On March 27, the Federal Office of the Taxpayers’ Ombudsperson (Ombuds Office) released a report, Charity Begins with Fairness: More to Explore about the Canada Revenue Agency’s (CRA) audit process for charities.

Report in Brief

The Ombuds Office examined CRA’s audit practices as a result of concerns from Muslim-led charities about their experiences with CRA and in accordance with direction from the Minister of National Revenue.

The Report’s conclusions are mixed – there were information-gathering challenges due to legislation and national security considerations. This meant that the Ombuds Office was limited in its ability to verify some of the complaints it heard, and not able to sufficiently address the selection of files for audit or the quality of services provided to audited charities.

“Although it does not provide all the answers that many are seeking, it is what we can provide under our Office’s authorities. That said, we believe it is a significant first step towards addressing the questions posed by the Minister and towards raising awareness of opportunities to improve the CRA’s services to both charities in general and Muslim-led charities in particular.”

The Report concludes that, overall, the audit selection process and audits appear to have fair procedures, and are conducted professionally and courteously. It also affirms the “critical importance” of CRA’s role in eliminating terrorism financing and abuse. But there were limits to the examination, including how the policies and processes are carried out in specific contexts.

The Report makes recommendations and suggestions, including that the CRA:

• Create an unconscious bias training course, target the course at those involved in audits, and make the course mandatory for staff involved in audits
• Ensure the audit information on its website is current
• Review and update the information it gives to staff taking leads about non-compliance
• Age its audit files as part of its reporting to help make audits more timely

Why the Report Matters

It may seem trite, but it is true that any time there is a review, investigation, or report into the regulation of charities, it is important! Maintaining the integrity and transparency of charities themselves is important, but equally so is the integrity and transparency of the regulatory process that governs those charities.

Audit selection should be fair, not based on which purpose a charity advances. Where a charity advances religion, it is important that regulators who may not share or understand a given faith, avoid making presumptions or assumptions that would negatively impact the audit selection process or the audit process itself. Examinations like this are important checks on how regulators approach compliance.

In response, the CRA has committed to implementing Charities Directorate training that will include unconscious bias, cultural competency and religious literacy. This last point is particularly encouraging – religious beliefs are often misunderstood when they aren’t personally held. Provided that the program accurately conveys religious beliefs, increasing insight and understanding of religion should positively inform interactions between CRA and faith-based charities.

The Report also shows that, while access to taxpayer file information was limited, the CRA uses screening criteria (indicators) of non-compliance that are reasonable, with no problematic indicator or criterium.  It also confirms that CRA cooperated with the Ombuds Office to the degree it was able, given legislative constraints, and that it is already considering improvements to the audit process (e.g. recording interviews).

For those charities that have never been involved in any sort of compliance review, whether an audit or an education letter, this report gives insight into many details of the audit process.

It has also prompted a further inquiry, this time by the National Security and Intelligence Review Agency which will review CRA’s Review & Analysis Division. This means that although we have a final report from the Ombuds Office, there is more to come.

Report in Detail

Background to the Report

The Ombuds Office examined CRA’s audit practices because of concerns from Muslim-led charities about their experiences with CRA and in accordance with direction from the Minister of National Revenue. Additionally, the examination was to look at how files are selected for audit, the quality of services provided to Muslim-led charities, and CRA’s efforts to make its employees aware of any potential biases.

Specific questions for the examination included:

• How are charities selected for an audit?
• How are the audits conducted?
• Is the audit process equitable?
• Is the audit process understood and transparent?
• Is the appropriate information communicated to charities, including the CRA’s concerns?
• Are audit decisions and compliance approaches made in a timely manner?
• Are the CRA’s audit decisions and compliance approaches fair?

The examination started in August 2021.  As it progressed, the Ombuds Office encountered challenges accessing certain taxpayer information. Those information gaps made it difficult to compare what was in the CRA taxpayer files with the information shared by stakeholders about their experiences. We wrote more about those challenges in our post, Federal Office of the Taxpayers’ Ombudsperson: Update on Examination into CRA Audits.

Findings of the Report

The Report has four main sections that discuss:

1. Examination approach – the scope of the examination
2. Operating environment – the process and mandate of the examination
3. Methodology – both the methodology and challenges of the examination
4. Analysis – the findings of the examination

We’ll cover key points for each category.

1. Examination Approach – Scope of the Examination

It focuses on “the fairness of the audit process for charities as a whole and not on a specific demographic or faith based or cultural group” including audit selection, the conduct of an audit, and options for objecting to audit findings. Attention was specifically directed to areas of concern identified through stakeholder consultations, and to CRA policies, procedures, and guidance in use between April 1, 2017-March 31, 2021.

2. Operating Environment – Process and Mandate

The report clarifies the Ombuds Office’s mandate, which is to “assist, advise, and inform the Minister about any matter relating to services provided by the CRA.” Its mandate does not include legislation, policy, administration, or enforcement of program legislation, unless it relates to a service issue.

3. Methodology

The Ombuds Office met with stakeholders and CRA staff, reviewed questionnaire responses, made information requests of CRA, consulted with government lawyers, and contracted experts.

Charities were asked for consent to access their CRA files; however, Income Tax Act confidentiality requirements and other legislative safeguards for the tax system prevented the Ombuds Office from accessing taxpayer information. CRA was also not able to answer some questions because of the sensitive nature of the information sought, such as audit techniques and how it assesses risk. Disclosing this information could allow people to circumvent CRA’s compliance activities, and this information is exempted from disclosure under the Access to Information Act.

As the Report explains, CRA cooperated with the Ombuds Office by providing its policies, procedures and templates, dialogue, access to senior executives, giving presentations, etc., but CRA could not specifically demonstrate how the audit polices and procedures are applied. These informational challenges were the reason the Ombuds Office could not “conduct a comprehensive examination” to fully examine audit fairness concerns.

Report limitation: “…we have not been able to sufficiently address two of the areas that the Minister asked us to pay special attention to, particularly regarding the Review and Analysis Division’s (RAD) activities, including: 1. The selection of files for audit, 2. The quality of services provided to organizations that are audited.”

4. Analysis – Findings of the Examination

Issue 1: Selecting files for audit by Review & Analysis Division

Public Information

On its website, CRA tells the public how it selects files for audit; however, that information is outdated and in the process of being updated. For example, the website lists “random selection” as a way charities are chosen for audit, but CRA no longer uses random selection when determining which charities to audit. Similarly, the website suggests that “articles in the media” is another means of selection; however, CRA confirmed that simply being in the media does not prompt an audit. Rather, it is high-risk non-compliance that could prompt an audit.

Report Recommendation: make sure the web page information is current.

Audit Selection

Charities are selected for audits based on information found or received by CRA, either through a “lead” or regular workload. In the past, “special projects” were also used, but the Ombuds Office found that “this does not appear to be the case anymore.”

Audits through Leads

A lead comes from another area of CRA, the public, or law enforcement. All leads, with the exception of leads from RAD, are funnelled through the CRA Lead’s Program. Leads intake officers check whether the organization is a registered charity, and use a procedural document with a list of questions to help them gather relevant information. The lead is then sent to the Charities Directorate for a risk-assessment to determine if a compliance response is required. High risk cases advance to audit.

The Ombuds Office had several concerns regarding lead intake:

• the procedure document was not detailed enough to help the Leads intake officers (e.g. it does not define what is or is not a charitable activity)
• lack of clarity about the discretion Leads intake officers exercise when forwarding – or not – a lead
• the procedure document could mislead its recipient (e.g. it identifies “activities outside Canada” as an example of a lead but that doesn’t – and shouldn’t – indicate or presume non-compliance)

Report Recommendation: CRA review and update the information it gives to Leads intake officers to ensure it is accurate and informative.

Audits through Regular Workload

Regular workload includes follow-ups on compliance agreements, reviewing T3010s, and post-registration reviews if there were concerns when the organization registered as a charity.

Assessing Risk

The report explains that CRA’s two divisions that audit (Compliance Division and Review and Analysis Division) assess risk differently. RAD looks for terrorism financing and abuse risks. All other risks are assessed by the Compliance Division.

The Ombuds Office found nothing problematic or unfair about the indicators used by either division; however, in both cases, the Ombuds Office was “unable to validate how they were applied.” In other words, they could not evaluate how the human factors of professional judgment, experience, use of safeguards, reviews, segregation of duties, etc. impact the process.

Issue #2: Quality of Services

This section of the report details the procedure of an audit.

Naturally, the report starts by looking at the initial contact between CRA and the charity selected for audit. The first matter is how and whom CRA contacts as a representative of the charity. That can be a bit complicated – is it a Director? Is it the authorized representative? No recommendation is made on this point. The report explains that CRA provides charities with information about how to authorize a representative to speak on their behalf in CRA’s initial audit engagement letter.

Next, there is an interview. There is no formal record of the conversation. Auditors are instructed to terminate the interview if they are being recorded. Interview notes may be provided to the charity, but it was unclear whether an informal request or an access to information request is required. The report notes that “the CRA is considering changes to this policy and that it may soon allow charities to make an audio recording of the interview.”

Audits vary in terms of length, and they can sometimes take years. There is no requirement to complete audits within a specific time limit: “While delays can happen on both sides, efforts need to be made to make sure that audits are carried out in an appropriate time period”

Report Suggestion: The Charities Directorate should consider aging its files as part of its reporting; timely audits make for more effective compliance measures and limiting costs and disruption for charities.

Audits also vary in outcome:

1. Clean letter – charity is compliant
2. Education letter – some areas of concern that can be corrected through education
3. Compliance agreement – areas of non-compliance that the charity takes specific action to correct
4. Sanctions – for serious or repeat non-compliance; financial penalties, suspending receipting privileges
5. Revocation – serious non-compliance
6. Annulment or voluntary revocation – used in rare cases

In terms of outcome, the report recognizes that no two cases are alike, professional judgment must be exercised, and there are different kinds of non-compliance. Because of limited access to compliance letters (redactions, etc.) the Ombuds Office found it difficult to assess whether allegations of double standards had a factual basis.

Report Conclusion: “Overall we heard that CRA auditors carried out audits professionally and courteously. We also found that most of the processes they follow are fair. However, much like with audit selection, we could only see part of the picture. While we could see the processes that inform an audit, we did not have access to how the CRA carries out an audit, how the screening team communicates their areas of concern, or how auditors address those concerns.”

Issue #3: Unconscious Bias

The report found that existing bias training focused on the employer-employee context, did not relate to decision-making, was voluntary, and that employee engagement in these programs could be improved.

Report Recommendation: As noted at the top of this post, the Ombuds Office recommended that the CRA create an unconscious bias training course for the Charities Directorate, focusing on those involved in the audit process, making it mandatory for those staff.

Issue #4: Clarifying CRA’s role related to charities and national security

At the outset, the report recognizes that CRA “has a responsibility to prevent the abuse of registered charities for the financing of terrorism.” The report outlines various events such as the Air India Flight 182 terrorist attack, September 11, 2001 attacks in the United States, and subsequent legislative responses that ultimately led to the creation of RAD within the Charities Directorate.

The RAD and CRA work with 13 federal departments and agencies which collectively implement anti-money laundering and anti-terrorist financing legislation. The CRA assess terrorism financing risk using “international accords, such as those outlined by the Financial Action Task Force (FATF).”

Report Statement highlighting the importance of the CRA’s role in eliminating terrorism financing and abuse: “While we are aware and understand the concerns that have been brought forward from some racialized communities, the importance of eliminating terrorism financing or abuse is also of critical importance.”

Considerations & Conclusion

The report was conducted in accordance within the parameters and direction from the Cabinet (Order in Council 2020-0703). To access certain information, the Order in Council would have had to give the Ombuds Office additional authority. Some of the national security matters were beyond the scope of the Ombuds Office, and additional authority “may not have eliminated all of the constraints.”

The report concludes by recognizing both its limits and accomplishments:

“Although it does not provide all the answers that many are seeking, it is what we can provide under our Office’s authorities. That said, we believe it is a significant first step towards addressing the questions posed by the Minister and towards raising awareness of opportunities to improve the CRA’s services to both charities in general and Muslim-led charities in particular.”

Response to the Report: CRA

The CRA responded to the report recommendation that CRA create a mandatory unconscious bias training course, focused on those involved in the audit process.

CRA agrees with the recommendation. Auditors receive extensive mandatory training on compliance activities, including using professional judgement, impartiality and safeguarding against unconscious bias. In addition to the current training, CRA committed to short, medium, and long-term responses to the report:

CRA-Wide Response

Mandatory unconscious bias training will be required of all CRA employees for 2023-24.

CRA–Charities Directorate Response

In the short-term, the Directorate will make its course on unconscious bias mandatory for employees and decision makers involved in charity audits. It will familiarize decision makers with a CRA “job aid” called Professional Judgement, Skepticism and Impartiality, and will update its training products.

In the medium-term, the Directorate will introduce a new training suite tailored to the Directorate on unconscious bias, cultural competency and religious literacy, and expand the mandatory unconscious bias training to all staff.

In the long-term, the Directorate will develop and provide refresher training on key topics covered in its mandatory training.

Response to the Report: Minister of National Revenue

The Minister of National Revenue also responded to the report. The Minister thanked the Ombuds Office, highlighted CRA’s response to implement recommendations, and referred to the upcoming NSIRA review, noting that it will “complement the Ombudsperson’s report and offer a comprehensive and rigorous examination of the issues raised.”