Speech on Bill S-222: The Effective and Accountable Charities Act

On March 16, 2021 Senator Omidvar spoke to Bill S-222, the Effective and Accountable Charities Act. Watch her speech:

Hon. Ratna Omidvar: Honourable senators, I rise today to speak to Bill S-222, the “Effective and Accountable Charities Act.”

This bill amends the language in the Income Tax Act which currently limits registered charities to spending their charitable dollars on their own activities. Charities can, of course, make gifts or grants to other charities, but the act, as currently worded, limits them otherwise to spending their charitable dollars on activities that they undertake themselves.

However, I think we will all recognize that there are times when the best way for a charity to pursue its charitable purpose is to work with or through non-charities, such as not-for-profit groups, social enterprises, co-ops, civil society groups, businesses and others who are on the ground and may well be the best partners for the charity to achieve its impact. Senators, this is true for charities working domestically and internationally.

Let me provide you with an example from Canada. The YWCA receives charitable dollars from Canadians. It can further grant these dollars to other charities or use them to conduct their own programs and projects. The policy rationale is grounded in accountability for tax-exempt charitable dollars. So far so good. I think no one can argue with accountability.

But what happens if the Y wants to work with, let’s say, Afghani women, who speak little or no English, to help them become financially literate? Then the best path to success may be to work with a local Afghani women’s group, which might not be a charity but instead a not-for-profit. In this case, because the act stipulates that charities must spend charitable dollars on their “own activities” the CRA guidance on this law kicks in. The CRA stipulates that when charities work with non-charities involving tax exempt charitable dollars, they must exercise “direction and control” over any such work so that the activities carried out by the non-charity must technically be activities of the sponsoring charity. This is the CRA’s way of ensuring compliance with the Income Tax Act.

As Terrance Carter and Theresa Man, both well-known charity lawyers have said, this process is outmoded, impractical, inefficient, inordinately expensive and unpopular, and fails to meet the objectives of the legislation. It is built upon the fiction that everything that a charity does through a third party intermediary must be structured as the activity of the charity itself when all parties involved know that this activity is that of a third party. This is where the legal fiction kicks in.

These are the facts, colleagues. They may sound largely technical, but they have an outsized impact on charities. You will hear me refer to the language of “own activities” in the act and to the language of “direction and control,” which is the guidance issued by the CRA. These four words — own activities, direction and control — have a far-reaching impact on charities, who they work with and how they work with them and, as a result, how much charitable benefit can be provided.

The report by the Special Senate Committee on the Charitable Sector, which was passed unanimously in the Senate last year, found that this approach — an attempt to ensure accountability of tax-exempt charitable dollars — is costly, inefficient and inconsistent with contemporary values of equal partnership, inclusion and local decision making.

The committee, therefore, recommended moving towards a new approach, away from the language of “own activities,” away from “direction and control” to one emphasizing a better, more effective, more efficient regime without sacrificing any measure of accountability.

The charitable sector — and by that I mean Canada’s many charities spread across our country engaged in charitable efforts in Canada and overseas — is squarely behind this recommendation. They include Imagine Canada, Canada’s largest sector organization of charities; Cooperation Canada, Canada’s umbrella group of charities involved in international development; the Canadian Centre for Christian Charities; the United Way of Canada, as well as 37 of Canada’s top charity lawyers who, in an open letter last month, called for a change to this law. And just last week, the Advisory Committee on the Charitable Sector for the Minister of National Revenue tabled its own report and they, too, flagged the urgency to remove the language of “own activities” from the act.

Many have in fact told me that of the 42 really important recommendations in the Senate report, this is the one that requires immediate action. So in a way, colleagues, I stand here with this legislation as their proxy.

But I also want to point out that these legal rules are a perfect example of an expression of systemic racism that is in fact permitted in Canadian law. As heard at the Committee of the Whole, the emergency debate and the inquiry tabled by Senator Plett on racism, systemic racism is hard to detect. It is deeply embedded, it may not have any intended victims, it is unconscious, it lurks in dusty corners of institutions, and yet it has an outsized impact on certain marginalized groups.

These measures did not start out this way. This particular feature in the Income Tax Act was brought into life in the 1950s to ensure that charities and foundations did not simply transfer charitable dollars from one entity to another without ever reaching communities. In essence, it was to prevent self-dealing, but over time it has had an unintended impact — strangling cooperation and collaboration between charities and non-charities. In so doing, it has resulted in a system which either requires charities to behave in a controlling and oppressive manner in order to be in compliance with the law or walk away from doing good work.

Colleagues, let me be specific. I want to illustrate in detail how the current system is inefficient, ineffective, costly and an example of a deeply embedded form of systemic racism. Let me paint this out for you by focusing on three different scenarios.

First, let me talk about how this law impacts giving to Indigenous organizations or change makers that are not charities. In most cases, Indigenous organizations, if they are not a band council or other form of local government, are not registered charities themselves. The only way, therefore, they can receive charitable dollars is to consent to a very complicated and expensive agency or intermediary contract between the charity and the Indigenous organization, under which the funding charity must exercise effective operational control over the activities of the non-charity they are funding.

I need not describe to you what the two words “direction” and “control” mean to Indigenous organizations and Indigenous peoples. Any intellectual property which is the result of this agreement is solely owned by the charity and not the Indigenous organization, with only very limited exceptions. All public statements, including press releases, need approval from the funding charity. Every line item in a budget must be approved and reapproved by the charity. The non-charity may be required to provide receipts, photographs, be subject to on-site inspections, provide minutes of meetings, written records of decisions and so on. Every legally binding document must be signed by the charity, including leases, contracts, et cetera. At times, they might even be required to change their staff if the charity so wishes. This, colleagues, is not a partnership. It is tantamount to a takeover.

It is not a surprise, then, that many charities shy away from funding Indigenous causes because of, first, the complexity of these rules and not wanting to offend Indigenous peoples. According to the Circle on Philanthropy and Aboriginal Peoples in Canada, grant making to Indigenous groups and causes is very low. Only 6% of Canadian grant-making foundations give grants to Indigenous beneficiaries or causes. It is no surprise that many Indigenous partners view the law and its application as yet another form of blatant and systemic racism.

Darcy Wood of the Winnipeg-based not-for-profit Aki Foods and a former Garden Hill chief noted that the law is colonial and paternalistic, not to mention overly bureaucratic. It signals that Indigenous organizations cannot be trusted to properly spend money.

Second, let me deconstruct how this plays out in very similar ways to organizations that are doing work with racialized communities. I have worked in the past with an exemplary Toronto not-for-profit called the Black Daddies Club. It strives to change the image of the absent Black father prevalent in the media. It assists young men to become better fathers and to support Black children, families and their larger community. Since they’re not a charity, they have to deal with the same issues as Indigenous peoples organizations if they want to work with charities. They have to create convoluted and expensive intermediary agreements. At times they have to agree to be hired by the charity. In other words, they too have to agree to be directed and controlled. As with all other organizations in the same situation, they must agree to sign their intellectual property over to the charity.

As you can see, colleagues, it puts both the charity and the non-charity at risk. The charity holds all the fiduciary governance and human resource responsibilities along with all the liability and the risk.

The non-charity, on the other hand, must give over control of the project to the charity. No one wins in this scenario. Everyone is diminished.

Finally, let me take you on a tour of Canadian charities overseas, for whom this is a bread and butter, daily issue. As we can appreciate, Canadian charities work in far-flung places, bringing health, education, housing and many other necessary services to them. Many of us, no doubt, donate to such charities. For international charities headquartered in Canada, working with local partners is not a choice but a necessity. But in order to comply with the law, they have to contort themselves to stay within it. They need to develop intermediary agreements, which of course is fine, but then they must prove that they exercise operational direction and control over an organization thousands of miles away. Not only are there legal costs to be borne, but there are also costs of education of the parties to the agreement, policy documents, separate protocols and processes, and significant planning and associated costs. A substantial administrative burden ultimately reduces funds that should have been used for direct charitable purposes.

As an example, I will cite the experience of Samaritan’s Purse Canada, which is affiliated with the Billy Graham charities. In pursuit of its charitable purposes, it runs a $300,000-program in Nepal to provide essential health services to children, including life-saving medical care to approximately 200 children annually. They work with seven local partners to deliver the program.

Since these local partners are not charitable under Canadian law, Samaritan’s Purse must direct and control them. To be compliant with the CRA, Samaritan’s Purse is required to have a separate agency agreement with each of the seven local organizations involved. This requires separate financial systems, 22 periodic payments, and 38 separate reports that these organizations must submit to be processed. With seven local organizations, this process is seven times more complex than it needs to be.

I have heard charities say that the risk, the administrative burden and the liability is too much for them. In addition, Canadian charities cannot realistically participate in pooled efforts with non-Canadian charities when, let’s say, charities from the U.K., the U.S. and Australia are pooling their efforts to address significant international development issues. Canadian charities cannot do so because they cannot realistically exercise direction and control over a pooled fund. So we miss out on partnering in pooled collective charitable efforts to address an issue.

In addition, and this is a really interesting outcome I think, Canada removes itself from the potential of hosting international charities and their headquarters here in Canada, bringing many jobs with them. When Oxfam, for instance, was on a search for a new headquarters when it wanted to relocate from Oxford in the U.K., I understand that Montreal, for very good reasons, was actively under consideration. But as soon as Oxfam discovered that by relocating to Canada, it would be subject to this arcane law, it moved on to consider other sites.

When the rest of the world is moving away from colonialism and towards participatory development, our law constraints us from doing so. Again, it is another expression of how systemic racism plays out. All the power is in the hands of the Canadian charity, which is forced to participate in this legal contortion, and so extend the terrible legacy of colonialism and control over the global South.

I propose an alternative to you which would increase efficiency, increase effectiveness, empower partners, without sacrificing accountability.

But before I do so, let me pre-empt a question that you may reasonably have. Why don’t all these organizations simply become charities? The answer is not simple. First, groups overseas will not qualify for Canadian charitable status because the organization needs to be resident in Canada.

Co-ops and social enterprises do not qualify because they do not have exclusively charitable purposes. Social movements which are organic, like Black Lives Matter, would also not qualify because they’re not organizations, only movements. As to not-for-profits, many are not charitable because charitable status with its accountability framework may well be out of their reach. The Black Daddies Club, for instance, is a very small organization of volunteers in the main. To manage charitable status is out of their reach.

Finally, colleagues, as the definition of charity in Canada has not evolved since its inception, we are stuck in Elizabethan times. The four heads of charity remain what they were decades ago: Relief of poverty, advancement of education, advancement of religion and other purposes. Other jurisdictions like Australia, for instance, have modernized their definition of charity and the Senate charities report identified the need to allow the definition of charity to evolve as an urgent matter. Until this happens, we are left with the old definition, under which many of the organizations that I have talked about would likely not qualify.

So where is the solution? I propose that we amend the Income Tax Act to move away from the current language of “own activities” to new language of “resource accountability.” The amendment before you, notwithstanding its length and look of complexity, is quite simple. It does three things.

First, it replaces the reference to “charitable activities carried out by itself” throughout the act with simply the words “charitable activities.” Because the act refers to the language of “own activities” in so many paragraphs, the amendment is, therefore, lengthy. But 90% of the amendment is about cleaning up the language.

Next, it amends one section of the act to expand the definition of “charitable activities” to allow charities to use their resources for charitable purposes by taking reasonable steps.

Finally, it inserts an important section into the act to outline what “reasonable steps” means. There are also clauses related to reviews and coming into force.

Charities and non-charities in this modern day must be able to work together, but safeguards must be in place to prevent nefarious activities. With resource accountability, charities and non-charities can both be empowered, here in Canada and overseas, without losing any measure of accountability over the expenditure of charitable dollars.

This approach shifts the charity’s focus from ongoing operational control of activities to an approach focused on taking reasonable and appropriate steps to ensure that the charity’s resources are devoted to achieving charitable purposes. It provides the CRA with a reliable working framework that funds and resources will provide benefits promptly while protecting the tax assistance that charities receive.

I want to be crystal clear. Accountability for tax-exempt dollars is paramount. The charity will engage in full due diligence up front and develop agreements on the deliverables, activities, budgets, reporting and timelines. The non-charity will be required to provide full accountability to the charity for receiving and reporting on the use of funds as per the timelines agreed upon. When these agreements are complete, the non-charity will report to the charity about how the money is spent or resources that were used and about the progress on outcomes and impact, but the non-charity will not be controlled or dictated to by the charity. The project management will rest with the non-charity.

In this way, the amended act will allow charities to move away from “direction and control” as a measure of accountability to upfront due diligence, financial control and reporting as the measure. The charity will no longer be required by law to act as the project manager under a fiction that the activity is that of the charity itself, when we all know it is not.

The point of working with the non-charity is that they are on the ground. They know the community or situation best and are in the best place to determine how to use the money. What the charity needs is assurance that the money is spent to achieve a charitable purpose. Resource accountability is more than appropriate to ensure that charitable funds are being used for charitable purposes and providing accountability for charitable giving.

Should the language in the Income Tax Act change as a result of this amendment, the CRA would then change their guidance on how charities report. The introduction of resource accountability would compel the CRA to possibly add questions and require more pointed information on the annual tax returns the charities file, but that is reasonable for them to do.

Some have asked whether the current law and guidelines are necessary and appropriate to prevent charitable dollars from falling into nefarious or rogue hands, especially into the hands of terrorist-related activities. My answer to that is unequivocally “no.” Resource accountability will not lead to any downgrade in the fight against terrorism. Let me explain why.

First, terrorism financing by rogue charities is extremely rare. Only 8 registered charities out of 85,000 in Canada have been suspended in the last few decades and have had their charitable status revoked.

Second, Canada has anti-terrorism legislation embedded in the Criminal Code, and there are many institutions, such as the RCMP, CSIS, FINTRAC and Five Eyes, who join hands on combatting terrorism. We do not need to force charities into conducting their own activities or be subject to direction and control to prevent terrorism. As noted security analyst and former CSIS agent Phil Gurski has said, “We have other tools at our disposal to deal with problematic cases.”

These tools, outside of the RCMP, CSIS and Five Eyes, include a key piece of legislation. Part 6 of the Anti-terrorism Act specifically deals with potential terrorism financing by rogue Canadian charities. In section 2(1), the act states its purpose of maintaining the confidence of Canadian taxpayers that the benefits of charitable registration are made available only to organizations that operate exclusively for charitable purposes. In section 4(1), it lays out the process of a charity’s revocation if it makes its resources available, either directly or indirectly, to any listed terrorist entity. This legislation incorporates the previous Charities Registration (Security Information) Act which had the same purpose: prevention of charitable dollars falling into rogue hands.

This includes a certificate signed by the Minister of Public Safety and Emergency Preparedness and the Minister of National Revenue expressing their opinion on a particular case with a referral to the Federal Court. The court may then consider the certificate, and if it is found to be reasonable, the court will proceed to revoke the charity’s registration.

Honourable senators, I hope you see we have a variety of robust agencies, instruments and strong legislative measures to confront terrorism and other nefarious activities. We should absolutely use them. My bill complements these other measures because it focuses on resource accountability to ensure that the resources of a charity are used only for its charitable purpose without the necessary impediments and legal fiction involving the “own activities” and the related patronizing requirement of “direction and control.”

Colleagues, I want to address a question you will likely have: How do other comparable jurisdictions deal with this issue? My research has found that the Canadian solution is remarkably unique among other developed nations. Charities in other jurisdictions must monitor and be accountable for use of any funding to non-charities. But for them, the Canadian level of operational control — that “direction and control” and “own activities” requires — is unusual and virtually impossible for them to work with.

The United States, the most security-conscious country in the world, uses a similar model to what I propose here. In fact, my proposal reflects theirs in many ways, but they use the language of “expenditure responsibility.” I’m proposing the language of “resource accountability” because it is more sensitive to the reality of how Canadian charities actually work.

In the U.S., foundations can make grants to foreign entities provided the foundation maintains what is known as “expenditure responsibility.” That means that the foundation is required to exert reasonable efforts to establish adequate procedures to see that the grant is spent solely for the purpose for which it is made, to obtain full and complete reports and to make full and detailed reports with respect to such expenditures. It is not dissimilar to what I’m proposing, as I said.

In the United Kingdom, charities may transfer funds to foreign partners provided that the funds are used exclusively to further the U.K. charity’s purpose and provided that the appropriate pre-grant due diligence is conducted, along with monitoring and reporting on the use of the funds. Again, very similar to what I am proposing.

In Australia, charities are required to appropriately manage their overseas activities and resources. They must conduct an annual review of these activities, ensure they have appropriate anti-fraud and anti-corruption measures in place and protect vulnerable individuals from exploitation and abuse.

In an analysis comparing the approach of the U.K., U.S., Australia and Canada, Dr. Natalie Silver of the University of Sydney Law School concluded that Canada’s control requirements are excessive and onerous.

Honourable senators, I hope I have provided you with an appropriate overview of the current law and the guidance of the law by the CRA. I have hopefully painted a picture for you on the impact on charities working in Canada and overseas, and provided you with a reasonable solution going forward.

In closing, let me reflect on the role that charities have played in the dark hours of the COVID crisis.

They have been on the front lines providing essential services to Canadians — through food banks, shelters, mental health counselling services and others. Earlier this year, the sector issued an urgent plea to the government to remove the “own activities” and “direction and control” rules to help it to provide services quickly to people in need. And yet their call was not heard.

It is indeed high time to heed their call. Let’s not make it so hard to do good, especially at a time when we need a strong charitable sector to take Canada on the road to recovery. It should not have to do so with one hand tied behind its back.

Thank you very much.

Hon. Senators: Hear, hear.

Hon. Robert Black: Will my honourable colleague take a question?

Senator Omidvar: Of course, I will.

Senator R. Black: Thank you, Senator Omidvar, for your hard work on this file. I had the opportunity to work with you in the Charitable Sector Committee during the last Parliament and we produced a wonderful report that has been supported by many charitable organizations across the country, as you noted.

My question is for greater clarity for me and my own purposes, and likely for others watching our work today. I’m a strong supporter and proponent of the S.H.A.R.E. Agriculture Foundation, which partners with like-minded rural organizations in developing countries where local governments are unable to offer support and services to impoverished rural communities.

Many of SHARE’s projects focus on supporting women and families, as well as education and literacy programs around the world. They’ve worked with organizations in Guatemala and Belize to provide water filters, as well as further education and follow-up on clean water use. In order for SHARE or any other Canadian charity to support such an initiative, what do charities and their local partners in developing countries do now under the current Income Tax Act and what would they do differently if your bill passes? Thank you.

Senator Omidvar: Thank you, Senator Black. That is an excellent question. Thank you for giving me the opportunity to paint a picture of what the scenario is today and what it would be tomorrow.

Right now, the SHARE foundation, as I think you mentioned, in order to stay within the confines of the law, would need to have the following conversation with, let’s say, an organization in Guatemala or elsewhere in the world. This is how the conversation would go. The Canadian charity, SHARE, would say: I am going to spend money to provide education to women in your community. It will be my project, not yours. Since I am not on the ground, I am going to ask you, organization XYZ, to help me develop and deliver the project. Since it is my money, my project and my activity, I am going to direct and control how you, organization XYZ in Guatemala, use my money to implement this program.

Now, if the law is amended, the conversation would change. Here is what the conversation would look like. SHARE would say to the Guatemalan organization: I like your project of providing education to women because it aligns with my charitable purposes. I am going to give you, organization XYZ, funds earmarked to invest in this. Use the money for this purpose only, and provide me with the reports and confirmation that you have used my funds for this purpose. It is still your project and your program, built with the help of my funds.

In this scenario, you would not only get accountability, but you would also get empowerment. I hope that answers your question, Senator Black.

Hon. Donna Dasko: Will the senator take another question?

Senator Omidvar: Yes, I will.

Senator Dasko: Thank you, senator, for the incredibly thorough presentation. I had about five questions and you answered almost every one in your presentation. I was going to ask you about other jurisdictions and all of the things that you ended up speaking about.

I would like a clarification. This proposal, as I understand it, doesn’t change the organizations that receive charitable dollars; is that correct? You started with your example of the YWCA. The Y would still be the organization that gets charitable dollars. It’s not as though more organizations are able to receive charitable dollars; is it that the charities themselves have more flexibility in how they spend those dollars?

Senator Omidvar: You are absolutely right, Senator Dasko.

It is the charities whose behaviour would change because the law would change. They would have more flexibility. They would have more authority and power to work in collaboration and partnership with other non-charities, and they would then be emancipated from these constraints of “own activities” and “direction and control.” Nothing would change for the not-for-profit; everything would change for the charity. I heard from many charities that they cannot wait to be emancipated from these constraints.

The Hon. the Speaker pro tempore: Senator Lankin, do you have a question?

Hon. Frances Lankin: I do, thank you.

Senator Omidvar, thanks very much for that presentation. It was concise, informative and persuasive. I was with you before you spoke, but I think your speech gave this chamber good grounding to debate this bill.

The Black Daddies Club is a good example. Through United Way Toronto, we had to establish a Youth Challenge Fund to flow government dollars, and we wanted it to be controlled by people from the Black communities, who knew the solutions. It was a difficult thing to set up without United Way being directly in control. You raise a pertinent issue.

I like what you spoke about in terms of resource monitoring and accountability. In some of our many examples that we’ve shared and that we know of in our past, the capacity-building work that can go along when you’re starting with a group that doesn’t have the capacity to get charitable status at this point in time can be an important resource. That is not just directing money to the programming they are offering, but it is supporting the development.

Do you see those sorts of things in terms of staff time and others as an important part of why you define this as not just expense monitoring, control or oversight, but as a resource?

Senator Omidvar: You’re absolutely right, Senator Lankin, to make that connection and differentiation from what the U.S. does, which is expenditure accountability. I have to tell you that I have been advised throughout this process by Canada’s top charity lawyers who worked with me, and we’ve come to resource accountability because it is a more fulsome and accountable measure of all the resources of a charity. It’s not just money. It’s staff; it’s space; it could be technology, in the meantime; it’s knowledge. All of these things together will make us not only more robust but also more accountable.