Adding Transparency to Tzedaka Organizations
How well-intentioned but misguided behavior limits the value and effectiveness of our generosity
As I wrote previously in The Economics of the Modern Tzedaka Industry, charities, alongside their magnificent accomplishments, can suffer from some serious management problems. But as I also noted in How Modern Tzedaka Organizations Can Be More Effective, that doesn’t mean the problems can’t be fixed.
This new article aims to take the conversation one step further by illustrating how a lack of transparency can sometimes lead to institutional inefficiencies and the loss of public trust. I’m going to focus specifically on the relationships tzedaka organizations in Canada have with the government’s tax authority, the Canada Revenue Agency (CRA).
The key issue revolves around the right to issue receipts for charitable donations that donors can use to claim tax deductions. According to Canadian tax law, only registered charities are able to issue such receipts. Achieving and maintaining charitable registration requires significant compliance efforts. These include ensuring that an organization’s activities fit their established program objectives, and that disbursement of charitable funds is directed only at eligible recipients.
All registered charities must file an annual tax return (form T3010) with CRA that details - among other things - their contact information, legal status, revenues, expenses, and program activities. By law, the contents of those filings are all publicly available online. If you’re not an accountant or tax lawyer, this may not make for particularly exciting reading. But if you’re willing to wade through the vast oceans of data, it’s possible to gain some interesting insights into the Canada’s charity industry.
Identifying Excessive Expenses
As you begin to explore filings from frum charities, you’ll quickly notice how some organizations claim considerably higher management and overhead costs than others. Those can range from well below 1% of an organization’s total operating expenses to one frum Toronto charity (registered as a public foundation) that spent nearly $16 million for professional and consulting fees in a single year. That overhead cost constituted more than 21% of their total expenses.
I’m not suggesting that there’s anything illegal or even improper going on inside that particular foundation, but I am pretty sure that I could get a lot more value by spending my charity dollar elsewhere.
Identifying Compliance Issues
Full compliance, as I noted, can be complicated. And, given that it’s a government we’re talking about after all, the regulations might not always make sense. But the potential costs of non-compliance - including financial liabilities, legal risk, and profound chilul HaShem - are too heavy to ignore.
Many forms of the misuse of charitable tax receipts can be characterized as money laundering - which is something governments around the world take very seriously. And it happens a lot. I’m aware of at least four large tzedaka organizations (three in Toronto and one in Montreal) whose charity registrations were audited and revoked by CRA. Here’s how CRA described their assessment of one of those four:
The audit by the Canada Revenue Agency (CRA) has revealed that the Organization is not complying with the requirements set out in the Income Tax Act. In particular, it was found that the Organization failed to meet the requirement for registration by not devoting all of its resources to its own charitable activities, notably by gifting funds to non-qualified donees, and by failing to properly demonstrate that individuals it was providing financial assistance to qualified as beneficiaries in the charitable sense; failed to maintain or provide adequate books and records; and failed to file an information return as required by the Act. For all of these reasons, and for each reason alone, it is the position of the CRA that the Organization no longer meets the requirements necessary for charitable registration and should be revoked in the manner described in subsection 168(1) of the Act.
I’ve seen strong evidence that, while those particular organizations may have lost their status, new organizations have taken their place and are still actively using the same underlying operational models.
Why should you care? Well for one thing, chilul HaShem hurts all of us - and often in ways that aren’t immediately evident. Don’t think we can hide: frum charities are very much on the radar of both regulators and industry observers. Just consider how at least 30 of the 400 Canadian charities that spend the most money on foreign activities are frum.
It’s also a good idea to avoid such rogue charities even before they’re caught. Historically, I don’t know whether CRA has ever retroactively disallowed a charitable deduction based on a subsequent ruling against the issuer of the receipt. But I'm not sure I'd want to expose myself to the risk.
Following the Money
The importance of tax receipts for charitable contributions means that registered charities have effectively become gatekeepers in the charity industry. People wanting to support a needy individual or cause will usually look for a charity with a compatible program objective. Meshulachim coming from outside the country will need to find a local charity that will accept donations and issue receipts to donors.
One common problem with this model is that service charges the organization deducts from a meshulach’s take-home income can be significant. When those charges are added to the costs associated with travel, lodging, drivers, and credit card processing, you wonder whether there’s any money to be made in this business.
Except that there most definitely is money to be made. There’s an robust industry of drivers, lodging hosts, credit card processing services - and registered charities - all devoted to serving meshulachim. Money is being made legitimately at every stage of a meshulach’s journey. It’s just that the meshulach himself and the mosdos he represents might not be getting any of it.
Understanding Inter-Charity Transfers
Something that really surprised me was how much money was moving back and forth between charities - in particular between many of the larger organizations. It’s not hard to find charities where more than 90% of their program spending consists of gifts to other registered charities. If you dig a bit deeper, you often find the recipient charities donating much of their budget to other charities.
In fact, according to CRA itself, this is perfectly normal. A public foundation, for instance:
generally gives more than 50% of its income annually to other qualified donees, (e.g., registered charities), but it may carry out some of its own charitable activities.
Similarly, such a foundation:
generally receives its funding from a variety of arm's length donors
I don’t always understand exactly how these transfers work, but I guess that some organizations specialize in specific program activities, inspiring donations from other charities that don’t have the resources or mandate to do everything themselves.
I hope this conversation doesn’t end here. There are still mysteries swirling around many elements of the international tzedaka industry, and there are still many efficiencies and improvements waiting to be discovered.
Feel free to add your thoughts.