I wish I did not have to write this article about the Canadian rules around international philanthropy and foreign activities but unfortunately, a small group of people has been constantly complaining about direction and control for 20 years.   It is quite surprising in the midst of a global pandemic that certain groups are advocating for a major change to the rules for Canadian registered charities conducting foreign activities and a Senator has said that she will be introducing such legislation in December which is in the midst of the “giving season”.  When many Canadian think we need more regulation over registered charities not less, how can this possibly go wrong?

While those who opposed direction and control have lost 5 court cases, now the group has increased a little in size and now seem to be pushing for eliminating or changing the rules (not clear at all) and I am concerned that public trust in international philanthropy may fall significantly.  One of the main groups pushing for the change in Canada is a Canadian charity, that has a close relationship with its US charity affiliate, and that US charity has endorsed Donald Trump! While that bothers me it does not seem to bother some Canadian charities and their representatives.

There is so much misinformation and misunderstanding circulating about the “direction and control” rules.  In my opinion, these rules work and allow over 5000 Canadian charities to spend over $4 billion outside of Canada each year.  Under these rules, charities need to maintain certain measures of control or oversight over their resources spent outside of Canada.  I am worried that proposed changes to the rules that I have seen are unclear and contradictory and in the long term could undermine international philanthropy from Canada and be used by some wealthy individuals to obtain large tax benefits without necessarily helping beneficiaries outside of Canada.   It took 20 years and 5 court cases to achieve the rules that we have at the moment and we don’t need another decade of uncertainty.  One leader of an umbrella organization has assured me that the intention is not to lower levels of accountability and transparency.   It is just hard for me to believe that all this effort is really just about changing the name of a rule or making slight modifications.

Canadian international development and humanitarian assistance organizations could be facing a difficult few years with potential government austerity and some Canadians cutting back support for international causes when they see so much need amongst their friends, family and neighbours in Canada.

After six months of a scandal involving one particular foreign activity charity, it could be devastating for the public to find out that some Canadian charities want lower levels of accountability and transparency for foreign activities. Although it is only a small number of charities that abuse the system unless we have clear and substantial rules, the perception of the public may be that international philanthropy is a Wild West and that would be very unfortunate.

We will address some recent complaints about the direction and control rules and, in particular, the ‘own activities’ test that forms a part of those rules. Later on, we will discuss the issue of funding local groups in international development and why so little funding goes to these local groups.

Section 149.1(1) of the Income Tax Act (Canada) requires that charitable activities be “carried out by the organization itself.” This is referred to as the ‘own activities’ test and is a requirement under the direction and control rules established by the Canada Revenue Agency (“CRA”).

We understand that certain charities that do international work, whether religious or secular, progressive or otherwise, have been criticizing these rules and CRA requirements as being unduly restrictive and in their view an obstacle to meaningful partnerships and empowerment of local actors.  One group referred to it as ‘colonialism, ineffectiveness and inefficiency’.  Think of almost any bad word or phrase and it has probably been used by someone to attack direction and control.


Some General Background re: Direction and Control and a Charity’s “Own Activities”

As you probably know, a registered charity can only use its resources (i.e. funds, personnel, and property) in two ways, both inside and outside Canada:

  • on its own activities (using staff or volunteers or using intermediaries with direction and control), and
  • on gifts to qualified donees.

In its Guidance on foreign activities, CRA notes that a charity usually carries on its own activities using its staff (including volunteers, directors, or employees), or through an intermediary (i.e. an agent or contractor). However, when using an intermediary, it must still direct and control the use of its resources, although it may generally delegate authority to make day-to-day operating decisions.

CRA further notes that, in limited circumstances, sometimes referred to as the “Charitable Goods Policy”, CRA may consider a charity to be carrying out its own activities by transferring certain resources to a non-qualified donee. The CRA will take into account all relevant circumstances when determining this, but at a minimum, the following three conditions must all apply:

  • the nature of the property being transferred is such that it can reasonably be used only for charitable purposes (i.e. medical supplies like antibiotics and instruments, which will likely only be used to treat the sick, or school supplies like textbooks, which will likely only be used to advance education);
  • both parties understand and agree the property is to be used only for the specified charitable activities; and
  • based on an investigation into the status and activities of the non-qualified donee receiving the property (including the outcome of any previous transfers by the charity), it is reasonable for the charity to have a strong expectation that the organization will use the property only for the intended charitable activities.

If any of the above three conditions do not apply, then a charity will only be able to meet the own activities test by directing and controlling the use of its resources.

CRA cites the following examples of a transfer of resources to a non-qualified donee where the above conditions could apply:

  • transfers, by a Canadian research charity, of books and scientific reports to a reputable foreign library or school
  • transfers of food and blankets to a foreign charity coping with a natural disaster, and that has a long history of successful operations
  • transfers of drugs or medical equipment to a poorly equipped foreign hospital with an excellent record of serving its community

CRA also notes that a charity does not have to adopt measures to direct and control the use of its resources when transferring property directly to proper beneficiaries of its charitable activities. For example, a charity could give school supplies, such as books or writing instruments, to impoverished students without having to direct and control how the students use those resources.

Otherwise, CRA states that when transferring resources to an intermediary, a charity must direct and control the use of its resources to meet the own activities test. The charity must be the body that makes decisions and sets parameters on significant issues related to the activity on an ongoing basis, such as the following:

  • how the activity will be carried out
  • the activity’s overall goals
  • the area or region where the activity is carried out
  • who benefits from the activity
  • what goods and services the charity’s money will buy
  • when the activity will begin and end

CRA notes that maintaining direction and control does not mean a charity cannot accept advice from its intermediaries, or that a charity must make every decision involved in the carrying out of an activity, although it must have the ability to intervene in any significant decision. Typically, the types of decisions listed above would describe the overall framework of an activity.

CRA further notes that an intermediary that carries out the work in the field is often in a better position to make day-to-day operational decisions. A charity can delegate the responsibility for such decisions to an intermediary, although this is not required under the Income Tax Act. For example, a charity might delegate the authority to make the following kinds of decisions:

  • which local vendor to buy supplies from
  • hiring and managing staff
  • locating potential beneficiaries for an activity
  • maintaining buildings owned or operated for the charity’s activities


Direction and Control Rules Do not Mean Being Controlling

As you can see from the above, the direction and control rules allow for a fair amount of flexibility in terms of who a Canadian charity can work with (individuals, for-profits, NGOs, foreign charities, or foreign governments) and how a project can be implemented. The type of activity that the Canadian charity undertakes can be subject to input by the intermediary, as long as it is the Canadian charity’s own activity and the Canadian charity has final decision-making power (to ensure, among other things, that the activity falls within the Canadian charity’s objects and meets other legal and ethical requirements of the Canadian charity).

By this we mean that prior to implementing its ‘own activity’, a Canadian charity can work with an intermediary to understand the real priorities in a particular area, resulting in a project that would be the Canadian charity’s ‘own activity’, but implemented by the intermediary to address an agreed-upon, pressing and concrete need. It is in this way that the direction and control rules actually facilitate local ownership. Having local people involved at the outset is helpful and having them implement a project makes sense given their knowledge and expertise.

Moreover, the direction and control rules set minimum standards but don’t actually prescribe exactly how a project must be run. If a charity wishes to micromanage its relationship with an intermediary, the rules allow for that. However, the rules also allow for intermediaries to make day-to-day operational decisions in accordance with their expertise (as long as appropriate reporting takes place).  Local actors typically have the knowledge and experience that allow them to make the best decisions about how to carry out a charity’s activity. Local people or organizations sometimes can do it quicker, better and more cost-effectively.

There are some Canadian charities that use direction and control as an excuse to micromanage. We have even seen extreme examples where a Canadian charity working with a foreign intermediary has used direction and control to expropriate the assets of a local charity under the guise of direction and control.  (i.e. if we fund you we need to own the assets). But this is offensive and not required by CRA and only seen it once.

There is nothing in direction and control rules that prevent a Canadian charity from working with local groups. On the contrary, the rules actually encourage it and how a Canadian charity chooses to do that is up to the Canadian charity.


Direction and Control Rules are Clear and Coherent

The direction and control rules are set out in the CRA Guidance (https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/policies-guidance/guidance-002-canadian-registered-charities-carrying-activities-outside-canada.html#toc2) and in case law: The Canadian Committee for the Tel Aviv Foundation v. Canada (2002 FCA 72), 2002-03-01; Canadian Magen David Adom for Israel v. Canada (Minister of National Revenue) (2002 FCA 323), 2002-09-13; Bayit Lepletot v. Canada (Minister of National Revenue) (2006 FCA 128), 2006-03-28; Public Television Association of Quebec v. Canada (National Revenue) (2015 FCA 170); Promised Land Ministries v. The Queen 2019 TCC 145.

Here are the requirements of direction and control:

  • the activity or project must be the Canadian charity’s own activity
  • a written agreement (and compliance with its terms)
  • a clear, complete, and detailed description of the activity
  • monitoring and supervision of the activity by the Canadian charity
  • instructions to the intermediary on an ongoing basis
  • segregation of funds
  • separate books and records that show use of resources and direction and control
  • periodic transfers of resources, based on demonstrated performance

We will not drill into the details about each of these requirements here but the rules are quite clear.  As one foreign lawyer described it to me – these are what in some countries you call “ordinary commercial practice” for business dealings or implementing projects.

To the critics of the direction and control rules, we would ask: what is the alternative? No measures of control? Some of them? If so, which ones? What system will be used to replace this? We would be happy to review an alternate set of rules and comment on their clarity and coherence.  So far we have not seen alternatives – we have seen catchphrases.   The worst thing about direction and control is the name – perhaps CRA should come up with a new name or catchphrase while keeping the same rules.  Perhaps “Responsible Oversight”!


Direction and Control Rules are Effective and Efficient

The direction and control rules have been criticized as being ineffective and inefficient. We would argue that it is not effective or efficient for Canadian charities to hand money over to certain organizations with no oversight.  We note the Gospel for Asia case as an example: in this case, donors sued Gospel for Asia USA for misrepresentations. The charity represented that donations went to helping orphans and widows in India, but apparently only a very small fraction of funds were actually distributed to beneficiaries. There were also complaints about the Canadian arm of this charity to CRA and the RCMP – by a pastor whose church had raised money for the charity for over twenty years. The Canadian charity could not account for over $90M in donations.

While it may seem more efficient to move money around without the ‘burden’ of rules with which to comply, the direction and control rules put checks and balances on organizations in that they require appropriate oversight. In doing so, we would argue that the rules allow for the efficient and effective use of funds by organizations and an ability to ensure that beneficiaries are actually benefitting.


Fiduciary Standards are Even Higher

We do note even if the direction and control rules were eliminated, directors of charities would still have fiduciary duties with which to comply. We suspect that these duties would require, among other things, directors to undertake most (if not all) of the direction of control rules in some way or another, given that these rules really just represent prudent practice.

The Charity Commission of England and Wales issued a report on a small charity in the UK (where there is no rule of “direction and control”) that built houses for the poor in Indonesia. The Commission asked the board of this charity to identify exactly which houses the charity built in Indonesia. With proper oversight, directors should have been in a position to do this seemingly simple task. However, the directors were unable to and the Commission held that they had breached their fiduciary duties.

In 2019, the Tax Court of Canada released its decision Promised Land Ministries v. the Queen, in which it upheld CRA’s decision to suspend the registered charity Promised Land Ministries (“PLM”)’s receipting privileges for one year for failing to maintain adequate books and records over a foreign activity by the Canadian charity. PLM had previously signed a Compliance Agreement with CRA, committing to maintain adequate books and records, including all receipts for the charity’s overseas expenses. When CRA came back to ensure that PLM was complying with that Agreement, PLM could not produce a break-down of some of its foreign expenses and all its receipts for its overseas expenses. The court rejected the explanation that there were no receipts for expenses in certain countries because those countries work mostly on a cash basis with no receipts. The Tax court endorses the view that it is important for charities to ensure that they are maintaining adequate books and records – which is one evidentiary aspect of direction and control – with regards to foreign expenditures.


General Comments and Concerns

Some religious or other organizations have models of operating outside the country that can be problematic.  Some want to send funds as “gifts” to their religious leadership outside the country and it is awkward to ask for any accountability from that leadership.

Others have carried out questionable foreign activities including combining aid with proselytization.  Others have in certain circumstances had priests or missionaries who have done very questionable things.  There are allegations that some secular and religious organizations have funded activities abroad and those activities have resulted in abuse of beneficiaries, staff, etc.  I don’t think that at the moment it is a good idea to allow Canadian tax-subsidized resources to be going abroad without any direction and control.

We further recognize that there are others in this sector who have a different view from ours. Some of these individuals are actively involved with operating or defending groups that have been involved in abusive charity gifting tax schemes. Some have been involved with or defended groups that have transferred tens of millions abroad with almost no books and records and with there being real questions as to whether any of the funds were actually spent on charitable activities.

We believe that taking tools away from CRA can result in a proliferation of bad actors, more negative media coverage of charities and a reduction in the public trust of Canadian charities. If there is a reduced public trust in charities, it will be harder to fundraise – especially for international development priorities – and consequently more difficult to carry out your mission.

If you take away the direction and control rules, there is a greater likelihood of actors who will use charities to take in money and move it offshore with there being no benefit to real beneficiaries (as allegedly seen in Gospel for Asia). (see CBC Charity Gospel for Asia files for creditor protection after $170M lawsuit). The direction and control rules strike a balance. They allow charities to receive favourable tax treatment; money must be spent here or abroad, with oversight, on their activities. Without them, it would be easier to move money out of charities in a way that wouldn’t be charitable and charities would become multi-national corporations and not the special entities that they are.

Finally, it is our view that Canada does not have the most stringent rules when it comes to international philanthropy. For example, Canadian non-profits that are not charities do not have to comply with the ITA and CRA requirements on foreign activities. Canadian registered charities on the other hand benefit from very significant donation tax incentives.   Some countries provide very limited tax relief to citizens or generous tax relief to a small portion of its (wealthy) citizens, Canada provides very generous tax benefits to most Canadians for donations to any registered charities.

Furthermore, although it does not get much recognition certain types of institutions like foreign universities benefit from special rules that are very generous.   Unlike other countries, Canadian individuals and businesses have the ability to gift funds directly to (approximately) 600 foreign universities and the UN who are considered qualified donees, and receive an official donation receipt for doing so. Canadian charities can also gift funds directly and easily to these organizations and do not have to comply with the direction and control rules in order to do so but they are a limited group of entities vetted by the Canadian government to meet the necessary criteria. These rules are extremely generous and we are not aware of any other country that has such generous rules.



Local Ownership and Low Levels of Funding for Local Groups in International Development


By some estimates, less than 2% of international humanitarian aid goes directly to local NGOs in the developing world.  See the Guardian “Five reasons funding should go directly to local NGOs”



Whether these numbers are accurate or not, it is quite clear that large INGOs, multilateral agencies, foundations, governments etc. are often more comfortable funding other large INGOs, multilateral agencies, foundations and governments rather than small local NGO organizations.   This is quite unfortunate.  There are lots of arguments that can be made, including in the above-referenced Guardian article, on why funding local NGOs can be very effective and efficient etc.

I am a strong supporter of what is called local ownership, which invariably means that a large amount of money should be going to local groups.


Local ownership is high when:

  1. intended beneficiaries substantially influence the conception, design, implementation, and review of development strategies;
  2. implementing agencies are rooted in the recipient country and represent the interests of ordinary citizens; and
  3. there is transparency and accountability among the various stakeholders.”

Quote from “In Local ownership and development co-operation – the role of Northern civil society: An Issues Paper” by John Saxby


  • Beneficiaries Design and Implement Strategies

There is nothing in the CRA’s Guidance that prevents a situation where the “intended beneficiaries substantially influence the conception, design, implementation, and review of development strategies;”

An intermediary can prepare, and often will prepare, the description of activities, as they are aware of details.  However, Canadian charity must consider whether the proposal meets with Canadian charity’s mission/objects, restrictions on funding that Canadian charity received from donor or funder, and complies with the priorities, legal obligations and ethical constraints of Canadian charity.  The charity cannot just send funds to an intermediary without knowing how it will be spent or maintaining direction and control.


  • Implementing Agencies Rooted in Country and Represent Ordinary Citizens

A few decades ago a prominent model was Canadian humanitarian workers or missionaries went to the Global South.  They often did not speak the language, or understand local culture, or have the necessary skills, etc.   But they could speak English and had the budgets to come back to Canada to tell everyone how wonderful their programs are going and how appreciative the local population is of the Canadian intervention.

The whole notion of structured arrangements, direction and control and intermediaries is really focused on the idea of using a contractor, agent, partner who is typically located in the Southern country and avoiding the necessity of sending in Canadian staff or volunteers to implement the charitable activities.

We don’t need direction and control rules if you just want to give money to Canadian charities to send staff/volunteers to developing countries. But that is typically not desirable.

It is the choice of the Canadian charity whether they wish to use intermediaries that “are rooted in the recipient country and represent the interests of ordinary citizens”.

Many organizations, for their own purposes, prefer to ignore or by-pass organizations “that are rooted in the recipient country and represent the interests of ordinary citizens”.  Some completely bypass these groups and others just largely by-pass them.

Many Canadian charities have affiliates in other countries and almost all their funds go to the affiliate in those countries.  Many of these affiliates, it would be hard to argue either are rooted in the recipient country or that they represent the interests of ordinary citizens.  Many of these affiliates are controlled by a group outside the country or sometimes by the government of the country who may not be democratic or representative of the interests of the people.


  • Transparency and Accountability

CRA is in favour of transparency for international and local work.  It manifests in various ways including requiring the T3010 to be largely publicly available, providing certain information and documents on charities and providing statistical information on all charities.

There are many special interests for various reasons do not want transparent relationships.

Transparency is not helpful for:

  • illegal activities;
  • unethical activities;
  • activities where there is a huge private benefit;
  • activities where there is no public benefit; and
  • very ineffectual or ineffective activities.


Furthermore, some people just don’t want to be transparent and accountable – this is a big problem with some foreign groups who are religious and some that are secular, both inside and outside of Canada.  How do you tell your religious leader, who is one step away from being a God, that they need to provide reports and ask for permission to make changes?  While some religious leaders may be very open to that, one does see others who prefer less transparency and accountability for the important work they are doing!

Nothing in CRA rules that prevents multiple accountabilities, but CRA is concerned with accountability for Canadian charity’s resources.

“Accountability is a concept in ethics and governance with several meanings. It is often used synonymously with such concepts as responsibility, answerability, blameworthiness, liability, and other terms associated with the expectation of account-giving.” (Wikipedia)

Well-run organizations should be accountable to stakeholders which include intermediaries/partners and also beneficiaries.

So while CRA does not require Canadian charities to be transparent and accountable to their “partner” or intermediaries in foreign countries it is no doubt a good practice if you wish to have a sustainable partnership that the Canadian charity is open, accountable and transparent with the intermediary.


Is Direction and Control the real issue preventing funding of local groups?

If the issue is how do we increase the funding for local NGOs in the developing world I think that is a fascinating topic and definitely worth exploring.

The issue of “direction and control“ somehow being a problem for funding local groups and local ownership is a total red herring.

It is not clear to me at all that Canada has the most stringent rules when it comes to international philanthropy as we have discussed above.

If someone says that direction and control is causing a problem with funding of local groups in developing countries then Canada presumably doesn’t fund them much or at all but all other countries do!  Is that correct!? Because that would be wonderful as Canada is only a small part of the international philanthropy and therefore I would be delighted to hear that small local NGOs around the world are getting a large part of government funding and international philanthropy. As we noted above in the Guardian article when looking at all countries you find that about 2% of funds go to local groups for international development.

I think that the problem of local groups not obtaining their fair share is a universal problem but there certainly are solutions to it.

Like I said I’m fascinated by the issue of how can Canadian charities fund more international work and consequently 12 years ago I created a website that is dedicated to that topic and have put large amounts of resources up to help Canadian charities, organized full-day programs on international philanthropy and helped hundreds of organizations including registered charities with foreign activities.

I would be very happy if this issue of encouraging more funds to local organizations was dealt with effectively.  Why not have GAC allocate 10 or 20% of its total budget to go to small organizations in the Global South or to Canadian charities who have to spend the funds using intermediaries that are small local organizations.   Certainly, that would increase significantly the amount spent with local organizations.

GAC is now funding an initiative to support small Canadian charities and perhaps some non-profits to receive small grants.   I think the amount involved is less than 1% of the GAC budget!

Remember that the government of Canada itself is not constrained by the requirements of charity law and direction and control and they can provide the funds to groups in Canada or outside of Canada, whether registered charities, businesses, individuals etc.

In fact in most cases when GAC provides funds they have very significant requirements for those funds which are far more onerous than the direction and control requirements.

There is a time and place to hire small local organizations and there is also sometimes the need to work with large organizations that have significant technical, financial and logistical abilities.

As we noted above the Canadian rules for direction and control allow Canadian charities to provide resources to both types of groups.   The rules are sensitive to the significant tax subsidy that donations provide and the importance of international philanthropy being done right.

It is interesting to see the assumption that all donors, funders etc. want “meaningful partnerships and empowerment of local actors”.  I sure wish that was the case.  Even in the Canadian context where funds are being transferred between qualified donees and no direction and control is legally necessary we see funders often micromanaging funds, restricting the use of funds unnecessarily because they don’t really trust the grantee or want to maintain as much power in the relationship that they have. How many funders restrict the amount of funds that can be used for administrative purposes out of a fear that the grantee will waste the money?  In the upside-down world of philanthropists and generosity if direction and control rules are abolished you might have more donors imposing their own accountability requirements to replace them.

Many funders in Canada have ideas of what is best for the community and they have certain solutions or interventions that they will fund. They are not that interested in local groups determining the priorities or how the program should be implemented.    There are initiatives to have more democratic and participatory decision-making around grantmaking but very few foundations in Canada use them.  There are initiatives to have more diversity at large organizations and foundations but I am not sure how well that is going.

Be careful what you ask for.  One danger we could see especially if there is a change in government is that the rules can be loosened now but later the tax incentives reduced or eliminated.  In the US, our neighbour to the south, about 2 years ago Mr. Trump made changes to their tax system that have meant that about 90% of donors receive no tax benefit for their donation to a 501(c)3.   As the US and Canada are always competing we may see Canada eliminate more tax incentives for donations or impose other restrictions that could negatively affect foreign activities by charities.

Also if charities don’t have direction and control requirements, CRA may have to increase significantly the number of audits of foreign activity charities to have a clear line of sight as to what each of them is doing.


The biggest concern with eliminating direction and control is that it would then allow charity capital owned by certain charities to move to other less regulated jurisdictions with less oversight and more “freedom”.   This may not increase the amount leaving Canada for actual foreign activities but just may allow funds to move to other countries to be stored there.  In some cases, there will be no transparency about what happens to those funds.  In this way funds are treated as charitable donations with huge tax incentives in Canada then moved elsewhere and used in many ways that never would have anticipated either by the Canadian group or Canadian taxpayers. I estimate that about $80-100 billion may leave Canada over the next 10 years.  This estimate is based on flat international philanthropy from Canada (about $4 billion per year) plus another $40-60 billion in assets moving to more “flexible” jurisdictions.

With COVID and deficit spending governments will be looking at reducing “tax expenditures” and this could impact the donation tax credit.   I have no problem arguing for the validity of a tax deduction for charities doing foreign activities where they are actually doing real foreign charitable activities.   But the tax cost could be very high if some wealthy Canadians put large amounts of funds in Canadian charities and receive about 60-70% tax incentives for their donations and then turn around and move those funds “offshore” or to one of many countries that does not provide similar tax incentives and therefore does not have significant regulation.  Once they are “overseas” in some cases there will be no transparency and of course, the intention of everyone concerned will be that the funds will only be spent on “charitable purposes”.    The stakes are very high.

There is no question in my mind that if there were no rules for direction and control, that while some groups would continue to operate appropriately, others would use the vacuum to take advantage of the situation.  It is also clear to me that removing rules for direction and control is not going to increase any funds going to local groups outside of Canada.

I doubt I will find any charities who say they want there to be strict rules governing how they operate – of course, everyone wants freedom of action for themselves.  But being a registered charity is not only a privilege but also part of your brand – if charities act badly, it undercuts the whole sector and your brand.   I don’t have to convince most Canadians that the actions of one charity over the last 6 months have caused the whole charity sector and especially some international development charities a lot of worry and angst.

That is why it is important that as a sector, for the good of the sector we need adequate oversight mechanisms to ensure that misbehaving charities will have some accountability.