Speech on Bill S-216: The Effective and Accountable Charities Act

On December 1, 2021 Senator Omidvar spoke to Bill S-216, the Effective and Accountable Charities Act. During the last parliament, this bill (then known as Bill S-222) passed in both the National Finance Committee and the Senate chamber. Watch her speech:

Hon. Ratna Omidvar: Honourable senators, I rise today to speak to Bill S-216, the effective and accountable charities act. During the last parliament, this bill not only passed the Finance Committee but also passed this chamber in June without amendments. I say this because I am re-tabling the exact same bill from the last parliament with the hope that it can receive the same support from my honourable colleagues.

Senator Plett, who was the critic of the bill at second reading, said, “This bill is long overdue.” Although he stood in the role of critic for this bill, he noted that he is very supportive of this legislation.

For those who, like me, have a frail memory, let me take it briefly from the top again.

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

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

Let me provide you with an example. The last time I spoke, I provided the example of the YWCA. The example is still a good one. The YWCA receives charitable dollars from Canadians and foundations. It can grant these dollars further or it can use the dollars for its own programs and activities. The policy rationale is grounded in accountability for tax-exempt charitable dollars. So far so good; no one can argue against accountability.

But what happens if the Y or the Girl Guides, or Big Brothers Big Sisters want to work with — let’s say, because of the context — Afghani women who speak little or no English to help them become financially literate or provide leadership training to them? Then the best path to success may be to work with a local group of Afghani women who may not be a charity but, instead, a not-for-profit or even a loose group of individuals.

In this case, because the act stipulates that charities must spend charitable dollars on their own activities, the CRA guidance to the law kicks in. The CRA stipulates that when charities work with non-charities involving tax-exempt dollars, they must exercise direction and control over any such work so that the activities carried out by the non-charity are technically activities of the sponsoring charities. This is the CRA’s way of ensuring compliance with the law.

Terrance Carter appeared at committee this year or last year; I forget. He is a well-known charity lawyer. He said to the Finance Committee:

This methodology is outmoded, impractical, inefficient, inordinately expensive, unpopular and fails to meet the objectives of the ITA. It is built upon the fiction that everything that a charity does through an intermediary must be structured as the activity of the charity itself . . . .

And this is the case even when all parties involved know that this is, in fact, the activity of the third party. This is what charity lawyers call the legal fiction. 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 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 actually be provided.

The report by the Senate Special Committee on the Charitable Sector, led by Senator Mercer, 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 empowerment.

The committee, therefore, recommended moving away — towards a new approach — from the language of “own activities” and away from “direction and control” to one exercising a better, more effective and 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, called for a change to this law.

In addition, 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 told me that of the 42 recommendations in the Senate Charities Committee report, that is the one that requires immediate action.

So in a way, colleagues, I stand before you with this legislation as a proxy for the sector.

But I also want to take this opportunity to point out that these legal rules are a perfect example of an expression of systemic racism, which is embedded in Canadian law. As we know from our own deliberations in the Senate on racism, systemic racism is hard to detect. It is deeply embedded. It may not have any intended or unintended victims. It is unconscious. It lurks in dusky corners of institutions and yet it has an outsized impact on certain marginalized groups.

It did not start off that way, by the way. This particular feature in the Income Tax Act was brought into life in the 1950s. It had never been reviewed since then, and it was brought into life to ensure that charities and foundations simply did not transfer funds between each other without hitting the ground, to prevent self-dealing. But in so doing, it had the unintended impact of strangling cooperation and collaboration, and it has resulted in a system that either requires charities to behave in a controlling and oppressive manner in order to be in compliance with the law or to simply walk away from doing good work.

Let me be specific, colleagues. I know it is technical, so examples will provide some context.

Let me start with the impact of this law on Indigenous organizations and Indigenous change-makers that are not charities. Senator McCallum’s deconstruction of racism as it impacts Indigenous communities yesterday should put this in context for us all.

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 they can receive charitable dollars is to consent to a very complicated and expensive agency or intermediary agreement between themselves and the sponsoring charity.

I need not describe to you what the two words, “direction and control,” mean to Indigenous organizations and Indigenous people. Any intellectual property that is the result of such an agreement is owned solely by the charity and not the Indigenous organizations. All public statements, including press releases, need approval from the funding charity. Every line item in a budget must be approved and re-approved if there is a minor change. 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 legal document pertaining to the project must be signed by the charity, including leases, contracts, et cetera.

At times, the sponsoring charity may require the staff to be changed. That, 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 organizations, first, because of the complexity of these rules and not wanting to offend Indigenous peoples. We know that grant-making to Indigenous groups and causes is very low. A recent study shows that Indigenous groups receive half a percentage point of all giving in Canada, which is annually $10.6 billion. I will repeat that: half a percentage point, colleagues. It is no wonder that many Indigenous partners view the law and its application as yet another form of systemic racism.

The same story unfolds when you look at racially marginalized people. It’s exactly the same context.

The example I provided last time from my own city of Toronto is a wonderful volunteer organization called the Black Daddies Club. It seeks to change the image of the “absent Black father” that is so prevalent in the media. It assists young men to become better fathers, but they’re not a charity. Because of that, they have to deal with the same issues if they want to work with charities: They have to create convoluted and expensive agreements; they have to sometimes agree to be hired on as staff of the charity; and as with all other agency agreements, they must sign over the intellectual property of the project to the charity.

As you can see, colleagues, I believe this law puts all partners at risk. It puts the charity and the non-charity at risk. The charity holds all the fiduciary governance and human resource responsibilities, along with 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; everybody is diminished.

Finally, let me take you for a tour of Canadian charities overseas for whom this is bread-and-butter work — a daily issue. As we can appreciate, Canadian charities work in far-flung places, bringing health, education, housing and many other services to those places. Many of us in this chamber no doubt donate to such charities, but in order to comply with the law, they too have to contort themselves to stay within the law. They need to develop intermediary agreements, which is fine. They must exercise operational control, and direction and control, over a project that is happening thousands of miles away. Not only are there legal costs to be borne, but there are expensive educational costs to do with Canadian law that have to be carried out, such as policy documents, and separate protocols and processes.

As one example, I will cite the work of Samaritan’s Purse. It runs a $300,000 program in Nepal to provide essential health services to children in that region. Now, $300,000 might not sound like a lot of money here, but it goes a very long way in Nepal. It has seven partners in order to deliver on its charitable purpose. However, to be in compliance with the CRA, they are required to have a separate agency agreement with every partner. That includes separate financial statements, 22 periodic payments, 38 separate reports. 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 are simply too much for them.

In addition, Canadian charities cannot participate in pooled funding agreements with other like-minded jurisdictions overseas. They can pool their funds to advance a common charitable good and create efficiency for pooling. Canada cannot participate in these funds, because we cannot exercise direction and control over their funds.

Gloria Novovic from Cooperation Canada explained the impact on international charities in this way at the Finance Committee:

It is essentially a problem of a broken traffic light. Our peer countries, the U.S., the U.K. and others, consistently operate on a yellow light system: proceed with caution. Their partners, which have undergone due diligence checks as this bill would also suggest, can continue their activities as they make operational, context-informed adjustments. They later report on their efforts and demonstrate how they have used funds towards a very specific charitable purpose.

For Canadian charities, this red light is a red light to more innovative partnerships, to collaboration with other donor countries who do not wish to get wrapped up in 70-year-old legislation and, more importantly, it is a red light to historically marginalized communities, to Indigenous, Black and other racialized groups . . . .

Colleagues, I have described the problem; now let me try to describe the solution. Before I do so, however, I am going to pre-empt a question that my wise colleagues will no doubt put to me: Why don’t all of these organizations simply become charities? The answer is not simple. First, groups overseas will not qualify for charitable status because organizations need to be resident in Canada to do so. Second, co-ops and social enterprises do not qualify because they do not have an exclusively charitable purpose. Organic social movements, like Black Lives Matter, would also not qualify because they’re not organizations; they are only movements.

As for not-for-profits, which really comprise the bulk of what I’m talking about, many of them 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. To manage charitable status is out of their reach, but should they be forbidden to enter the public-goods space because of this law?

Finally — and this was a point that was heard again and again at the Senate charities committee — the definition of charity in Canada has not evolved since Elizabethan times. The four heads of charity remain what they are today: relief of poverty, advancement of education, advancement of religion and other purposes. Other jurisdictions, like Australia, have modernized the definition of charity and the Senate charities report identified the need to allow the definition of charity to evolve as an urgent matter. Until that happens — and I’m not sure it will — we are left with the old definition under which many organizations that I have described would likely not qualify.

Here is my solution: I propose 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 it looks complex, but it is really quite simple — does three things.

First, it replaces the reference to “charitable activities carried out by itself” throughout the act with two 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 simply 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 outlines what these reasonable steps are. They are:

(a) before providing resources to a person who is not a qualified donee, it collects the information necessary to satisfy a reasonable person that the resources will be used for a charitable purpose by the person who is not a qualified donee, including information on the identity, experience and activities of the person who is not a qualified donee; and

(b) when providing resources to a person who is not a qualified donee, it establishes measures, imposes restrictions or conditions or otherwise takes actions necessary to satisfy a reasonable person that the resources are being used exclusively for a charitable purpose by the person who is not a qualified donee.

There are also clauses about coming into effect and reviews.

This approach shifts the charity’s focus from ongoing operational control of activities to an approach based 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, and I desperately want to finish my speech before 4 o’clock. Accountability for tax-exempt dollars is paramount. The charity must engage in full due diligence up front. The non-charity will be required to provide full accountability. When these agreements are complete, the non-charity will report to the charity about how the money is spent, but the non-charity will not be controlled or dictated to by the charity. The project management will rest with the non-charity.

I am quoting Senator Plett again, because he said it so succinctly:

By amending the Income Tax Act, we will ensure that a better framework is provided, which will be similar to the regulatory requirements in other countries and provides an opportunity for greater efficiency, effectiveness and coherence in our charitable sector . . . .

Should the language in the Income Tax Act change as a result of this amendment, the CRA would then actually change its guidance. The CRA may well choose consultations to finally ask charities to report on their annual reporting form a simple question: How much money did you spend with non-qualified donees? That would be a signal.

Some have asked me whether this law will 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. Let me explain why. First, terrorism financing by rogue charities is rare. Only 8 charities out of 85,000 in the last two decades have had their charitable status revoked. Second, Canada has anti-terrorism legislation embedded in the Criminal Code; there are institutions such as the RCMP, CSIS, FINTRAC and Five Eyes. Outside of this, we have the Anti-terrorism Act and Part 6 of that act lays out a number of processes, including the process for a charities revocation if its resources are made available either directly or indirectly to any listed terrorist entity. Further, the Budget Implementation Act, or BIA, that we passed last June provided additional tools to the government to go after rogue charities. The measures we approved in the BIA allowed the Minister of National Revenue to immediately revoke the registration of a charity upon its listing as a terrorist entity without going through a judicial process.

Honourable senators, I finally want to address the question of what other jurisdictions do. Well, the level of operational control exercised by Canada is unusual and virtually unique. The United States, which is the most security-conscious regime in the world, uses a similar model and they use the language of “expenditure accountability.” We are using the language of “resource accountability.” In the U.S., foundations can make grants provided the foundation provides for expenditure responsibility. In the U.K., charities may transfer funds to foreign partners provided that the funds are used exclusively to achieve the U.K. charity’s purpose, just as this law is proposing. In Australia, charities are required to appropriately manage their oversees activities and resources.

In closing, let me reflect on the role that charities have played in the dark hours of the COVID crisis. They have been at the front lines providing services to Canadians. Essential services — food banks, shelters and mental health counselling. Earlier this year, the sector, in its distress, urged the government to remove the “own activities” and “direction and control” rules to help it provide services quickly to people in need, and their call was not heard. It is indeed high time, honourable senators, to heed that call. Let’s not make it so hard to do good, especially at a time when we need a strong charitable sector in Canada. It should not have to work with one hand tied behind its back. I urge us to send this bill to committee as soon as possible. Thank you.

Hon. Ratna Omidvar: Honourable senators, I concluded my remarks yesterday, and brought them in just before 4 o’clock. But I understand that Senator Lankin has a question, and I’m more than happy to answer it or other questions.

Hon. Frances Lankin: Thank you, Senator Omidvar, for your work on the charity committees report that Senator Mercer chaired. I think that it is some very important work and this recommendation is one piece of that. I am entirely supportive of what you’re trying to accomplish.

The question I wanted to ask you, because I believe it’s important to put it on the record — you spoke a number of times about resource accountability. I think you said that in the States they use different terminology, but the intent here is not at all to diminish the accountability that charities have for the proper stewardship of donor dollars. I am wondering if you would speak to the term “resource accountability” and what is envisioned in terms of how that would work. And with the CRA, how do you envision that we will be able to really ensure accountability to donors? Thank you very much.

Senator Omidvar: Thank you, Senator Lankin. I appreciate the question because I know of your long experience in the charity sector. You led the United Way in my wonderful city and led it ably for many years, so you come from a point of experience and concern. I’m grateful for your question.

On the terminology, “expenditure responsibility” in the U.S. versus “resource accountability,” in this proposal, I have been advised by Canada’s top charity lawyers, who advised me that the term “resource accountability” is more appropriate for the Canadian context.

Now, this is a private member’s bill, so if and when it is passed — and I certainly hope it is passed, honourable senators, with your support — one of the processes that will follow will be consultations by the CRA on how far we go with resource accountability. Is it just money? Is it more than money?

While I hope it’s a more fulsome expression of what we mean, it is at the same time a strong underlying expression of accountability, whether it is limited to money or whether it expands to technology, space, staff, et cetera. I hope that answers your question.