Is the end near for Direction and Control?

Is the end near for Direction and Control?

In June, Cooperation Canada held a session dedicated to the sector-wide efforts to address the outdated regulatory framework of ‘direction and control’ which imposes significant barriers to establishing equitable relationships with communities and organizations without a charitable status. As the sector gears up for a new season of efforts of legislative change, we hope this Q&A will help.

 

Why are we (still) talking about the Canada Revenue Agency’s ‘direction and control’ requirements?

The international cooperation sector is undergoing a transformative shift: global governance frameworks are increasingly highlighting the importance of establishing equitable partnerships with local civil society organizations and other non-traditional partners in pursuits of healthier, more equitable and sustainable world for us all. These principles are recognized across global frameworks such as the 2030 Agenda for Sustainable Development (2030 Agenda), the Grand Bargain for Humanitarian Action, and policy instruments such as the recently approved Recommendation on Enabling Civil Society by the Development Assistance Committee of the Organisation for Economic Cooperation and Development (OECD DAC). Canada’s domestic policy framework, such as the Feminist International Assistance Policy (FIAP) espouses the same values. However, the ability of Canada’s charities to establish equitable partnerships with diverse actors working in domestic and international contexts is constrained by the 70-year-old legislative framework dubbed ‘direction and control.’

 

What is ‘direction and control’?

Canada’s charities are regulated by the Canada Revenue Agency’s (CRA) guidances CG-002 and CG-004 which respectively set conditions for Canadian charities to work with non-charitable actors internationally and within Canada. Building on Income Tax Act (ITA) provisions dating back to 1950s, these regulations represent a global legislative exception, requiring all registered Canadian charities to implement their ‘own activities’ when working with non-registered charities, and to exercise ‘full direction and control’ over those activities.

For Canadian registered charities supporting a project of a local partner without a charitable status, ‘direction and control’ regulations dictate the need for a written agreement that relegates these local partners – who are generally the ones with context-specific knowledge, community ties, and the initiative behind the given project – to the role of ‘intermediaries’ in need of micromanagement. In other words, staff from Canadian charitable organizations are legislatively obligated to insist on compliance processes that undermine the agency and the independence of actors without a charitable status.

In humanitarian contexts where these constraints cost lives and livelihoods, Canada’s charitable organizations again represent a global exception. In the aftermath of disasters and crises, speed and coordination matter. This is why the global community is increasingly working with ‘pooled funding’ where various actors contribute to centrally coordinated response delivered by pre-vetted local actors. Canadian charitable organizations cannot legally participate in most pooled funds and are forced to spend more resources on burdensome reporting requirements. This means that the contributions Canadians direct to solving global challenges are spent less effectively.

 

How is Direction and Control perpetuating inequality?

Direction and control legislation disincentivizes Canada’s charities from supporting nonprofit and community organizations, as Kevin McCort, the President and the CEO of the Vancouver Foundation confirmed during Cooperation Canada’s Forum 2021, saying that “domestic funders are also increasingly finding that the definition of charitable purposes has excluded a number of groups (…) so we can’t fund (…) community groups, but they are doing the kind of work we want to fund in service of our charitable purposes.” While local actors are proven to be the most effective in addressing community needs including throughout the COVID-19 pandemic they receive insufficient support.

The more marginalized a community is, the less likely it is to have a charitable status. By making it harder for equity seeking groups to access funding, Canada’s legislation is perpetuating inequality. Results of such systems are clear: a Carleton University domestic study found that only 0.7% of grants issued in 2017/2018 was allocated to Black-serving organizations, and just 0.07% to Black-led organizations. Similarly, this analysis of the Registered Charity Information Return database for 2018 shows that Indigenous Groups (defined using the Indigenous Peoples Solidarity Fund developed by Wanda Brascoupe for CanadaHelps) received only $1 for every $178 allocated to non-Indigenous groups.

Internationally, the figures are not better. This 2016 OECD report shows that less than 1% of global funding is allocated to women’s rights organizations in historically disadvantaged countries, and the 2021 Grand Bargain report found that the commitment of ‘localization’ has not been achieved.

 

How were the ‘direction and control’ regulations updated in November 2020?

In November 2020, CRA updated the above-listed guidance documents for clarity and context-informed amendments. During the same Forum 2021 session in June 2021, Tony Manconi, the Director General of the CRA Charities Directorate outlined these updates. Efforts to clarify the terminology entailed, for example, replacing expressions such as ‘agent’ and ‘agency agreement’ with ‘intermediary’ and ‘intermediary agreement’ and spelling out the definition of the term ‘capital’ to include ‘real property land’ and ‘immovable property on land.’

In terms of the changes that do, effectively, shift CRA expectation, a notable update is that of the increased threshold for projects requiring formal agreements from $1,000 to $5,000. Moreover, CRA will no longer require that non-charitable partners use a separate bank account for charitable funds, but the financial records will need to be fully accounted and linked to the reported expenditures. According to the latest guidance, charities are expected to show ‘direction and control’ via written agreements, detailed descriptions of project activities, monitoring and supervising, regular reporting, ongoing instruction, periodic transfers, and clearly separated activities and funds. The new guidance also clarifies the definition of ‘adequate books and records’ for low and high-risk categories.

While helpful, these amendments made by the CRA do not resolve the central concern of ‘direction and control’ focused on micromanaging local partners’ activities and undermining their agency. With the ‘direction and control’ test solidified in the legal precedence and case law on the Income Tax Act, room for regulatory flexibility on the part of CRA is extremely limited. To truly amend this outdated framework, a legislative change to the ITA is required.

 

What is the proposed legislative approach?

Significant efforts have been made to inform legislative reforms of the ‘direction and control’ framework. The Advisory Committee on the Charitable Sector (ACCS), established in 2019 to promote dialogue between the CRA, the Department of Finance, and charitable sector experts, has issued recommendations outlined in the January 2021 and April 2021 aligned with previous reports carried out since 2012. These include the 2019 Report of the Special Senate Committee on the Charitable Sector, which suggests removing the ‘own activities’ test from the Income Tax Act and focusing on the expenditure responsibility test instead. The Government response to this report, however, has not outlined a clear way forward.

To move away from activity-based compliance approaches and strengthen financial accountability of charitable actors, Senator Ratna Omidvar proposed the private members Bill S-222, which passed in the Senate on 17 June 2021. As the Senator explained during the June Cooperation Forum session, Bill S-222 builds on examples from countries like the United States and focuses on financial accountability, which leaves further room for subsequent CRA regulations to be developed in consultation with the sector. Furthermore, as a group of charitable lawyers supporting this bill claims, the bill does not erode existing guardrails around other aspects of charity regulations, including those related to anti-terrorism and proceeds of crime (money laundering).

According to Senator Omidvar, Bill S-222 aims to strengthen accountability provisions by expanding the definition of charitable activities and defining reasonable steps for ensuring resource accountability. This includes replacing operational direction and control with full upfront due diligence and establishing partner agreements that would, in line with international standards, list expected outcomes and the impact, reporting requirements, as well as budgetary and activity-level commitments. Non-charitable actors would remain accountable for the use of resources towards declared charitable purposes and desired outcomes, but the legal responsibility for project management and financial control would rest within their institution.

 

What are the potential next steps?

Bill S-222 was approved in June 2021, thanks to the all-party support of the Senate, which according to Senator Omidvar suggests a common understanding of the importance and the urgency of the proposed amendments. MP Philip Lawrence, the Conservative Party Critic for National Revenue, had committed to tabling the bill in the House of Commons. However, Canada’s federal election has interrupted this process of legislative change and this fall, the bill will need to be re-introduced.

Should Bill S-222 pass both the House of Commons and the Senate this time aroumd, CRA will have two years to produce regulatory guidance that operationalizes the new provisions and clarifies what, for example, an acceptable due diligence process or a partnership agreement would entail.

 

How can Cooperation Canada members get engaged?

To support sector efforts to amend the ‘direction and control’ legislation, Cooperation Canada members are invited to join a working group dedicated to this agenda. The group will be co-led by Céline Füri (Oxfam-Québec) and John Clayton (Samaritan’s Purse). The group will share intel, resources, and coordinate advocacy outreach in collaboration with other domestic groups. To get engaged you can:

  • Learn more about this issue and consult additional resources on this Cooperation Canada page
  • Join the ‘Direction and Control’ Working Group using Cooperation Canada’s Member Portal. Contact Fanta Diaby for help with the Portal and look out for the next meeting invitation.

 

Cooperation Canada, CanWaCH and the Humanitarian Coalition applaud the Government of Canada’s early response to avert the looming famine catastrophe

Cooperation Canada, CanWaCH and the Humanitarian Coalition applaud the Government of Canada’s early response to avert the looming famine catastrophe

Today, the Government of Canada announced the allocation of $155 million CAD to support countries at the brink of famine. This decision is critical: right now, 11 people are dying every minute due to hunger and 41 million people are at risk of starvation. By acting now, before famine is declared, the Government is helping to prevent a catastrophe.  

This funding will be urgently disbursed across multilateral and civil society organizations for countries designated as most at risk by the international community. Decades of evidence have shown that the best humanitarian responses are early responses. Today’s decision reflects Canada’s commitments to humanitarian principles and international solidarity.  

Today’s announcement builds on commitments made at the G7 Summit in June, when global leaders pledged $8.5 billion towards famine prevention. The urgency of this funding is key: acting before a famine is declared is a humanitarian imperative. When famine is officially announced, it means that 30% of children are already suffering from malnutrition so acute they will either die or face life-long health consequences. Famine also drives conflict, worsens health crises and gender inequality while obliterating generations of investments in livestock, fisheries, and communities’ self-sufficiency.  

Canada is reacting now; before waiting on UN appeals and media moments – showing resolute action that reflects the values of Canada’s Feminist International Assistance Policy. The looming famine crisis is far from over – and women, adolescents and children will continue to be disproportionately affected. We call on Canada to continue to closely monitor the situation and scale up its response in an urgent, predictable, and equitable way, as it has done today.  

Global Affairs Canada CSO Partnership Policy – A Brief Guide and a Call for Engagement

Global Affairs Canada CSO Partnership Policy – A Brief Guide and a Call for Engagement

 

The ambitious objectives outlined in Canada’s Feminist International Assistance Policy (FIAP) can only be achieved in consultation with international and local civil society. Coherent with the Istanbul Principles and related frameworks such as the International Framework for CSO Development Effectiveness and the Busan Global Partnership for Effective Development Cooperation, FIAP is strengthened by a Policy on Civil Society Partnerships for International Assistance (the CSO Partnership Policy). Constructed in consultation with civil society, this policy outlines and defines how Global Affairs Canada (GAC) will engage with civil society actors on the implementation of the FIAP across nine action areas.

 

Nine action areas include:

  1. Empowering women and girls, promote gender equality, and reach the poorest, most vulnerable and most marginalized as the most effective means to eradicate poverty
  2. Facilitating a safe and enabling environment for civil society
  3. Protecting human life and dignity
  4. Fostering CSO leadership in innovation
  5. Integrating the role of CSOs as independent actors into international assistance programming
  6. Establishing more predictable, equitable, flexible, and transparent funding mechanisms
  7. Fostering multi-stakeholder approaches to international assistance
  8. Engaging Canadians as global citizens in international assistance
  9. Promoting sustainability, transparency, accountability, and results

Policy objectives – CSO implications

The human rights-based feminist approaches of FIAP require fundamental shifts in the structures, policies, processes, and programs of civil society actors working with GAC. Many of these shifts require institutional prioritization and resources, as we learned from civil society organizations (CSOs) partaking in the Women’s Voice and Leadership initiative.

Integrating considerations that account for gender norms and existing inequalities as well as devising tools and processes that allow for more gender-responsive and gender-transformative programs is a sector-wide challenge that can be achieved through collaboration, predictable and inclusive consultations, and continuous learning among diverse partners. To support these efforts, GAC and Canadian civil society crafted a policy outlining the entry points for strengthened government-civil society collaboration.

The CSO Partnership Policy highlights the responsibility of civil society actors to consult marginalized groups, including women and girls and ensure their perspectives are integrated across all areas of program design, delivery, and evaluation. Specifically, organizations are called to employ human rights-based approaches and institutionalize gender-based analysis in all of their work. CSOs should also collaborate with local/national responders as indicated through the guidance A Feminist Approach: Gender Equality in Humanitarian Action to strengthen the organizational and response capacity of local humanitarian actors as well as their long-term sustainability.

Implementation Plan

The CSO Partnership Policy is operationalized through the Implementation Plan, which lists proposed action for each of the nine action areas outlined above. To ensure progress towards the targets outlined in the Implementation Plan, Global Affairs Canada and Cooperation Canada have convened a Civil Society Policy Action Group (CPAG), which is open to civil society actors across the country. The two co-leads comprise the CPAG Secretariat, which on the GAC side reports to the Assistant Deputy Minister (ADM) for the Partnerships for Development Innovation Branch. CPAG gathers specialists from the sector, with each of the nine action areas co-led by representatives from relevant GAC teams and CSOs, who in consultation with broader coalitions formulate recommendations for policy implementation.

In 2018, CPAG devised a national survey, which informed the prioritization of: Objective 1 (Empower women and girls and promote gender equality); Objective 6 (Establish more predictable, equitable, flexible, and transparent funding mechanisms); and Objective 8 (Engage Canadians as global citizens). The implementation plan for the remaining objectives were approved in 2019, offering a policy tool for CSOs working towards a range of FIAP targets.

During the initial stages of the COVID-19 response, which called for GAC-CSO consultations on urgent matters related to the pandemic and its impact on the sector, CPAG activities were paused. Given the usefulness of tools and commitments outlined in implementation plans for all nine action areas, CPAG is currently calling on CSOs to engage with the group as a platform for improving the effectiveness of GAC-CSO collaboration.

Next Steps

CPAG is re-convening in 2021 to provide an overview of the group mandate and the progress made so far, articulate priority areas for 2021. To support an accountable and a forward-looking approach, CPAG will also be producing snapshot reports on the progress made for all nine action areas.

Canadian civil society organizations are called to engage around the work of CPAG to ensure this forward-looking and ambitious policy for CSO engagement is effectively translated into institutional systems and processes. Stay tuned for information sessions and updates related to this work.

UnyimeAbasi Odong, Policy intern, Research, Policy and Practice