Modernizing the Regulation of Charities: An International Discussion
Among Common Law Jurisdictions
October 17-18, 2006
List of Participants
National Director of the Non-Profit Centre in the Australian Taxation Office
Director General, Charities Directorate, Canada Revenue Agency
Terry de March
Director, Policy, Planning and Legislation Division, Charities Directorate, Canada
England and Wales
Executive Director, Legal and Charity Services, Charity Commission, England
Collector-General, Revenue Commissioners, Ireland
Head of the Charities Regulation Unit in the Department of Community, Rural
and Gaeltacht Affairs, Ireland
Chief Executive of the Charities Commission, New Zealand
Head of Finance and Governance, Voluntary and Community Unit, Department
for Social Development, Northern Ireland
United States of America
Lois G. Lerner
Director, Exempt Organizations, Internal Revenue Service, USA
Director, Customer Education & Outreach Internal Revenue Service, USA
Day One – Tuesday October 17, 2006
Elizabeth Tromp introduced all delegates, the organizers and observers for the inaugural
international conference. Mr. Brian McCauley was introduced to provide the opening
remarks. Please note that the items do not necessarily follow in numerical order as the
Agenda was adjusted due to time restrictions. The item on Foreign Activities was
included in the binder but not presented at the conference.
1. Welcome Address by Brian McCauley, Assistant Commissioner of the
Legislative Policy and Regulatory Affairs Branch, Canada Revenue Agency
The conference delegates share the basis of common law for the regulation of charities.
Bringing common law regulators together provides an opportunity to share challenges,
successes and information. This is not done often enough and it is hoped this will be the
beginning of an ongoing dialogue and network between jurisdictions. The event is a
workshop, not just a conference.
The charitable sector in Canada is rapidly evolving because of increased incentives for
individuals and businesses to donate to charities and changing demographics. The
government is concerned with accountability in the sector and ensuring citizens are
New legislation has recently allowed the Canada Revenue Agency to share information
with intelligence agencies to help deter money laundering and terrorism.
Canada currently relies on common law; the next couple of days may highlight the
values and costs to be taken into account should Canada decide to create a Charities
Act in the future.
Issues relating to the use of common law were discussed. The UK’s Charities Bill 2006
is the first attempt at putting the complexity of common law into statute law. The Bill will
not remove the use of common law. The benefits of having common law to back up
statute law were discussed. A statutory framework specifies how organizations need to
operate, but people will find holes in the statutory framework. Common law backs up the
statutory framework and fills in these holes.
There was general consensus that common law lacks clarity and can be confusing for
the courts, regulators and sector. Relying on common law makes it difficult to describe
“charity” and therefore more challenging for regulators to provide the sector with the
information to know if they are onside. Despite the challenges of common law, it adds
flexibility to the definition of charity, as it can be adapted to specific circumstances and
provide analogies for issues that have not been brought before the court.
It is anticipated that the following items will be discussed during the conference:
Establishment of an international policy dialogue
Identification of areas of ongoing collaboration
2. Profiles of Regulators
Item 2.1 - P.Y Lim – Administration of Charities, Australia
Please refer to presentation slides in section 2.1 of the conference binder.
The agenda includes many items that are issues in Australia; this demonstrates the
common issues faced by the regulators.
Charities are the combined responsibility of the state and the federal governments in
Australia. The federal government uses common law and Pemsel’s four heads to define
charity. Australia has had its own evolution on the definition of charity.
The Non-Profit Centre is the part of the Australian Taxation Office (ATO) that is
responsible for the regulation of charities.
In 2000, the Prime Minister initiated an inquiry into the definition of charity. The inquiry
asked questions such as whether the common law should be codified. The inquiry led
to recommendations, many of which reflect topics that are on the agenda for this
conference. The government accepted a number of the recommendations, including
creating statutory extensions to the definition of what is charitable. The common law
meaning of charities continues, but the statutory extensions to the definition of charitable
now recognizes certain childcare, self-help groups and closed and contemplative
religious orders as charitable. The inquiry also discussed the different rules for charities,
which operate in each state.
The Non-Profit Centre in the Australian Taxation Office tries to determine what a charity
is under common law and this can be challenging. The different levels of courts can
have differing views of charity depending on their reading of the factual merits. For
example, in a recent case, the Supreme Court of Victoria (state court) and on appeal the
High Court of Australia have made unanimous but opposing judgments on the merits in
determining the charitable status. The presence of various levels of government in
Australia is an issue also faced by Canada and the US with the involvement of
state/provincial and federal government in the regulation of charities.
In Australia, policy is created by the Treasury Department and administered by the Tax
A major driver for charitable endorsement is exemption and other concessions from
fringe benefit tax. Normally an employer pays tax on non-cash benefits, e.g., cars, cell
phones, provided to employees. Charities do not pay this tax. This differs from the US
where employees pay tax on the benefits given to them because it is part of their
compensation. Employees are required to pay the tax even if they are employed by a
An endorsed charity is required to notify the ATO if changes are made to its Constitution
or activities. Endorsed charities are not required to file annual returns. Tracking of
charities is done on a risk assessment basis. Endorsement for tax-deductible gifts is
separate from endorsement as a charity. Organizations can apply for both endorsements
at one time to reduce administration.
The financial year runs from July-June. This financial year, the Non-Profit Centre is
testing compliance with the Tax Office’s view of charity. This is an interesting area
because of the recent release of our public rulings and the statutory extension to the
definition of charitable.
Item 2.2 - Kenneth Dibble – Regulation of Charities, England & Wales
Please refer to presentation slides in section 2.2 of the conference binder.
The Commission is a Statutory Regulator regulating a common law system; this will
remain largely the same with the new Charities Bill 2006.
The Charities Bill 2006 lists thirteen charitable classifications. This is the first time
charitable purposes have been listed in statute. The Bill removes the presumption of
public benefit for the first three heads of charity. Removal of the public benefit
presumption has been controversial. There has been discussion on how to address
previously registered charities and whether they need greatly to be reviewed to ensure
they meet the public benefit test. Common law has not elaborated on public benefit
because it has always been assumed.
The new Bill will result in a low-cost tribunal being set up for appeals against
Commission’s decision. The tribunal will facilitate appeals by charities that are not able
to go to court because of the high costs to challenge Commission’s decisions.
Currently most incorporated charities abide by company law. The new Bill will create a
jurisprudential framework for incorporated charities (CIO - charitable incorporated
organization). The existence of the CIO will remove the dual regulation by both the
Charity Commission and the Companies House and DTI (Department of Trade and
Industry), it will simplify administration and continue to provide charities with the reduced
risks provided by a corporate structure.
The Commission registers an organization if it believes the court would view it as
charitable. As a result, the Commission has recognized new charitable purposes over
the last ten years and they have not been challenged.
The sector is diverse, making it difficult to find a common method of regulation.
Compliance efforts are proportional to the risk associated with the charity’s income and
Item 2.3 - Gerry Harrahill – The Regulation of Charities, Ireland
Please refer to presentation slides in section 2.3 of the conference binder.
The Department of Community, Rural and Gaeltacht Affairs has had responsibility for the
general regulation of charities including fundraising activities since 2002. Fundraising
permits, required for street and house collection, are issued under the overall control of
the Department of Justice by the police.
Exemption from value added tax is a current issue of concern for charities. Charities’
income is exempt from tax, but charities are not automatically exempt from new taxes
that are introduced.
A recent European Court of Justice decision has recognized the right of a charity
established in Italy to have tax exemption in Germany1. The decision provides that a
Member State of the European Union which exempts from corporation tax, rental income
received by charities in that Member State is precluded from refusing the same
exemption in respect of similar income to a charity established in another Member State
solely on the basis that it was established in the other Member State.
The group discussed whether constraints could be put on the operation of charities
established in other jurisdictions. It was thought that any constraints would need to be
applied very carefully. If restrictions are put into place, they could raise security concerns
as organizations seeking charitable registration in more than one jurisdiction may be
able move money around for illegal purposes, such as terrorist activities. There was
general interest in the European Court of Justice decision and its impact.
Item 2.4 - Trevor Garrett – The Regulation of Charities in New Zealand
Please refer to presentation slides in section 2.4 of the conference binder.
The Charities Act came into effect in 2005. Charities registered before the Act came into
effect were given a letter of covenant stating that they did not need to be re-evaluated if
conditions for registration changed (are grandfathered forever regardless of all future
legislative amendments or only for the purposes of the new Charities Act?).
The Charities Act creates a regulator that will have several roles: registering and
monitoring charities, addressing complaints about charities, education relating to
charities and ensuring the public’s confidence in charities.
An organization will need to provide information on its rules, activities, and officers to be
registered as a charity. The information will be available to the public, however, charities
can ask for certain information to be withheld. The Regulator is currently determining the
information that should be withheld and the justifications for withholding it. Since the
Regulator is not yet operating, it is not known how many charities are presently in New
Zealand. It is believed the number is anywhere from 25,000 to 100,000.
Item 2.5 - Seamus Murray – Review of Charities Administration and Legislation in
Please refer to presentation slides in section 2.5 of the conference binder.
The Regulator’s role is a bit different in Northern Ireland because of its small size. The
population of Northern Ireland is 1.75 million and it has been estimated that there are
12,000 charities. Northern Ireland is part of the United Kingdom. Charity regulation in
Northern Ireland is a devolved matter though currently due to the political situation
government in N. Ireland is under the direct rule of Ministers at Westminster.
Establishment of an independent charities regulator in Northern Ireland was discussed in
1994, but there was no definitive agreement on the way forward at that time.
Currently, organizations submit an application to Her Majesty’s Revenue and Customs
for tax benefit status and a reference number is issued. Reference numbers only
demonstrate that an organization has been recognised as a charity for tax beneficial
PriceWaterhouseCoopers, News Alert, NA 2006-025, September 15, 2006.
The Department for Social Development has responsibility for charity policy and
regulation though this could be described as a light touch approach. It has been taking
forward a review of charity regulation over the last two years and has been observing the
situation with charity regulation elsewhere in the UK to help in setting up the Regulator in
Northern Ireland. The public’s awareness of charities and fundraising has increased.
“Scandals” and misuse of charitable registration, (e.g. criminal activity, tax evasion,
fraud, money laundering, etc.) have contributed to increased awareness. There is more
opportunity for abuse without a Regulator and there is pressure for the new Regulator to
prevent and address abuse.
An issue that has yet to be addressed is the regulation of charities that fall under two
jurisdictions. An example is religious parishes stretching over the border of Northern
Ireland and Ireland.
For consistency, the proposed Northern Ireland Draft Charities Order 2006 is largely
based on the English bill, but about 20% of the Order is based on the regulation of
charities in other jurisdictions. For instance, the public benefit test in the Order is based
on the Scottish version that is more stringent than the English version. The test will look
at possible disbenefits2 as well as benefits provided by the organization. An example is
perhaps a private hospital which has the obvious public benefit of providing health care
but the disbenefit may be restrictive conditions for accepting patients such as high fees.
The draft Order lists 12 headings of charity. The headings were created by clarifying the
four heads of charity. There is no presumption of public benefit.
All charities will have to report finances. It is expected that there will be different levels of
reporting for different sized charities. Thresholds for reporting levels have not been
Item 2.6 - Lois G. Lerner – The IRS Regulation of Charities
Please refer to presentation slides in section 2.6 of the conference binder.
The Internal Revenue Code (IRC) is the basic statute describing what a charity is for tax
purposes. Charities qualify as Exempt Organizations under section 501(c) (3) of the
IRC. Jurisdiction over charities is divided. The federal government is responsible for
administering tax rules in the IRC and state governments are responsible for day-to-day
activities of charities.
Laws relating to the tax-exempt status of charities are passed by Congress, which
oversees everything done by the Internal Revenue Service (IRS). The IRS is an agency
within the Treasury Department, which is responsible for policy decisions regarding
charities. Congress and the Treasury Department consult with the IRS when creating
laws and policies relating to charities.
Tax-exempt charities, other than churches, file annual reports with the IRS and the
financial information is available to the public online. The public is able to use this
information to identify concerns and bring them to the attention of the IRS.
The term “disbenefit” is commonly used in the Charities Directorate of the CRA
Churches are considered charities, but unlike other charities, they are automatically tax
exempt and are not required to apply for tax-exempt status. There is a lot of debate as to
whether churches should be subject to the same rules as other charities, especially the
prohibition against political intervention.
To be recognized as a Tax- Exempt Organization, charities must have legal status as a
non-profit corporation or trust at the state level. The requirements for non-profit status
vary among states. Charities can conduct business in any state they choose and are not
restricted by the location in which they are established. The IRS requires Exempt
Organizations to have a clause in their legal documents stating that, upon the
organization’s termination, all assets will be given to another Exempt Organization.
Charities may conduct some business activities, such as a museum shop, and receive
income from those activities, but may be taxed on the income from the business if it is
unrelated to the charitable purpose of the organization.
There are differing levels of tax deductibility for donations made to charities. Donations
made to public charities (supported by donations from the general public) have a higher
level of deductibility from federal income tax than donations made to private foundations
(majority of funds donated by one person or family) .
Charities are prohibited from intervening in political campaigns for public office, including
directly or indirectly supporting or opposing specific candidates.
The IRS is modernizing internally and externally. Internal IT systems are being reviewed
and modernized to ensure they are compatible and secure. Charities can complete
annual returns online. The IRS has developed a prototype for a cyber assistant that will
assist organizations fill out the form used to apply for tax-exempt status. Electronic
subscriptions to Exempt Organization Updates, an on-line newsletter, are available on
the IRS website.
A current issue is public concern over executive compensation within charities. Some
believe charity officials should not be earning large salaries. To determine whether a
particular charity official’s salary is reasonable, the IRS can look to salary levels for
comparable positions in both the not-for-profit and the for-profit sectors.
Item 2.7 - Elizabeth Tromp – The Regulation of Charities in Canada
Please refer to presentation slides in section 2.7 of the conference binder.
The Canada Revenue Agency is responsible for administering the Income Tax Act. The
Charities Directorate, part of the Canada Revenue Agency, is responsible for
administration relating to charities. The Department of Finance consults with the
Canada Revenue Agency to develop legislation relating to charities. The Charities
Directorate does not have the authority to become involved in the operation of a charity;
it uses compliance initiatives to regulate charities.
In 2000, the Voluntary Sector Initiative reviewed the sector’s involvement with the
government. The Joint Round Table (a joint sector/government committee) was
established under the Voluntary Sector Initiative to look at strengthening the regulatory
framework for charities – it led to a series of recommendations. Most of the
recommendations were adopted by government as part of a Regulatory Reform
Initiative, announced in March 2004. One of its recommendations led to the creation of a
Charities Advisory Committee that operated for two years and provided advice and
feedback to the Charities Directorate and the Minister on issues related to strategic
direction and major program initiatives. A Technical Issues working group was also
established and meets twice a year. The Association of Gift Planners and the Bar
Association have representatives on this working group
Eligibility for registration is determined by common law, not the Income Tax Act. Very
few cases are taken to court to expand the common law. An independent appeals
mechanism within the Canada Revenue Agency has recently been established to
provide a lower cost mechanism for challenging decisions made by the Charities
Directorate. The group discussed costs associated with organizations challenging
Regulators’ decisions. This is a common issue faced by the Regulators and some
Regulators have set up internal appeals mechanism, or subsidies for organizations
wanting to appeal decisions.
The Charities Directorate develops administrative policies to guide officers in their
decision-making and at the same time provide transparency and clarity to the public on
how the law is applied. The Charities Directorate is required by law to revoke the
charitable status of organizations that do not file annual returns. Reminders are sent to
charities prior to revocation. Failure to file a return results in approximately 1,000
revocations a year. Lists of revoked charities are posted on the Directorate’s website.
The sensitivity of listing revoked charities is an issue in other jurisdictions. The US has
only recently been able to post information on revoked charities for the public. In
Australia the Tax Office cannot publicize the names of revoked charities and there is
concern about the effect this information would have on the organization’s reputation. In
the UK, non-compliant organizations stay on the register and the Commission sorts out
the issues. In most jurisdictions, the names of revoked charities drop off the Charities
In Australia, there is current interest in assessing the value and costs of introducing
annual returns. There is concern over disbursing the assets of an organization that
always operated as a charity. The importance of returns and monitoring financial
information was addressed. The 9/11 disaster has made it apparent that small amounts
of money can be used to create big problems. The information provided in annual
returns is useful to indicate compliance, find areas of risk and to provide information to
the public. The ability of the media to bring issues of non-compliance to the Regulators
attention was mentioned as journalists are often very thorough in their analysis.
Canadian charities are required to meet a disbursement quota; this is unique to Canada.
It has been argued that the disbursement quota requirement is becoming less relevant,
is not an efficient control mechanism for compliance, and its calculation is becoming
increasingly complex. An increasing number of charities receive funds from sources
other than receipted donations, for example, government grants that do not factor into
the calculation of the disbursement quota. The disbursement quota requirement is
currently being discussed and the sector has provided its views on the requirement.
The newer Regulators raised the issue of distinguishing between activities of a charity
itself, versus activities of the charity’s officials or administrators. For example, a church
leader encouraging members of the congregation to donate to a particular group. How
do Regulators decide whether the activity is one of the charity, or an individual? The
Regulators that have been in existence for a longer period of time believe that a charity
should not allow itself to be used by a subset of members promoting activities or a
message that a registered charity cannot become involved with. A charity official using
their position for their own purposes could be considered an unlawful activity.
3. Definition: Challenges of deciding what is charitable and selected case
Item 3.1 - Gerry Harrahill – The Irish Experience
Please refer to presentation slides in section 3.1 of the conference binder.
The central issue for the Revenue Commissioners when granting tax exemption is public
benefit. The Charities Act of 1961 assumed the presence of public benefit for religious
charities. The public benefit test is used most often for fourth head charities. Charities
are required to demonstrate the benefit provided by identifying the beneficiaries and
proving that the beneficiaries are numerically significant. Charities are also required to
demonstrate that their activities fulfill a need.
To be considered an educational charity, an organization must demonstrate that
increasing knowledge or abilities of an individual or group; hobby-like activities would not
normally be considered charitable on the grounds that they will have little or no
educational value attached. A school seeking registration as a charity must be approved
by the Department of Education. Restrictive enrolment for schools that are registered
charities has not been a problem in Ireland. Most of the schools are independent,
community based, open to the public and do not discriminate on the basis of religion or
other characteristics. In other jurisdictions, such as the US, schools that discriminate
can lose tax exemption.
The proportion of religious charities is increasing in Ireland and applications from new
types of religious organizations are being received. Determining what constitutes a
religious charity is increasingly challenging because of changes in the population.
Charities are required to provide their governing instruments to the Commissioners when
seeking registration. If the documents are not in order because the organization is
lacking legal expertise and it appears the organization will be undertaking charitable
activities, the Commissioners will work with them to put the documents in order.
Ultimately however the manner in which a charity is established is a matter for the
promoters of the charity.
Registered charities are advised to check with the Commissioners before making any
changes to their governing instruments or operation. Changes could affect the
organization’s eligibility for registration. This is especially important if objects or
membership regulations are being changed. Asking charities to discuss proposed
changes in advance facilitates communication between the sector and the
Commissioners. This emphasis on prior consultation has been successful to date.
The absence of appeals to the Tax Appeal Commissioners or the court in respect of
decisions taken by the Commissioners as regards charitable tax exemption has meant
that a potentially key catalyst in pushing existing boundaries as regards what constitutes
a charity for tax exemption purposes has been missing.
Charities provide an annual report with financial information to the Commissioners. The
report must advise if any changes have been made to the organization’s governing
instruments. The annual report provides charities with an opportunity to check over their
own operation and ensure compliance.
The Commissioners have the authority to review the operation and finances of a charity
at any time. Reviews are conducted on a risk driven basis e.g. when there is a case of
increased risk or an emerging concern. Charities can also be subject to a Revenue
audit as part of the normal audit and compliance activity undertaken by Revenue. During
this normal audit/compliance activity status as a charity is not reviewed.
The Commissioners try to implement a compliance program that does not impose an
unnecessary compliance burden on charities. Within Revenue, charities are considered
as relatively low risk. The important contribution they make to society is recognised. The
majority of charities are small, localised and have a revenue of less than 50,000 euro a
year. The compliance approach is to ensure that charities are aware of the
requirements governing their charitable status for tax exemption purposes i.e. that they
are established for charitable purposes only and that the income of the charity is applied
for charitable purposes only.
Charities can become involved in business activities. The Commissioners receive
occasional complaints from for-profit organizations claiming it is unfair competition. The
group discussed this issue, as it appears to be a problem for all Regulators. The
presence of charitable activities is not always apparent to the for-profit entities.
The European Court of Justice decision of September 2006 was discussed. There was
concern that it may lead organizations to “shop around” for charitable registration. The
decision could support consistency in the definition of charity throughout Europe. The
delegates did not believe the regulation of charities was considered when the European
Union Constitution was created.
In Ireland, the Commissioner’s website is often the first source of information for
organizations seeking registration. Organizations are often unaware of regulations
associated with registration until they are registered as a charity. The Commissioners
hope the proposed new Regulator will help to increase public awareness of charities and
the broad regulatory regime.
Item 3.3 - Kenneth Dibble - The recognition of the advancement of religion as a
charitable purpose within the jurisdiction of the Courts of England and Wales
Please refer to presentation slides in section 3.3 of the conference binder.
There are three main issues relating to religion as charitable purpose:
1. The Commission does not have a definition of “religion”, but is required to
interpret what “religion” is in the context of determining what is charitable at law.
2. Removing the presumption of public benefit for religious charities has given rise
to the question of what constitutes public benefit for the advancement of religion.
3. The concept of religion in western societies has changed over the last 10-20
years. Common law refers mainly to Christian religions and has not developed to
address the increasing multi-culturalism of society.
The Church of Scientology’s application for charitable registration led the Commission to
consider the principle for the advancement of religion as charitable in 1999. The analysis
led to the creation of four tests for organizations advancing religion:
1. Do the adherents have a belief in a Supreme Being?
2. Do the adherent worship the Supreme Being?
3. Does the organization advance religion?
4. Is the organization established for the benefit of the public?
Although the Commission produced a 55-page document (available on its website)
outlining its decision regarding Scientology, the analysis does not adequately clarify the
law regarding the advancement of religion. The new Charities Bill provides some
clarification on the definition of religion, but does not provide clarification on the concept
of “supreme being”.
How much needs to be done to advance religion was discussed. For instance, do
adherents need to go out and provide benefits to people outside of the congregation or
is it sufficient to advance religion among those who attend services? In most
jurisdictions, advancement of religion requires the provision of benefits to the wider
community, not just the adherents. In Ireland, closed orders are considered to be
charitable. The recent Inquiry in Australia recommended that closed orders be
considered charitable as an extension of religion. Other Regulators do not consider
closed orders as charitable because the existence of a public benefit cannot be proven.
The courts have not explored public benefit for religious charities because its presence
has always been assumed. A key element of the public benefit test is accessibility for
the poor. Charities can charge fees for services, but need to make provisions to provide
benefits to those who cannot afford the fees. The class of recipients must be broader
than those that can afford the fees.
Participants discussed how to measure the benefits of a religion in tangible terms. It was
thought this might be a balancing act between benefits and disbenefits provided. The
extent to which a charity can cause harm or a disbenefit was discussed. An acceptable
level of disbenefit could be an organization with a view on diversity that differs from
contemporary society promoting its view among members who are free to join or leave
the organization. The disbenefit would extend too far if the organization promoted its
view to the wider society or tried to make the wider society adopt its view.
Tithes and benefits provided to religious leaders were discussed. There was general
consensus among the Regulators that leaders should not be provided with non-
incidental benefits. All benefits provided to leaders should be authorized by an
organization’s governing documents. The US has encouraged religious charities to
separate financial responsibilities and spiritual leadership to encourage oversight of
funds spent on benefits provided to spiritual leaders.
Item 3.2 - Richard Brunton - Research as Education. Do think tanks and policy
institutions qualify as charities?
Please refer to presentation slides in section 3.2 of the conference binder.
The Charities Directorate refers to think tanks and public policy institutions as Public
Policy Research Institutes (PPRIs). There are approximately 50 PPRIs registered as
charities in Canada. PPRIs are registered as educational charities because they
conduct political research by applying scientific research methods.
Think tanks are often viewed as being neutral and making unbiased recommendations,
but mostly they are perceived as being political. This causes concern because charities
must devote substantially all their resources (90%) to charitable activities, therefore no
more than 10% of a charity’s resources can be devoted to political activities. The
Charities Directorate needs to determine if a PPRI’s political activities are a collateral
purpose or if they are incidental and ancillary to charitable purposes and activities. To
make this determination, the Charities Directorate looks at the manner in which a subject
There was discussion as to how a Regulator would determine if a charity is being biased
and whether PPRIs should be classified as educational charities or as fourth head
charities. Regulators in the UK and US assume PPRIs are inherently political to a
certain degree but do not challenge their charitable status on that basis. In the UK,
PPRIs with charitable registration are labelled as being left or right wing and in the US
the organization is required to list any political affiliations.
Item 3.4 - P.Y. Lim - Commercial Operations and Charity
Please refer to presentation slides in section 3.4 of the conference binder.
Rising costs of operation and competition for funding has driven charities to become
involved with commercial activities.
Regulators use different regimes to monitor the commercial activities of charities. The
UK has legislation relating to trading and profit and Canada has policies for related
business. Analysis of the Regulators’ approach to commercial activity shows a common
theme: commercial activities should be related and connected to the organization’s
The Tax Office has taken the longstanding purpose test to commercial activity. There is
no principle stating that a charity can or cannot be involved with commercial activities or
principle stating that commercial activities must be compatible with charitable purposes.
The Tax Office does not only take the level of business activity into consideration.
The recent Inquiry in Australia focused attention on commercial activity by charities.
There has also been media attention of businesses complaining about unfair competition
Commercial activities often support the operation of a charity. To determine if the
activities are charitable, the organization’s purpose needs to be examined. The
Regulator needs to determine if the commercial activity is incidental or if it is a dominant
part of the operations.
Some organizations are set up to support the operation of other charities. These
organizations are charitable if they enhance the efficiency of charities. An example is
the provision of accommodation for nurses. According to a recent example found in the
Australian ruling, the provision of insurance to church groups can be charitable. The
purpose of the related organization in question was examined. Through the provision of
insurance, the organization was able to meet its end purpose of improving the efficiency
of churches. Limiting services to churches was a major factor in the ruling. The amount
charged by the insurance provider for services was not considered in the ruling.
There are limits on the commercial activity a charitable organization can engage in. For
example, the courts have held that it is not charitable to provide superannuation to
employees of a charity. The benefit is provided to the employees of the charity rather
than to further the charitable purpose.
There was discussion about whether it is charitable to run a business if all profits are
given to a charity. There was consensus that it is not charitable because the
organization could be seen as operating a commercial enterprise and extending beyond
The UK has intermediary charities that set up to provide services, such as IT and
accounting, to other charities. The Commission’s website provides guidance and
policies for the intermediary charities. Common law does not provide much guidance on
where to the draw the line on commercial activities. In general, commercial activities
should be limited to the provision of services to other charities.
4. Selected Topics in the Regulation of Charities
Item 4.1 - Trevor Garrett –Reflections on Regulatory Oversight
Please refer to presentation slides in section 4.1 of the conference binder.
Mr. Garrett’s experience is drawn from setting up a Casino regulator in New Zealand.
There are a variety of regulatory methods and industries are often under or over
regulated. The regulatory system needs to reflect the level of culture being regulated.
Regulators need to understand the business of the industry. Understanding is improved
when the regulator visits the bodies being regulated. It is also important for the industry
to understand the regulator and its rules; this promotes compliance with the rules.
A regulator should fix the biggest problem and ensure the problem is thoroughly
understood. Regulators often try to find solutions to problems that don’t exist, resulting
in unnecessary rules. It is important to question why the regulator is being created and
to assess the current situation and any existing problems.
Changes in the environment affect the role of Regulators. In the case of casinos,
competition from online gambling and the legalisation of casinos in other jurisdictions
has increased. Charity regulators need to take the increase of international operations
into consideration. When setting up a regulator, the diversity of the sector, how to
conduct effective consultations, and the success of activities such as education need to
The group discussed Regulators achieving a balance of service and enforcement.
Raising awareness by publicizing enforcement efforts, by issuing warnings or lists of
revoked charities is difficult for some countries. The Tax Office in Australia cannot
publicise details of any charity and when revoked, an organization’s name is simply
removed from the Register. A recent legal opinion in the US has allowed the IRS to
publicize the name of revoked charities. The group discussed the legal restrictions on
publicizing compliance information in various jurisdictions, and the impact of releasing
this information on the reputation of charities and on public confidence.
Day Two – Wednesday October 18, 2006
Item 4.2 - Terry Dunne - Regulatory Reform and Charities in Ireland
Please refer to presentation slides in section 4.2 of the conference binder.
The topics listed on the agenda demonstrate that Ireland is facing similar issues as other
The Charities Bill has not yet been published. Ireland has looked to other countries,
such as the UK and Northern Ireland, while developing legislation. The UK’s new
Charities Bill is very useful for new regulators because past failures were examined
during its development and the Bill underwent a large amount of scrutiny.
The necessity and purposes of an Irish Regulator were evaluated. It was decided that a
Regulator is needed because of the importance of charities’ contribution to society and
to maximise public confidence in the sector.
Similarly to New Zealand, Ireland has been assessing whether to take an enforcement
or service approach towards regulation. There is a view within elements of the sector
that a Regulator should only have an enforcement role, though the Irish legislation is
framed so that the Regulator will have both an enforcement and a supportive role.
Not all of the rules for charities will be legislated. The Regulator will create an Agreed
Code of Good Practice for charitable fundraising. This will allow the Regulator and sector
to review the Code’s regulations, determine if they are working and decide whether they
should be continued.
The devolution of charity regulation in the UK was discussed. Wales, Scotland, and
Northern Ireland are creating their own regulators. The legislation of new regulators
needs to be compatible and consistent with that of the UK, but this is not being forced.
The new Regulators are examining the merits of the traditional view of charities and are
trying to create a new and better way of regulating charities.
Sharing information between charity Regulators and tax bodies was discussed.
Regulators that are part of a tax body are able to share information for purposes of tax
compliance matters whereas Regulators that are not part of the tax body are more
restricted in sharing information.
Item 4.4 - Bobby Zarin – Disaster Relief
Please refer to presentation slides in section 4.4 of the conference binder
Disasters such as 9/11, the Tsunami in 2004 and hurricanes Katrina and Rita in 2005
have given the Internal Revenue Service (IRS) experience with disaster relief charities.
Following disasters, charities tend to set up very quickly, and often do not set up
The first major disaster in recent years was the 9/11 terrorist attacks in New York City
and Washington, DC. Following those events, the IRS provided guidance and tips for
setting-up charities on its website. The IRS did not want to impede charitable work and
set up an expedited application process for 9/11 charities, with a turn around time of
approximately two weeks. A more thorough examination of the charities was done at a
Following the events of 9/11, charities received more donations than required for
disaster relief efforts. Charities used the excess money for other charitable activities,
which caused a public outcry because donors believed the funds would be used for 9/11
relief. The charities did not break any tax rules; this was more a public relations issue.
This experience made the public and charities “smarter” in future disasters.
The next large disaster was the Tsunami of 2004. This time the IRS took a different
approach and encouraged the public to donate to existing charities, rather than create
new charities. The IRS issued press releases to educate the public about the benefits
of donating to established charities with existing networks to provide aid. Although the
IRS encouraged the use of existing charities, it did not prevent or discourage new
charities from being created. Charities also took a new approach and were very clear on
how donations were being spent, letting the public know where funds were needed and
indicating how people could direct donations to particular activities. Charities were
required to provide the IRS with documentation to demonstrate control of funds
overseas. The majority of donations were given to well-established charities following
The next disasters were the hurricanes of 2005 in the United States. The IRS was well
prepared because of its experiences with 9/11 and the Tsunami. The IRS continued to
expedite applications for new charities to help with the disasters, but also conducted a
closer scrutiny of charities at the application stage. That way, less post-application
follow-up was needed. The expedited application process took about two to three
Regulators in UK, Australia and Ireland also encouraged donations to existing charities
following the Tsunami. The UK’s Charity Commission encouraged donations to a
disaster umbrella organization that distributes funds to disaster charities.
The IRS originally created the Review of Operation (ROO) to review organizations that
were granted tax exemption before they began operating. The review would be done
after the organization started operation, to ensure it was doing what it said it was going
to do at the time it applied for tax exemption. The ROO is now also used for as a follow-
up mechanism for cases involved in enforcement initiatives.
The majority of fraudulent activity in the US during disasters was conducted by
organizations pretending to be charities, not by charities that had been approved for
exempt status. The IRS warned the public about the fake charities, even though
responsibility for pursuing the fraudulent charities rests with criminal law enforcement
agencies rather than the IRS.
Guidestar was discussed. Most charities do not file their Form 990 electronically.
Guidestar in a private service that posts information from the annual 990 returns filed
with the IRS. Having the information in electronic format is very useful for statistical
analyses. Guidestar has not been as successful in UK because the Commission
provides all the same information to the public free of charge through its website.
5. Best Practices in Monitoring
Item 5.1 - Lois G. Lerner – The IRS Credit Counselling Compliance Project
Please refer to presentation slides in section 5.1 of the conference binder
The Internal Revenue Service (IRS) has experienced success with using the press,
media and Internet to self-promote. The Exempt Organizations office of the IRS issues
press releases through the media obliges requests from the media for interviews and
has annual press conferences to announce its work plan for the upcoming year and
discuss accomplishments of the past year. Engaging the media allows the IRS to direct
the message provided to the public and to be anticipatory rather than reactionary. The
Credit Counselling Project is an example of success with using the media.
The widespread use of credit cards has changed the operation of many credit-
counselling agencies. The agencies have become larger, are no longer community
based, and charge fees for services. They have become monitors of debt management
rather than counsellors. Many agencies receive “fair share” payments from credit card
New legislation came into place exempting credit-counselling agencies with Exempt
Organization status from strict Federal Trade Commission rules involving up front
payments from consumers. Following the legislation, abusive organizations sought
Exempt Organization status and the IRS saw an increase in applications from credit
counselling agencies. The Exempt Organizations section of the IRS collaborated with
the taxable side of IRS to determine which credit counselling organizations to audit. It
also created the Core Analysis Tool, which enabled auditors to quickly separate
legitimate and potentially abusive organizations by providing a roadmap of criteria to
Letters and questionnaires were sent to credit counselling agencies to determine
whether they were compliant. The letter stated that a response was not required, but the
IRS could choose to audit the organization. This encouraged the majority of
organizations to complete the questionnaire and reply to the letter. The IRS also
provided the organizations with the Chief Counsel’s legal analysis of what was required
for a credit counselling to meet the requirements for charitable status. It is unusual to
provide legal opinions outside of litigation.
Organizations began to apply for purposes other than credit counselling, but then
switched to credit counselling activities following approval of tax-exempt status. To
counter this practice, a question specifically asking about credit counselling was added
to applications for exempt status.
The IRS exempt organizations office issued a public report on credit counselling
agencies. The report listed problems with the agencies, why the problems existed, how
the problems were addressed and areas of ongoing concern with the agencies. This
was the first time Exempt Organizations had issued a public report on the outcome of a
compliance project. It was very successful and has become a standard practise for
reporting on compliance projects.
Public outreach and education prevented complaints and bad press about the IRS’
investigation of credit counselling agencies.
4. Selected Topics (cont.)
Item 4.3 - Kenneth Dibble – Transparency and accountability in obtaining and
disseminating public data about charities
Please refer to presentation slides in section 4.3 of the conference binder
The main methods of regulation are direct regulation and self-regulation. Self-regulation
is successful when there is good governance and disclosure in the sector.
Transparency in the sector is important when Regulators have limited resources to
monitor the sector. Transparency also allows knowledgeable decisions by the public
when making donations and by the government when giving grants or subsidies.
Electronic media and communication have made information on charities readily
available to the public.
The annual return was introduced in 1993 in the UK to identify compliance issues. The
return has not been as useful in identifying compliance issues as originally anticipated.
Whistleblowers and the media identify the majority of compliance problems. The sector
did not resist the introduction of the annual return and is not resisting the introduction to
electronic annual returns that is currently underway. The information provided in annual
amounts and returns is provided to the public, allowing them to judge the effectiveness
of charities and the impact of their expenditures.
The information provided in the annual returns is converted into electronic format and
manipulated to find trends. The Commission has found the best sanction for charities on
providing actions, is listing defaulters on the Commission’s website. The new Bill will
make minor changes to sanctions available to the Commission.
Charities may be asked to complete serious incident reports to indicate if they are
involved in certain activities such as fraud. Being dishonest can have criminal
implications and organizations are more likely to report these activities to the
Commission than to the police.
5. Best Practices (cont.)
Item 5.2 - Ron Bourque – Canada’s Auditing Strategy
Please refer to presentation slides in section 5.2 of the conference binder.
The Charities Directorate’s overall audit coverage is 1%, an attempt is being made to
increase this to 1.25%. Although most activities pertaining to the regulation of charities
are centralized in Ottawa, audit activities are based in all five regions of Canada. There
are 40 charity auditors in Canada. As of April 1, 2005, the Canada Revenue Agency
(CRA) has been conducting its own audits, rather than hiring another agency to conduct
them. This is beneficial because all tax information within the CRA, including personal,
corporate and charity, is available to auditors and utilized to assess risk.
The Directorate’s audit program is focused on education to ensure charities are aware of
their obligations. The Directorate has been able to double its audit capacity with the
recent regulatory reform initiative. Audits have been expanded beyond high risk to
include other types of audits such as follow-ups and random. This has allowed audits to
be proactive rather than reactive. Auditors know if an audit is random, a follow-up or
high-risk, but they are expected to conduct their audit in the same manner for all cases.
Charity audits examine an organization’s financial information and activities. The
Directorate is concerned with whether the organization’s activities are charitable and its
finances are used for charitable activities. The audit does not investigate if the
organization is efficient with its funds.
The Directorate usually deals with the charity itself when conducting audits.
Professionals such as lawyers or tax practitioners may become involved if any problems
The group discussed promoters targeting charities to use as tax shelters. In most cases
charities do not purposely get involved with schemes. When investigating tax schemes
the CRA educates charities involved and reassesses donors’ taxes. Tax shelter
schemes are a common problem in Australia. When the schemes are discovered all
organizations involved in the transactions must file a form detailing the transaction and
New legislation in Canada has introduced 13 progressive penalties for non-compliance.
The penalties are in the Income Tax Act, the process of applying them is administrative
and use of the penalties needs to be approved at Headquarters. The sector has
provided a lot of feedback on the new legislation. While the first step in most cases will
still be educating the charity and in some cases seeking a compliance agreement, the
sector has expressed some concerns over what they perceive to be a more rigorous and
less flexible approach to charities audits. The Directorate is trying to address these
Revocations of charities are effective on a go-forward basis. Only donors can be re-
assessed retroactively. The Charities Directorate only can go back three years in
reassessing tax credits claimed for donations, anything beyond three years is statute
barred. A recent case in Australia stated that the Taxation Office could go back a
number of years to recover funds.
Audit results in Canada are not public. In the US, audit results are releasable if the
organization’s tax exemption is revoked; in the UK all audit results are protected. The
release or protection of audit results refers back to the impact the release of compliance
information can have on a charity.
The efficiency of Canada’s audit program was discussed. Revocation for cause is rare
which could be an indicator of high levels of compliance. Australia is currently working
on creating benchmarks for its audit program.
Quality assurance of the Charities Directorate’s audit program is done at Headquarters
in Ottawa. The quality assurance program in the US identifies problems across the
board, but does not indicate the individual linked to the problem. This makes it difficult to
address quality assurance problems.
6. Combating Terrorism
Item 6.0 - Donna Walsh - Review and Analysis Division Program
Please refer to presentation slides in section 6.0 of the conference binder.
The Financial Action Task Force on Money Laundering (FATF) Special Resolution VIII
refers specifically to misuse of funds by non-profit organizations and charities.
Canada’s Anti-Terrorism Act has increased the government’s ability to intervene when
there is a link between terrorism activities and funding. The Canadian model represents
an “all-of-government” approach where both criminal and civil powers are engaged to
prevent and suppress terrorism. Part 6 of the Act is the Charities Registration (Security
This legislation is specifically designed to protect the use of sensitive information in
determining whether an organization should be registered as a charity under the Income
Tax Act. It works on the basis of a special ministerial certificate which is automatically
and immediately subject to judicial review.
According to the Act, a charity cannot make its resources available to terrorist entities;
this includes financial, human and physical resources. Terrorist entities are defined in
the Criminal Code. The legislation does not allow the argument to be made that the
humanitarian arm and terrorist arm of an organization can be regarded as separate and
Provisions of the Charities Registration (Security Information) Act are used as a last
resort. Standard Income Tax Act rules are used as much as possible.
Judicial review of the Security Certificate process is designed to be as transparent as
possible. The judge must provide the organization with a summary of the information
used to issue the Security Certificate. However information that could injure national
security must be excluded from the summary. The judicial review process includes an
open court hearing in which the organization can call its own witnesses and cross-
examine government witnesses.
The Review and Analysis Division deals with both registration and
compliance/revocation cases. It is working on understanding and recognizing predictors
Three case studies were presented to demonstrate how the Review and Analysis
Division uses regulatory framework and legislation together to prevent registration of
charities devoting resources to terrorist activities.
The Division is only able to investigate charities. The group discussed the benefits of
taking a corporate approach and examining all taxpayers to prevent terrorist activities.
Separating taxpayers by type could result in missed links.
The group discussed terrorist groups moving into the non-profit sector once the ability to
use charities is cut off. Some believe charitable registration is attractive to terrorists
because of the benefits provided to the organization and donors.
The possible social issues arising from Anti-Terrorism legislation was discussed.
Sections of the society may feel the legislation is directed at them, making it beneficial to
use existing powers before Anti-Terrorism legislation. This highlights the difficult position
The new Regulators and those without Anti-Terrorism provisions were very interested in
Canada’s legislation and the authority it provides to prevent the involvement of charities
in terrorist funding. The legislation is a very big step and makes a positive statement.
The US has a terrorist list, it is illegal to donate to any organization on the list and the
organization is automatically disqualified from being recognized as a charity. Is Canada
able to automatically revoke a charity if it appears on a terrorist list? The Directorate
would likely know about the organization before it appeared on a terrorist list. The
benefit of the Canadian legislation is that it can prevent the registration of front
organizations and organization linked to terrorist activities that do not appear on terrorist
There was discussion about whether terrorism should be dealt with in the civil area of
charities or it is more appropriately addressed by law enforcement. A benefit of
Regulators being involved is their expertise of charities and access to charity
information. Some of the other Regulators are seeing the same links to terrorism as
Canada, but do not have authority to do anything about it.
The Review and Analysis Division is currently gathering and analysing information to
determine which organizations to thoroughly examine. Criteria are being designed in an
objective and justifiable manner. Presently, the Division screens all applications
received by the Directorate, approximately 3,000 to 4,000 a year. Every year, the
Division conducts secondary screening on approximately 100 applications. The criteria
used for screening are not public.
3. Definition (cont.)
Item 3.5 - Richard Brunton – Promotion of Sports in the 21st Century.
Please refer to presentation slides in section 3.5 of the conference binder.
Court decisions are made at both the provincial and federal level in Canada. The
provincial court in Ontario has ruled amateur sport to be charitable (re Laidlaw).
Amateur sport has not been recognized as charitable by any other province or by the
In 2005, the Amateur Youth Soccer Association (A.Y.S.A.) argued in the Federal Court
for the recognition of amateur sport activities as charitable. The Federal Court did not
find amateur sport activities to be charitable. The court ruled that Parliament had
addressed this area specifically through a separate provision that limits tax benefits to
nationally operating amateur sport groups, Registered Canadian Amateur Athletic
Associations (RCAAAs). The A.Y.S.A. has appealed to the Supreme Court of Canada
and the case should be heard within a year.
There are discussions in Australia as to whether certain sports providing health benefits
can be recognized as charitable. The UK’s new legislation will recognise sports requiring
physical or mental skills as charitable. The policy objective is to promote the physical
and mental health of the public. The US recognizes amateur sports as charitable, a
major issue is determining if a sport group is amateur.
The group discussed the insight that will be provided by the A.Y.S.A. case. Other
Regulators may be able use the decision for comparative purposes. The group
discussed whether the new UK legislation will impact the court’s decision. Most of the
Regulators agreed that court decisions in other nations are persuasive and can impact
decisions in other jurisdictions. The US does not look to court decisions in other
jurisdictions; they do not have the Commonwealth link shared by most of the other
7. Talking Points for Discussion and Decisions on areas for collaboration
The purpose of this discussion was to determine what interest there is in creating an on-
going forum and what mechanisms would be most useful and appropriate.
There was complete agreement among participants that the meeting had been
extremely valuable. Not only did it allow jurisdictions to exchange information and ideas,
but it also clearly demonstrated that there were many shared issues and challenges in
spite of differences in the regulatory regimes. It was noted that most of the jurisdictions
had undergone, are undergoing or will undergo change or reform and that discussion of
these changes offered great learning opportunities for all. It would be beneficial to meet
at a later date to review and analyse the impact of the various changes.
Participants provided the following comments in relation to questions identified for
1. What type of forum would be most useful?
All participants agreed that face-to-face meetings for the exchange of information and
ideas had been very useful and should be continued. Email networks were also strongly
urged so that jurisdictions could be kept up to date on items of interest in other countries
2. What mandate and terms of reference would it have?
Specifics about the Terms of Reference and Mandate were not discussed, however, it
was agreed that a more formal approach would be necessary to lend credibility to the
forum and to underscore the importance of future meetings.
3. What issues can / should be discussed in the forum?
There were a number of areas that would warrant further and on-going discussion.
Although the conference was conceived as a policy forum, it was recognized that other
areas of regulation were important to discuss. In particular, areas of discussion should
1. Developments in the legal framework, either statutory or through common-law
2. Policy developments in response to various issues
3. Administrative developments
4. Efforts to deal with abuses by charities and with terrorism
The development of regulatory practice and policy consistency in an environment where
charities operate on a global level is a key point of interest.
4. How does it link (if at all) to other regulatory/forum bodies?
The European Union was mentioned as an important body to be monitored due to a
recent decision involving charities.
The UK and Ireland Charity Regulators Forum is being established and should be
linked with the International Forum.
5. How should it operate?
Frequency – It was generally agreed that the frequency of meetings should be
every 12-18 months, as it would allow for significant developments to take place.
Canada suggested the 12-month time frame in order to maintain momentum.
Location – The location of the next Conference was not discussed. Canada
suggested the responsibility of hosting the Conference (this includes organizing,
holding and chairing the event) should rotate between regulators.
Chairing - It was suggested that the chair could be rotated among the
Reporting – Canada committed to preparing the meeting minutes and circulating
them to the participants for comments. Reporting would be covered in the terms
Level of Participation – It was agreed that the level of participation (senior officials
from each jurisdiction at the Director level and above) was appropriate. It was
suggested that higher level officials from the participating jurisdictions could be
invited to participate. It was also noted that the ability to bring in subject matter
experts on particular topics was valuable.
6. Do we limit participation or open it up further?
There was widespread consensus that participation in this forum should continue to be
based on the shared principles of common-law legal systems. It was recognized that the
involvement of other jurisdictions with different systems could provide learning
opportunities, however, there was definite agreement that the shared legal basis added
greatly to the ability of the participants to discuss common problems and issues. It was
also noted that there are disadvantages in structuring the forum around a small group,
but that a larger group could change the dynamic significantly and make it more difficult
to engage in in-depth conversations on particular items. It was generally agreed that the
size of the group was appropriate and that creating a larger group at this stage could
hinder the discussion.
7. Do we involve the sector in any way?
It was agreed that the sector should have a role in the forum, but in a limited way and
not as an equal participant. Suggestions were to have guest speakers or a panel
discussion where regulators could learn from sector representatives and exchange
information with them. It was felt that the presence of the sector at the entire meeting
would limit the ability of the regulators to discuss issues openly.
8. Next Steps and Closing Remarks
Canada will prepare terms of reference and take the lead on information sharing for the
next six months, at which time the responsibility will be handed off to the Regulator that
comes forward to host the next conference.