CBA Charity Law Symposium – May 23, 2014

The importance of an independent and effective charities regulator in Canada

Cathy Hawara, Director General

Thank you for inviting me to speak today. I’m pleased to be here again this year at the National Charity Law Symposium. I look forward to the symposium every year – it is a great opportunity for the Canada Revenue Agency to engage directly with leading experts in charity law from across the country – as well as with some of the many dedicated individuals working in the charitable sector.

The organizers also give me quite a bit of latitude in terms of what my speech can focus on, so long as it gives participants an inside view into the Directorate, our priorities and our approach – which I think has real value.

In early April, I attended a conference of international charities regulators in Australia, and while the conference covered many different topics, most of our discussions highlighted the importance of an independent and effective regulator of charities in our respective countries. I have alluded in past speeches to the importance we attach to our integrity as an impartial regulator. And the entire Agency has certainly been focused on effectiveness – as has the government as a whole. My speech today will draw on my reflections during the conference in Australia on the issues of independence and effectiveness, as I share with you my views on those two issues.　

Constitutional Framework

I think it’s important to start this discussion with a brief word about the constitutional framework within which we operate.

As we carry out our responsibilities within the Charities Directorate, we are keenly aware of the constitutional authorities within which we operate. We know – as you do – that in Canada, the regulation of charities is, generally speaking, a matter of provincial responsibility. As a result, to the extent that the federal government deals with aspects of the regulatory regime for charities, it does so through its powers of taxation.

The CRA’s role is to ensure that only qualified entities are registered under the Income Tax Act and that, once registered, they adhere to the obligations associated with tax exempt status. The preferential tax treatment that charities receive, in particular the ability to issue tax deductible receipts, is considered by many charitable organizations to be crucial to their existence.

The Constitution makes it clear that the responsibility for managing the operations of charities falls to provinces and territories. The reality is that they have limited their involvement in regulating charities. Only Ontario and Alberta have enacted what could be considered regulatory statutes in relation to charities and, in the case of Alberta, the legislation is limited to regulating charitable fundraising. We have become the de facto regulator by virtue of the federal government’s taxation power and policy to provide tax incentives to support giving to charities.

This degree of provincial oversight (or lack thereof) creates what some consider a regulatory gap. Some stakeholders within the sector would like the Charities Directorate to fill this gap, while others would prefer that we do not. Some suggest the Directorate’s role includes helping charities by providing guidance on best practices for operating a charity. In our consultations with small and rural charities a few years back, they asked us to provide them with the tools they need to manage a charity, not just to be compliant with the Income Tax Act. At the same time, others take the view we have no mandate or authority to pronounce on issues such as governance.

We have attempted to strike the most appropriate balance between those two views, always keeping the constitutional boundary within our sight. In recent years, we have on occasion published suggested best practices that we know, from experience, will help charities avoid non-compliance with the Income Tax Act. Our discussions with counterparts at the provincial level indicate they are supportive of the approach we have taken. Venturing beyond a narrow interpretation of our legal mandate by offering assistance that will indirectly help charities remain compliant with the law is, in my view, consistent with our commitment to client service, and does not overstep our authority. After all, failure to follow our recommended best practices, on its own, would not have any consequences for a charity under the Income Tax Act.

Leaving aside these differing views, what is clear is that the general public looks to the CRA, as the visible authority, to regulate charities. However, we must respect the limits of our mandate – and we do. As the regulator, the Directorate’s role is to administer all of the rules in a way that is consistent with what is happening on the ground in the charitable sector. But, the bottom line is that our constitutional construct has meant that the function of charities regulator is found in the CRA.

Independent Regulator

The issue of our independence as the charities regulator has been called into question from time to time, and most recently as a result of the Budget 2012 measures related to charities and their political activities. Commentators have also raised the issue of independence in relation to where the Charities Directorate is located within the structure of Canada’s government – in the tax authority. Interestingly, both of these issues followed me to the conference in Australia.

There, the two main questions for me were:

• Can the regulator properly do its work, when it is housed in the tax authority, whose mandate is to collect tax and bring in revenues for governments? and,
• Can the regulator operate independently from the government if it is located in a line department, as opposed to being established as a separate, stand-alone entity?

These questions were particularly relevant to the people I met in Australia because of the very real debate happening there at the moment about the future of the new Australian Charities and Not-for-profit Commission. They are also relevant to the charitable sector here in Canada – and from my experience over almost five years now, I believe we have a strong answer to both of those questions.

1. Charities regulator within a tax authority

It is clear that having the charities regulator sitting within the CRA, or within any larger organization for that matter, presents both challenges and opportunities, which have a direct impact on how we regulate charities.

Because we operate within the tax authority, some perceive us to be an extension of the tax collectors in the Agency, with an agenda to minimize foregone revenue. For example, a C.D. Howe report published in 2009, argues there is a conflict of interest when the organization responsible for maintaining the integrity of the national tax base is also responsible for registering and policing non-taxable entities that can detract from the tax base.

It is also suggested that the CRA – the administrator of fiscal policy – is going beyond its mandate by attempting to regulate charities. The theory maintains that it is incompatible to have the administrator of fiscal policy, with a mandate to protect the tax base, operating in a social policy sphere to regulate charities. Certain functions, such as decisions about whether the activities of a charity support its purposes, or whether certain political activities are acceptable, are said to be beyond the Agency's design and general mandate. The argument is that such non-tax decisions should be reserved for public servants with expertise and delegated authority in social policy, and that administrators of fiscal policy are in no position to make social decisions.

I would offer the following points in response. The Charities Directorate is part of the CRA, but the CRA’s mandate isn’t to minimize foregone revenue or to minimize tax credits, as some believe. Nor is the CRA itself exclusively mandated to collect tax. The CRA’s mission is to administer tax, benefits, and related programs, and to ensure compliance on behalf of governments across Canada, thereby contributing to the ongoing economic and social well-being of Canadians.

In fact, the CRA is responsible for approving and issuing social benefits to millions of residents each year. Although we don’t often think of the organization in this way, the CRA is one of the largest sources of assistance to Canadians, including the needy, and dedicates a large portion of its resources to ensuring they receive the benefits they are entitled to in a timely way. So if the mandate of the CRA is to be cited in discussion about the suitability of the CRA as a home for the regulator of charities in Canada, it is important to consider the whole of the Agency’s mandate.

With regard to the notion that the CRA is an organization of "bean counters" and therefore not the place for making charity policy – it is true that the CRA has a large number of accountants, but that doesn’t mean we don’t have employees with other skills. Such a generalization is an oversimplification of our organization. In the Directorate, our employees have a variety of educational backgrounds. Some have worked in policy development or communications in other government departments. Many have a strong affinity to the charitable sector, having worked with charities as volunteers, board members, or employees. Many have come to us specifically because of their interest in working to ensure a robust charitable sector in Canada. (And a fair number of us are lawyers, so that must surely play in our favour!)

On a practical level, being part of the CRA does mean that we have to live with some challenges in how we do our work. For example, our policies on security of communications are in place for very good reasons, but can limit innovation in client communications. Also, the CRA brand is very well known to Canadians as a tax and benefit administrator, but it isn’t obvious to the uninitiated that the CRA is the federal government’s source for information about charities. So we have to work hard to ensure the visibility of our program.

On the other hand, we have been able to leverage the capacity of the CRA in many instances to enhance our program. The expertise in the CRA that is available to the Directorate in areas such as technology, contracting, and communications is quite impressive and has enabled us to be innovative and responsive to feedback from our clients. One of my managers tells the story of having a laptop crisis just before a meeting in Toronto. When he called IT support in Ottawa and explained the urgency, they asked for his location, told him to walk three blocks south, and then to knock on a certain door, where a CRA tech support officer would be there to help him. This is just one very small example of the many ways the Directorate receives support from the broader organization to fulfill its mandate. More significantly, our IT colleagues will help us modernize our IT systems – more on that in a moment.

2. Independence from political interests

I will admit that the comments about the lack of independence from political interests, which we have read much about in the media in recent months, have been of greater concern to me. Public perception about how we do our job has a direct impact on our credibility as an independent regulator.

The media can draw notice to our work in positive and negative ways – it can act as a partner in delivering our messages but can also create confusion when articles misrepresent our role or provide inaccurate or incomplete information to the public. And this situation is exacerbated by the fact that we are bound by the confidentiality provisions of the Income Tax Act and are very limited in what we can say publicly about our activities. Please don’t misunderstand me – I am in full support of our confidentiality provisions, they are critical to a well-functioning tax system. I am simply commenting on the practical effect of these provisions, which can lead to a distorted perception of the overall operational focus of our compliance program.

Based on recent media reports and headlines, there is a perception that audits of charities are politically motivated, and the CRA is targeting certain types of charities at the instruction of the government. In fact, this is how the current situation in Canada was played back to me by lawyers and accountants I met while I was in Australia. This was what they had gleaned from the media coverage that had made its way to them from the other side of the world.

We recognize the need to be as transparent and accountable as possible about how we administer our program. This doesn’t come as a surprise to us. When we began implementing the measures announced in Budget 2012, we were very deliberate in articulating our framework and the underlying principles related to our compliance program – we were going to stay true to those principles as we embarked on our work related to political activities. As I have made clear in the past, the process for identifying which charities will be audited (for any reason) is handled by the Directorate itself and is not subject to political direction.

We also wanted to be ready to share as much information as we could directly with charities about the work we had undertaken as a result of the Budget announcement. Frankly, we need to share information about much more than that! That’s why we introduced the Charities Program Update – it is our way of reporting back to you and to charities on our activities. And we used the last Update to share as much information as we could about the progress of the political activities initiative. I think it’s fair to say this was a first for the Directorate – and I suspect this is the beginning of more meaningful reporting on our activities. In my view, it is through this kind of transparency that we can demonstrate to the charitable sector our independence and the rigour with which we carry out our activities.

For those of you who are interested in an update on political activities, to date, we have identified 52 charities for audit, 32 of which are ongoing or already closed. These charities represent a broad segment of the charitable sector. All four charitable purpose categories are included, with audits of organizations registered to relieve poverty, advance education, advance religion, and organizations established for other purposes beneficial to the community in a way the law regards as charitable. Charities we are auditing under the latter category include those established to promote health, uphold human rights, promote animal welfare, protect the environment, as well as community organizations.

With respect to the audits that have been closed already, we have used the full range of tools at our disposal, including education letters and compliance agreements, as we continue to use our "education first" approach. Where we have seen more serious non-compliance with the Act, we have taken appropriate action.

I am keenly aware of the concerns this file has raised, and I can assure you that the Directorate will continue to conduct its activities with fairness, professionalism, and integrity.

Our educational work has also continued on this front – if you have not seen them yet, we recently released a series of three videos, outlining as clearly and simply as possible the rules governing political activities. And we continue to add more questions and answers to the section of our website dedicated to providing resources to charities on political activities.

A final thought on independence and the structure of the regulator in Canada. As I take a step back and consider the evolution of the Charities Directorate as the regulator over the last ten years or so, what strikes me the most is the impact the sector itself has had in shaping the Directorate into the regulator we know today. I think back to the voluntary sector initiative – which may seem far away for some of you – but which is never too far from our minds in terms of how we have reached this point in our maturity as the charities regulator. While the initiative may not have included recommending a particular institutional model for the regulator to the government, it did include recommendations about all of the functions currently carried out in the Directorate, from registration, education and outreach, to monitoring, intermediary sanctions and compliance activities. It was the first document I read before I arrived at the Charities Directorate, and it is always within reach on my desk – it serves as a reminder of how much we have accomplished, and continue to accomplish, by working together, transparently and cooperatively, while respecting each other’s different roles and perspectives.

Effectiveness of the regulator

Let me offer a few thoughts about our effectiveness as a regulator. While in Australia, international regulators participated in an open forum hosted by the Australian Charity Law Association, where lawyers and accountants who work with the charitable sector gathered to discuss different models of charity regulation found throughout the world and in particular, the effectiveness of those models. In my view, and as I explained during the forum, there are three features of the Canadian approach that I believe account for effective regulation of charities in Canada.　

1. Compliance continuum

The first is how we approach compliance along a continuum – some of you may have already heard me refer to the "compliance continuum." The notion of a compliance continuum allows us to take into account the diversity of the sector, including the varying levels of capacity and compliance motivation, as well as the pressures charities currently face. By applying different strategies along the compliance continuum, from education through to enforcement, to respond to this diversity in the sector, we adopt a more balanced and fair approach to compliance – and that yields better results.

From a capacity perspective, we know that not all charities have the same capacity to understand and apply the rules under the Income Tax Act, or to understand our policies and procedures. We must balance the needs of small and rural charities (run primarily by volunteers) with the needs of larger organizations with a national or international focus, who can rely on a more stable workforce and external charity law experts to meet their obligations.

With respect to compliance motivation, we must take into account the fact that organizations have different attitudes, or cultures towards compliance. We see many that are willfully compliant, meaning they want to comply and are doing their best to do so. Then we have those who will do the minimum to comply, what we might call reluctant compliers, who will only make an effort if they perceive a risk to their organization. And, unfortunately, we have the abusers – a small minority who are intentionally non-compliant and set out to abuse their registration.

And finally, we must also be sensitive to the pressures the sector is facing and take that into account in our compliance approach. For example, the high turnover of staff within charities makes education, communication, and other outreach activities designed to facilitate voluntary compliance an ongoing effort. Mission drift is often a problem as charities face pressure to grow, maintain market share, fundraise, and to provide benefits to their clientele.

Approaching our compliance activities along a continuum allows us to tailor our activities to be most effective, taking into account this diversity, while keeping focused on the regulator’s ultimate goal – ensuring that charities comply with their obligations.

Taking all of these factors into consideration, we start from the assumption that the vast majority of charities want to comply and that achieving good compliance starts with education. If our assumption is correct (and our random audits tell us it is!), then it follows that by investing our resources in education and by providing charities with the tools and resources they need to comply voluntarily, we will reap the most benefit from a compliance perspective.

What all this means is that, in practice, a large part of what we do is about facilitating voluntary compliance: our outreach and education activities, our dissemination of information through our website, our client services agents who answer your calls and respond to written enquiries, to name a few. That is not to say that this is all we do – but it is the first step along the compliance continuum. Our activities move along the compliance continuum, to assisting compliance with more direct interactions with charities (for example, after reviewing the T3010), and then to the other end of the continuum to enforce compliance, primarily through our audit program. Enforcement will always be necessary, because of the minority who are either reluctantly compliant or non-compliant. But in my view, we make wiser investments of our resources when we make compliance easier – and we will be looking to do more and more of that as we move forward.

2. Engagement with the charitable sector

The second feature of our approach that I believe makes for effective regulation is our active engagement with the charitable sector and other stakeholders. The Directorate has a long tradition of meaningful consultation and engagement with registered charities on a variety of issues. Examples include the process of developing new guidance products, the small and rural charities initiative, and changes to the charities annual return.

We recognized early on that we would not successfully achieve our mandate if we carried it out in a vacuum. We actively seek out intermediaries through different means, to better understand the charitable sector and its challenges. The relationships we have built with these intermediaries have served us exceedingly well – they are built on mutual trust and have led to meaningful consultation and engagement on many features of our work. As a result, meaningful consultation has become an integral part of how we do our work – and has led to more effective regulation. This has been a feature, although perhaps not well-known, of the work we have conducted as a result of Budget 2012. Before making changes to the T3010 and its accompanying guide to include more information about charities’ political activities, we reached out to a number of charities and representatives, to gather feedback on our proposed changes. The same is true for most of the educational products we developed as well. The feedback was invaluable, and led to many refinements in the final products. It is clear that this kind of exchange serves both our interests and those of the charitable sector.

I can say with confidence that Canadian registered charities and their representatives have provided invaluable and important insight into the vast majority of issues that we deal with on a day to day basis. Having access to stakeholders that can provide us with "on the ground" type considerations of the challenges they face, has had a direct impact on how the charities program has evolved over the years. I greatly appreciate the contributions they have made to our service delivery and certainly look forward to continuing to work together as we move forward.

3. Partnering with intermediaries

Finally, in my view, the third feature of our effective regulatory model is related to the last, but should be specifically highlighted – it is the fact that we work closely with and leverage the capacity of third parties like all of you. Because of the diversity of mission and capacity in the charitable sector, which I alluded to earlier, it is understandable that the sector isn’t neatly organized under a single umbrella body. That’s why we rely on professionals who work with registered charities to carry our message forward to the sector and to influence their compliance behaviour. We are very grateful for the assistance we receive from umbrella organizations, professionals, and their associations in disseminating important messages to charities and advising them about how to remain compliant.

We have put considerable effort into these collaborations and we are hoping to increase this activity in the future. For example, we have recently engaged more formally with the academic sector to assist us in data integrity work, and we are looking to do the same in the delivery of our educational programs. We want to take stakeholder engagement to the next level by building more partnerships. There is great potential for even greater collaboration.

IT Modernization Project

I’ve shared with you my views on what makes our regulatory model in Canada effective – I have to admit though that there are some aspects of that model that have been less than effective! But thankfully, that is about to change!

To facilitate voluntary compliance, we have to minimize the compliance burden by streamlining processes and providing high quality service and support. While many government services have been modernized to enhance service delivery, the charities program has not kept pace. As you undoubtedly know, our current processes are entirely paper-based – whether a charity wants to apply for registration, file its annual return or make an enquiry, all of that happens on paper, with all of administrative burden that entails – both for the charity and for the Directorate. Over the past few years, we have been working hard to build the business case for an investment that would enable us to modernize our program. And our wish came true with this year’s federal budget!

Budget 2014 announced several measures designed to reduce the administrative burden on charities, encourage charitable giving, and help charities understand and meet their compliance obligations. Since Andrew Valentine has already discussed the measures of Budget 2014 earlier this morning, I will not speak in detail about the budget. However, I did want to take this opportunity to highlight the major announcement that relates to the modernization of electronic tools used by the Directorate.

The Directorate will receive funding to modernize its IT systems. This initiative will involve a redesign of the Directorate's principal information technology systems, the Charities Assessment Registration System (CARE) and the Charities Internet Display System (CIDS). Once the redesign is complete, the Directorate will be able to offer new electronic services, including online filing of Form T3010, Registered Charity Information Return and Form T2050, Application to Register a Charity Under the Income Tax Act. In essence, this initiative will allow the program to evolve to meet the modern data needs of the Government of Canada, the charitable sector, and the Canadian public. Our vision for modernization will push the Directorate forward in many different ways and allow it to be an even more effective regulator. We look forward to engaging with the sector and others in the years ahead, as we move forward with this initiative.

Conclusion

I am about to mark my fifth anniversary with the Directorate. I am proud of what we have accomplished together, and I’m looking forward to this next phase of development for the Directorate, always staying true to our role as an independent and effective regulator.

We will continue to develop resources to help charities understand and meet their regulatory requirements. We will also take advantage of changing technologies and gather feedback from the charitable sector to improve our outreach activities, our online tools, and the web experience.

It is my hope that by working together, and by sharing knowledge, we will continue to learn from each other, to improve the services we offer, and further the development of a strong and accountable charitable sector.

Thank you for your time and I hope you enjoy the remainder of the symposium.