SPECIAL REPORT The charity industry
Critics call for tighter control of the billions raise or good works
Dinner is on the table and the phone rings. “Good evening,” says a cheery voice, “and how are you this evening?” Hungry, what do you want? What the caller wants is money— “Can we count on you for $100? No? Fifty?”—for animal sanctuaries, wheelchair basketball players, homeless teenagers or opera companies. Across Canada, multiplying regiments of volunteers and paid agents are aggressively hitting the phones, ringing doorbells and using direct mail to pry open the public wallet on behalf of an ever-widening array of charities. (These days, it is not uncommon for a canvasser to call back, and sometimes more than once, after being turned down.) Already embracing more than 70,000 organizations, the charity sector rakes in a lofty and mostly taxfree $80 billion-plus every year, making charity a bigger business than agriculture or the automobile industry. And while most charities are legitimate and well run, some have been accused of misconduct ranging from waste to outright fraud. “There are problems all over the place,” says a Revenue Canada official. “There’s always a rotten apple in the barrel.” One explanation behind the militant search for money is that many charities are trying to provide social services discontinued by budget-slashing governments. At the same time, the void left by these cutbacks has led to the creation of more and more charities—5,000 new ones in the past three years. It has heightened competition for the donor’s dollar and made unscrupulous operators harder to spot. As a result, critics say Canada should follow the lead of England and most U.S. states by enacting tough new laws to regulate charities and make them more accountable for how they spend their money.
And there are a lot of critics. In a 683-page, two-volume review made public in early June, the Ontario Law Reform Commission, favoring the creation of a government body to police the province’s charities, said the existing law, rooted in the 16th century, is “inadequate, badly conceived and outdated.” The Revenue Canada official, who requested anonymity, said Ontario, Alberta and British Columbia try to keep an eye on charities, but in the other provinces “charities supervision is almost non-existent.” In his 1992 report to Parliament, the auditor general said Revenue Canada’s rules were so loose that charities that ran afoul of them could avoid a penalty simply by creating a new charity and moving their money into it.
Anyone can set up a charity and ask the public for money. The provinces insist that all the money collected—whether from black-tie benefits or plastic jars on convenience store counters—must be spent on charity, minus reasonable expenses, but enforcement across the country ranges from weak to none. If the charity wants to encourage generosity by offering receipts for which the donor gets a tax credit, it must apply to Revenue Canada for registration. Ottawa’s rules are few; the principal one requires registered charities to spend 80 per cent of tax-receipted donations on charitable works. As far as Revenue Canada is concerned, what they do with non-receipted donations—or any other income, including billions in government grants—is up to them.
There are numerous examples of how easily charitable funds can be either mishandled or plundered. In 1991, Toronto social activist and fund-raiser Patricia Starr was convicted of criminal breach of trust when tens of thousands of dollars she was responsible for on behalf of the National Council of Jewish Women, a charity, wound up financing the campaigns of Ontario politicians. One national charity allows volunteers to use official cars on weekends and donors’ dollars pay for the gas. In 1995, a British Columbia forensic auditor’s report disclosed that $60,000 in charity funds raised by the Nanaimo Commonwealth Holding Society had been used to pay the expenses of provincial NDP delegates to a Winnipeg convention.
The harshest indictment of the existing safeguards has come from Ontario Liberal MP John Bryden. Last October, Bryden—a former Toronto Star financial writer—presented the Commons finance committee with a scathing 81-page report urging drastic reform of the charity field. “Very clearly,” he says, “there is a lot of mismanagement and abuse.” Not so, the charities have angrily fired back, claiming they are already well-supervised by their volunteer boards of directors. Chad Hanna, executive director of the Muscular Dystrophy Association of Canada, says charities have always prized accountability “because we want people to understand what we do.” And Patrick Johnston, president of the Toronto-based Canadian Centre for Philanthropy, which acts as a clearinghouse for 630 member agencies, 95 per cent of them registered charities, quarrels with the implication of critics like Bryden that the whole field “is full of people on the take.”
The arena where this battle is being waged represents a huge chunk of the Canadian economy. A1993 study by Johnston’s centre estimated that the nation’s charities had assets of about $109 billion and employed 1.3 million people—12 per cent of the entire workforce. This year, charities, transfused with individual and corporate donations and government grants, will take in nearly twice the combined revenues of manufacturing giants Northern Telecom Ltd., IBM Canada and Alcan Aluminium Ltd. As long ago as 1990, the auditor general calculated that tax-exempt charitable donations—which are dwarfed by the provincial and federal grants, bequests and investment income that charities get—had passed $3 billion a year, which represented a loss to the federal treasury of $600 million.
For Canada’s charities, collecting money is an expensive business. Of the $98 million collected by 20 selected health charities in 1995-1996, more than $29 million went to salaries and administration. Fund-raising costs exceeded $21 million and the organizations claimed to have spent just under $49 million on charitable activities. The group also finished the year with more than $35 million in the bank. Most of them say much of the banked surplus has been committed to future research or other programs.
There are charities that champion natives, animals, Christians, trade unions, foreign aid, women and children; the fight against pollution, poverty, smoking; and ailments from psoriasis to schizophrenia. The Consumers Association of Canada and the Canadian Cancer Society are charities. So are the National Association of Canadians of Origins in India, Ottawa’s National Arts Centre, the Victorian Order of Nurses and the Harborview Volunteer Fire Department of Guysborough County, N.S. What is less commonly known is that the sector also includes such respected institutions as universities, hospitals, museums and places of worship.
But over the entire sector, says Bryden, “billions of dollars are being misspent and we won’t solve the problem until we write legislation with real teeth.” Meanwhile, an Ontario government charities handbook suggests that the public should be cautious. The “relatively small number of unscrupulous individuals who abuse the public’s confidence,” it says, “should make all of us vigilant.”
The wealthiest charities are those with the fattest government grants, mostly hospitals and universities. But in 1996, the beleaguered Canadian Red Cross got two-thirds of its $530 million in revenue from the public treasury. The smallest charities are mom-and-pop ventures like the Neurofibromatosis Society of Ontario, based in Whitby, which raised $14,000 to help victims of the inherited nerve disorder. Then there are hundreds, perhaps thousands, of organizations whose entitlement to charity status is less obvious—like the Canadian Society for the Study of Names, the Governor General’s Foot Guards and the American Civil War Reenactment Society. “Not everyone,” said Bryden, “is committed to celebrating the battles of another country.”
Unlike business and industry, answerable to stock exchanges, securities commissions, shareholders and the marketplace, charities enjoy relative freedom. In order to attract more money, most choose to register with Revenue Canada so they can issue receipts for tax purposes. But they have to file an annual return to verity, among other things, that they followed the 80-per-cent rule. About the worst that Ottawa can do to a charity if it misbehaves—for example, by political lobbying or failing to reach the 80-per-cent threshold—is to revoke its registration (which, incidentally, does not prevent it from staying in business). It is not much of a deterrent: Revenue Canada has the manpower to audit no more than 600 or so charities a year, and only about 15 to 20 are disqualified.
The day-to-day supervision of charities, including what they do with their money, is the responsibility of the provinces. Yet Ontario, credited with having the best surveillance program in the country, has only seven people in the office of the public trustee to monitor more than 26,000 charities. The trustee’s role is to make sure that money donated or bequeathed to charity ends up where it is supposed to, but the office seldom learns of abuses unless someone complains. “We need to be able to pick up on the cases that we now don’t know about,” says deputy public trustee Jay Chalke. “We do a good job with the tools we have, but if we had better tools we could do a better job.”
In the United States and England, the tools are better—and tougher. Maryland, for example, has a toll-free line for complaints about charities. In New Hampshire, charities that fail to file financial statements on time can be fined up to $10,000. And in Connecticut, a judge last March fined a charity $15,000 for not having filed since 1992. “The United States,” says the Revenue Canada official somewhat enviously, “is way ahead of us in terms of charitable sector regulation.” One example: the U.S. Internal Revenue Service can fine charity officials who accept “excessive” salary deals. In Canada, there are no limits on the incomes of charity employees but trustees must serve free of charge.
In England and Wales, more than 180,000 charities are answerable to the government’s Charity Commission, which has the power to investigate abuses of its guidelines for accounting practices, budgets, collections, banking, purchases and investments. A commission publication notes that some charities claim they should be able to operate on trust alone, but that, it concludes, “is not realistic.” The argument for independent regulation is at the heart of Bryden’s 10-month drive to have the federal and provincial governments rein in the charity sector. Charities supporters have fought back. During the campaign leading to the June 2 federal election this year in the southwestern Ontario riding of Wentworth/ Burlington, the 54-year-old ex-journalist found himself up against more than his Tory opponent. A group calling itself Physicians Concerned About Tobacco Diseases bought a full-page ad in The Ottawa Citizen to denounce his skirmishes with antismoking organizations such as the Canadian Council on Smoking and Health, a charity.
The doctors also paid for a full-page ad in the local weekly Dundas Review, arguing that the MP’s “campaign against Canadian charities” was endangering public health. A commercial on a Hamilton radio station proclaimed that “we don’t need a threat to public health representing us in Ottawa.” All that intervening, calculates Bryden, cost him about 10,000 votes, although he won comfortably anyway. In a recent interview in his storefront riding office in Dundas, west of Hamilton, Bryden relished his victory and declared himself back on the warpath.
What he basically wants the two levels of government to do, says Bryden, is follow the regulatory road taken by America and England. Ottawa and the provinces, he says, should collaborate on creating a set of enforceable standards for all charities and “if people are wilfully cheating they ought to go to jail.” He says if the 80-per-cent rule is to be retained, then it should apply to grants, bequests and investment income, not just receipted donations.
Fat U.S. charity salaries can lead to fines
RANKING 20 CANADIAN HEALTH CHARITIES
TOTAL ANNUAL REVENUE
(most recently available year)
PERCENTAGE SPENT ON CHARITABLE PROGRAMS
Neurofibromatosis Society of Ontario $14,139
Huntington Society of Canada 1,574,996
Canadian Liver Foundation 7,016,364
Canadian Foundation for the Study of Infant Deaths 507,318
Heart & Stroke Foundation 9,360,947
Canadian Lung Association 2,437,861
Tourette Syndrome Foundation 485,793
Spina Bifida Association 269,587
Canadian Cystic Fibrosis Foundation 10,547,275
Canadian Hemophilia Society 3,163,722
Canadian Psoriasis Foundation 134,861
Osteoporosis Society of Canada 1,398,613
The Arthritis Society 12,351,528
Muscular Dystrophy Association 8,151,082
Kidney Foundation of Canada 16,397,440
ALS Society of Canada 1,349,185
Schizophrenia Society of Canada 1,136,740
Ontario Federation for the Cerebral Palsied 2,231,611
Multiple Sclerosis Society of Canada 12,925,262
Crohn's and Colitis Foundation 4,944,859
And finally, Bryden says, “charity” has to be redefined. At present, Revenue Canada and the courts use the formula devised by a British judge in 1891 that a charity must either relieve poverty, help education or religion, or otherwise benefit the community. The problem with that yardstick, says Bryden, “is that just about anything can be made to fit. Charitable activity should be directed to helping people in need.” Bryden based much of his 1996 report on an examination of about 500 of the financial information returns charities are supposed to fde each year. Called T3010s and publicly available from Revenue Canada, these returns are the only window on where charities get their money and how they spend it. An expanded T3010, requesting more numbers, will be used for the 1997 fiscal year. But the rules stay the same—a charity cannot advocate or oppose changes in the law, must spend its money “predominantly” on good works, keep administrative expenses “reasonable,” avoid big surpluses and describe in detail what it proposes to do. Revenue Canada says that abbreviated responses, such as “to relieve poverty,” will just not do. Yet they are commonplace.
Some organizations spend little on real charity
The figures for 1995 furnish some insight into how the charitable sector as a whole interprets words such as “predominantly.” To begin with, as many as 13,000 organizations apparently did not file returns at all and got away with it. The roughly 60,000 that did had revenues of $54 billion of which nearly two-thirds went to charitable programs (although the definition of “charitable” may differ from one charity to the next). Manage ment and administration, together with the salaries of employees not assigned to charitable deeds, absorbed an additional $15 billion.
Individual returns are more revealing. Although Revenue Canada says applicants for registration must submit a detailed statement of purpose, Physicians for a Smoke Free Canada described its mission in 1993 merely as the “promotion of public health policy.”
That volunteer fire department in Nova Scotia had receipts of just under $52,000 in 1995, but did not say how much it spent on charity. Its mission statement: “to provide fire protection.”
The Can-Am Indian Friendship Centre of Windsor, Ont., got no donations at all in 1994. Government grants and “expense recovery” yielded an income of roughly $1 million, and more than $600,000 went to salaries.
There are more bizarre examples.
The Tulsa, Okla.-based Osborn Foundation of Canada raised more than $150,000 in receipted donations in Canada and allocated only $42,000 to charity—all of it in the United States. Its robust mission: “Advancement of Christianity worldwide.” Iliqvik Inc., a Dorval, Que., charity offering unspecified services to adult Inuit, took in less than $325,000 (none of it in donations) and spent it all on management and administration. In Red Deer, Alta., the Quimby Foundation used tax-receipted donations of nearly $70,000 to preserve the writings of Phineas P Quimby, a 19th-century American clock maker. Charities can also support other charities. In Saskatoon, Quick Build Systems, a registered charity, got $47,000 from the Jehovah’s Witnesses to make them furniture.
Across North America, the best-known charities are the ones that fight a wide variety of human ills by funding research, helping victims and educating the public. In the United States, the American Institute of Philanthropy periodically rates these so-called health charities like school exams—A, B, C and so on—and pulls no punches. In its September, 1996, ratings, it gave the National Easter Seal Society a D because it spent too much on fund-raising, and the Shriners an F for keeping too large a surplus. The institute and similar agencies say at least half of a charity’s income should be spent on charitable programs. The American Red Cross, the March of Dimes, the American Heart Association, the American Lung Association and the Muscular Dystrophy Association all scored above 75 per cent.
The Revenue Canada returns covering 20 Canadian health charities cited earlier showed that 12 channelled half or more of their total income into charitable programs. The tiny Neurofibromatosis Society of Ontario led the pack at 90 per cent, followed by the Huntington Society of Canada and the Canadian Liver Foundation at 77. The Canadian Foundation for the Study of Infant Deaths was fourth with 71 followed by the Heart and Stroke Foundation of Canada with 67. The lowest percentages: the Multiple Sclerosis Society of Canada at 24 per cent and the Crohn’s and Colitis Foundation of Canada at 22. I However, cautions the Canadian phili anthropy centre’s Johnston, the Canadi§ an numbers may not tell the whole story. £ The problem, he says, “is that charita? ble organizations in this country are opæ erating without any commonly accepted guidelines for how expenditures are accounted for.” An expense that one charity assigns to programs might be regarded as an administrative cost by another, he notes. Charities, says Johnston, “are doing what they think makes sense in the absence of rules.”
► Ask if donations are tax-deductible; if
the answer is yes, demand a receipt bearing the charity's name and Revenue
Canada registration number. ► Be wary of mail appeals. Make sure the
charity and its purposes are clearly identified. ► Ask telephone canvassers to forward a
copy of the charity’s annual report.
► Before succumbing to pictures of starving children or abused animals, ask what proportion of the donation dollar is spent
on administration and fund-raising. ► Information about charities is available from provincial consumer protection of-
fices, Revenue Canada or the Canadian Centre for Philanthropy, 1329 Bay St.,
“It’s time academics and government started doing more research on the whole sector.” Until that happens, the suppliers of aid and comfort will each have to make up the rules as they go. And charity will continue to begin at home—probably over the phone. □
Suite 200, Toronto, Ont., M5R 2C4. Both he and the Revenue Canada official say there can be no rational and effective regulation of the charitable sector until a lot more is known about it. “The field has never been seen as an important area of inquiry,” Johnston says. Adds the Ottawa tax man:
Cancer lab researcher: ‘doing what makes sense’ WHIN CHARITY COMES CALLING Prospective donors to charity should heed the following suggestions from the Canadian Centre for Philanthropy and the American Institute of Philanthropy: ► Never give cash. Write a cheque payable to the charity, not the canvasser ► Insist that canvassers identify themselves and provide the charity’s full