparency to help recipient charities steward the relationship effectively. Donors can typically choose to be identified, have only the fund name listed, or grant anonymously.
Pledges: A DAF advisor cannot personally pledge DAF assets, as the foundation is not bound by such a commitment. However, some foundations are willing to enter into three-way pledge agreements with the donor and the charity, provided the DAF maintains sufficient assets.
Eligible Grants: The rules are clear: DAFs cannot be used to fulfill pledges for event tickets, auctions, membership fees, or political contributions. The grant must be a pure gift to a qualified donee.

A Strategic Pillar of Canadian Philanthropy

The Canadian DAF is a robust, flexible, and efficient vehicle for charitable giving that has become a cornerstone of the country’s philanthropic landscape. Its foundation-centric model provides administrative ease and legal robustness, while the variety of fund types and an active granting culture ensure that philanthropic capital flows effectively to communities in need.

For anyone looking to understand modern philanthropy in Canada, grasping the nuances of its DAF system—from the foundation-level disbursement quota to the flexible fund structures—is essential. It demonstrates a mature and adaptive sector capable of meeting the diverse goals of today’s donors.