Modernizing Charity Regulation for Greater Efficiency and Better Results

By Susan D. Phillips, PhD, Professor Emerita, Philanthropy and Nonprofit Leadership, School of Public Policy and Administration, Carleton University

Investing in regulation

The Carney government is preoccupied, as Canadians expect it to be, with protecting the country’s sovereignty, fighting US tariffs and reducing internal trade barriers. The Speech from the Throne also committed the federal government to a new fiscal discipline and improving public sector productivity by deploying technology. This means adjusting how we do things and investing in new technologies to save money and deliver better results.

Investment in modernizing the regulation of Canadian charities is a relatively easy, but impactful, way to realize cost savings for government, make administration easier for charities, deter fraud and increase transparency and understanding of this important sector. All Canadians have a stake in this, even those who haven’t thought much about charity regulation.

The 85,500 registered Canadian charities are enormously diverse. They include large, government-affiliated organizations (such as universities and hospitals), grantmaking foundations, and social service, arts, environmental, faith-based and community organizations, among many others. What they all have in common is governance by volunteer boards of directors and a requirement to provide public benefit. Collectively, the sector accounts for 1 in 10 full-time jobs and holds $503 billion in assets; the 11,000 foundations alone have assets of $142 billion. While these aggregate numbers are large, the reality is that 40% of charities are small, operating with one or no staff.

Some of the challenges, including fraud

Charities are exempt from income taxes and many other taxes, and can issue tax receipts for donations. Donations are a vital source of revenue for charities, particularly when government funding is reduced. The tax credit, which is very generous in Canada, is a significant ‘tax expenditure’ – about $4 billion per year that the federal government chooses not to collect to incentivize private giving. In effect, all Canadians support charities, whether directly through donations or indirectly through the charitable tax credit. Canadians thus expect charities to be administered and regulated with integrity regardless of whether they have substantial or limited resources.

The Charities Directorate, a component of the Canada Revenue Agency (CRA), has oversight responsibility for charities, while the Department of Finance sets overarching policies and regulations under the Income Tax Act. The Charities Directorate registers organizations for charitable status, administers relevant regulations, provides guidance and education, monitors the activities of charities, audits for non-compliance, and can issue sanctions or revoke charitable status for those found non-compliant. All charities must file an annual tax return (T3010) with the Charities Directorate, which becomes public information. To ensure that charities direct their resources to charitable purposes, they are required to annually disburse 5% of their assets (not used for charitable purposes), a requirement known as the Disbursement Quota (DQ). While operating charities readily meet this requirement, the DQ is more significant for grantmaking foundations that should be disbursing millions of dollars each year.

The Charities Directorate appropriately assumes that most charities want to comply with the regulations. It takes an education-first approach to assist charities (especially small ones) in understanding how to comply and assumes a risk-based approach to auditing those that might be offside. Canadians expect the CRA to address compliance issues in a timely and effective manner to maintain trust and confidence in the charitable sector.

While the vast majority of charities are prudent and trustworthy, charities are also subject to mischief and outright fraud. This is mainly due to unscrupulous individuals who take advantage of charities for purposes of overly aggressive tax planning or avoidance, providing private benefits to themselves, financing for-profit operations through charities, or sending funds offshore. They may do so by setting up networks of ‘shelf’ charities that circulate funds among themselves, which is hard to trace, by inflating the value of donated goods and issuing tax credits worth more than the actual donations, or by a variety of other devious schemes. Compared to other high-income countries, Canada has been distinctively prone to such abuse: tax shelters involving fraudulent charitable gift arrangements have cost Canadian taxpayers over $4.5 billion, and this is only the portion that have been caught. Both the federal government and the charitable sector have an interest in correcting this because abuse defrauds taxpayers, penalizes charities who might lose donations or other support to these bad actors, and erodes public confidence in both government and charities.

An underlying problem is that the Charities Directorate still operates in the paper world of a generation ago, because previous governments did not invested in making it a digitally-enabled regulator akin to those of the UK or Australia. An investment in technology would save money and deliver better results.

Solutions for regulation, education and enforcement

The number one compliance challenge for charities is filing the annual tax form (CICP, March 2025). The T3010 form can be completed online: 20% of charities complete and file it online. But, 80% download the file, fill it in manually and mail or fax it to CRA, mainly because the online system is so clunky that it is easier to submit by hand. Omissions or mistakes made by the person (often a volunteer) completing the form thus cannot be automatically detected before filing. The Charities Directorate staff then have to key in the information from about 68,000 organizations, which is costly, takes a long time, and results in a multitude of additional errors. This is sheer madness in a digital-AI era.

Charities should be easily able – and be incentivized – to file their annual tax return electronically, assuming appropriate technology supports doing so. This would fix the enormous inefficiencies with the filing system which result in extensive inaccuracies in the data reported. Digital filing could give rise to a cottage industry providing software assistance, making this process much easier for small charities reliant on volunteers. The Charities Directorate has begun to more proactively encourage e-filing with some certified third-party software and easier sign-in to the CRA account, but the underlying digital infrastructure remains an issue.

Better technology would help the Charities Directorate ensure that foundations are meeting their annual 5% Disbursement Quota. The potential extent of under-performance by foundations is not transparent and often difficult to assess because many do not provide the relevant data or proper calculation of the DQ on the T3010, and filers are not prompted to correct the form before submission. With digital filing supported by better technology, ‘Notices of Filing’ could be automatically generated, akin to the notices provided for individual and corporate filers, so foundations can self-correct and the Directorate could better monitor any non-compliance.

The Charities Directorate could also better educate boards of directors about their governance responsibilities related to compliance and be better able to catch fraud. The existing system does not allow the Directorate to easily update a charity’s list of directors (which normally change every few years). Consequently, they miss out on providing educational compliance resources to new directors, helping them to fulfil their responsibilities more effectively. It is also difficult to identify multiple charities that are run by the same set of directors, which is a red flag for mischief afoot.

Although people who have been involved in gifting scams or convicted of other relevant crimes involving financial dishonesty are ineligible to serve as board members or charity CEOs, it is difficult for CRA to identify them once a charity is registered.

Having the names of directors input electronically with the annual filing would provide the Charities Directorate with an up-to-date list of ineligible individuals.

In addition to the filing database, the Directorate’s other legacy computer systems reportedly can’t communicate with each other or with those in other government departments. Consequently, when a charity is being investigated for serious non-compliance, it can take months to revoke its status and publish an official notice, allowing the offending charity to keep operating and taking donations from an unsuspecting public. When a charity applies for a contract, grant or contribution from a line department, that department cannot obtain information on its financial situation directly from CRA. Rather, it collects such information anew from the applicant charity, which simply creates extra work for the charity and is costly to the department.

Canada could take lessons from Australia when it created a new digital-first charity regulator in 2012 using e-filing and the data-sharing principle of “report once, use often.”

Small changes will lead to large impacts

Smart investment can pay off in another way that multiples the value of a digital-first regulator: additional public and private investment could create a collaborative university-sector Charity Data Lab, the equivalent of the Business Data Lab hosted by the Chamber of Commerce. Such a partner Lab would provide real-time, future-focused insights on the sector that help governments, other stakeholders and citizens better understand and engage with charities and be more intentional and impactful with their philanthropy.

Beyond the benefits that would flow from improving the digital capacity of the charity regulator, an organizational realignment could further enhance its work at virtually no cost. While federal regulation of charities hinges on its constitutional authority for taxation, the Charities Directorate is an odd fit with the much larger taxation part of CRA, which is focused on collecting revenues and ensuring people pay taxes, rather than supporting organizations that do not.

When the main taxation part of CRA gets the sniffles due to an issue with tax collection, the Charities Directorate catches pneumonia: it is overshadowed and distracted from its work.

The expertise and specialized work of the Charities Directorate could be improved by carving it out from CRA to be a separate agency under the Income Tax Act and mandate of the Minister of Finance and National Revenue (and Secretary of State for CRA). This follows a similar logic to the creation in 2004 of the Public Health Agency of Canada (PHAC) separate from Health Canada over concerns that the federal government lacked the capacity to effectively respond to public health threats.

Canada’s charitable sector is similarly underserved and invisible in public policy because it is hidden away in the tax agency. Such a move (accompanied by legislative amendments) could also loosen some of the rigid privacy restrictions of the Income Tax Act that appropriately apply to individuals and corporations but are not relevant to charities, thus allowing data sharing across departments and making charity regulation more transparent.

Making ‘Canada Strong’ relies on people coming together to build strong, engaged inclusive communities – places with a sense of belonging where people want to live and work. Governments at all levels have a part in incentivizing and supporting a vibrant civil society as one means of attracting global talent, thereby enhancing the country’s productivity. With a recession looming, Canadians will depend more than ever on a wide array of charities and other community organizations that will have to be even more resilient and innovative. As with the private sector, efficient, responsive and effective regulation matters. With a relatively small investment in better technology for charity regulation, the Government of Canada can spend less and allow charities and philanthropy to invest more.

Dr. Susan D. Phillips is a Professor Emerita in the MPNL program, and researches comparative public policy for the third sector, philanthropy and nonprofits, and public management. In 2023, she published “Philanthropic Response to Disasters: Gifts, Givers and Consequences,” with by Alexandra Williamson and Diana Leat. Read Susan’s full bio.

Monday, July 7, 2025 in For homepage, Leadership & Governance, News & Events, Public Policy & Advocacy
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