Foundations vs. Donor Advised Funds: Choosing the Right Vehicle for Your Philanthropy

At the highest level, there are two things you can do with wealth: spend it or give it away. This article focuses on the latter, specifically, structured philanthropic giving. For many families, charitable giving is more than a financial decision; it’s an expression of values, legacy, and purpose. Whether prompted by a major liquidity event, integrated into estate or tax planning, or used as a way to engage the next generation, how you give can be just as meaningful as why.

With so many options available, choosing the right giving vehicle can feel overwhelming. Most families would prefer to focus on the causes they care about, rather than on administrative complexity.

In Canada, individuals and families typically give in one of three ways:

1. Direct donations to a registered charity
2. Through a Donor Advised Fund (DAF)
3. By establishing a private foundation

When charitable giving becomes more significant, DAFs and private foundations are the most commonly considered options. Both allow donors to give capital, receive an immediate tax receipt, and disburse funds gradually—typically meeting a 5% annual distribution requirement—while allowing the remainder to grow tax-free.

Below is a summary of each vehicle, along with key considerations to help determine what’s right for your family.

What Are Donor Advised Funds (DAFs)?

DAFs are charitable giving accounts administered by public foundations, such as the Toronto Foundation or various community foundations across Canada. Donors contribute assets to their fund, receive an immediate tax receipt, and then recommend grants to qualified charities over time.

Key Benefits of DAFs:

• Simplicity: No need to set up a legal entity—administration, compliance, and tax filings are handled by the sponsoring foundation. They’ll even write the cheques to charities on your behalf.
• Privacy: DAFs are not listed individually on the CRA’s public charity database. You operate a named fund within a larger public foundation.
• Timing Flexibility: Ideal for liquidity events—contribute upfront for tax planning and decide where to give over time.
• Cost: Fees are typically a % of assets and often include investment management and administration.
• Community Engagement: Many DAF sponsors help donors connect with causes and shape a giving strategy—especially helpful for families early in their philanthropic journey.

Considerations:

While DAFs offer ease and flexibility, the sponsoring foundation retains legal ownership of the assets and final authority over grant approvals. While donor recommendations are nearly always followed, ultimate control is more limited than with a private foundation.

What Are Private Foundations?

A private foundation is a registered charity established and governed by a family. It offers full control over investments, governance, and grant making. For families seeking to build a long-term philanthropic legacy or engage multiple generations, a foundation can be a powerful vehicle. Foundations also offer greater flexibility to hire staff or engage in certain advocacy initiatives.

Key Features of Private Foundations:

• Full Control: Families make all decisions related to grants, governance, and investments. Foundations must meet a 5% annual disbursement quota (3.5% for assets under $1M).
• Visibility: Foundations can serve as a platform for a public philanthropic identity—valuable for families who want to be known for their giving.
• Startup Costs: There are legal and registration fees required to setup a private foundation
• Ongoing Costs: There are ongoing annual expenses such as bookkeeping, accounting, a potential audit, and charity tax filings to consider.
• Administrative Responsibility: Families are responsible for cash management, compliance, board meetings, grant tracking, and reporting.

Considerations:

While private foundations offer full control and long-term flexibility, they require sustained engagement and a clear succession plan. Over time, family enthusiasm may wane—especially if generational views diverge or priorities shift.

Choosing Between a DAF and a Private Foundation

When deciding between a DAF and a private foundation, we often encourage families to reflect on questions such as:

• How much time and involvement do we want to commit?
• How important is privacy in our giving?
• Do we want full control over investments and grantmaking?
• Is there a clear plan for next-generation involvement?
• Are we prepared to manage administrative responsibilities?
• Are younger family members excited about being part of this legacy?

There’s no one-size-fits-all solution. In fact, some families use both—starting with a DAF for its simplicity and evolving into a private foundation as their philanthropic vision and engagement grow.

Guiding Your Decision: When to Consider Each Vehicle

Aligning Structure with Strategy

Ultimately, the right vehicle depends on your goals and the type of impact you want your philanthropy to have. Consider how involved you want to be, how much privacy and control you require, and what role you envision for your family over time. The structure you choose should support both your charitable intentions and your broader financial, tax, and estate planning objectives.

At Northwood Family Office, we work with families to clarify their philanthropic goals, explore the right giving structures, and align those decisions with their overall wealth strategy. Whether through a DAF, a private foundation, or a hybrid approach, we focus on creating meaningful, values-driven strategies that stand the test of time.