With the government promising to modernize the charitable sector framework, the sector should advocate for a regulatory environment that goes beyond “prevention of harm,” contributor Abdul Nakua argues, and empowers it to reclaim a larger role in building a more resilient society.
This second article in a series on reclaiming the public square in a time of rupture cross-examines how the current regulatory regime has affected the development of Canada’s charitable and non-profit sector and why a change in the trajectory is not just needed but must be championed by the sector and the government. An outdated governance framework combined with government overregulation and arbitrary rules have stifled any serious development of the sector.
With the world transforming rapidly, there is a strong imperative to re-examine the role of the social sector and re-evaluate its value proposition for Canadians. At the heart of this re-examination lies the relationship with the government and the place of the sector within Canadian society. And at the core of this is a fundamental reform of the regulatory regime.
At this time of global transformation, the need for rebuilding a strong social sector cannot be overestimated. The common wisdom within the sector establishment has long been that funding is the “most urgent capacity challenge” facing Canada’s charitable sector. However, as the sector passes through this time of uncertainty, there is a strong case to be made that over the past many decades it was shaped more by the regulatory regime than by the funding models. Therefore, ignoring the regulatory environment within which the sector is operating will hamper the best efforts for reform and growth.
Since its inception, the regulatory emphasis of the Canada Revenue Agency, which is responsible for regulating registered charities and other qualified donees to ensure compliance with the Income Tax Act and its regulations, has been on “prevention of harm” to charities, donors, and the public. The development and growth of the charitable and non-profit sector was never a stated aim for the regulator or an identified outcome from the regulation. This narrow focus has hindered the capacity of the sector to grow and to express its full essence and potential. The sector has endured the consequences of this narrowly conceived regulatory regime.
This narrow focus has hindered the capacity of the sector to grow and to express its full essence and potential.
Undoubtedly, this contributed to the creation of a civil society model in Canada that is stuck within a 19th-century view of charity. Sector leaders over the past 50 years have realized that the sector has long outgrown this regulatory framework, and various reforms have been attempted, including the proposal by the Coalition of National Voluntary Organizations in 1983 and the 2002 proposal by the Voluntary Sector Initiative. Several high-profile reports, most notably the Broadbent Report in 1999 and a 2019 Senate report titled Catalyst for Change: A Roadmap to a Stronger Charitable Sector, made strong cases for the urgency to modernize the regulatory framework among other things. However, the barriers to effecting meaningful change have proven to be insurmountable so far. Changes have been few and far between, and mostly confined to tax codification and demands on transparency and governance.
Barriers to change
Two key realities contributed to this. The first is lack of government leadership: the sector has never been a top priority of any government. Despite the best efforts of sector leaders, successive federal governments were reluctant or unprepared to make significant changes to the rules. The second, and more important, is the sector’s lack of political clout to challenge the status quo. The factors that shaped the current state of the sector are many. They range from the lack of a singular voice, to the shrinking capacity of the sector to mobilize and advocate, to the lack of clarity on the sector’s mission. Revealingly, legitimacy is still earmarked by static metrics of service-delivery capacity rather than capacity to mobilize or have an impact on policy debates. Competing priorities among sector leaders has further weakened the sector position. For example, larger, service-oriented organizations often dominate the agenda with the government. Their priorities tend not to be aligned with the social-justice-focused and equity-seeking segments of the sector, however.
More consequentially, the post-9/11 counter-terrorism architecture has introduced major changes to the regulatory regime. The CRA became part of a whole-of-government framework that involves 12 other federal departments and agencies. They were granted broad powers and authorities by the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). This legislation also established Canada’s anti-money-laundering and anti-terrorism financing framework, which involves among others the Financial Transactions and Reports Analysis Centre of Canada and the Office of the Superintendent of Financial Institutions. The declared objectives of the PCMLTFA are to implement specific measures to detect, prevent, and deter money laundering and the financing of terrorist activities. However, this regime’s impact on the sector has gone far beyond the stated objectives. It has narrowed the mandate of the CRA even further and marginalized its role in regulating the sector. More importantly, it has further entrenched the “prevention of harm” doctrine within the regulatory regime.
Three recent reports exposed the impact of this regime on the sector.
The first was released by the National Security and Intelligence Review Agency (NSIRA) in 2025. This review was conducted after much hesitation from the federal government to address the concerns raised by the sector about systemic biases within the regulator. The report is highly critical of the CRA and its Review and Analysis Division (RAD) and confirms many of the concerns raised by Muslim-led charities and substantiates many of their fears. The NSIRA review found that RAD processes lack credibility and are susceptible to “risks of bias and discrimination.” Specifically, the report cautions that the “national inherent risk assessment” has a built-in bias, as RAD’s category of “high-risk jurisdictions” has been applied so broadly that it has led to many audits that lacked sufficient justification or credible evidence. More notably, the report notes that no credible risks were identified prior to triggering these audits. Exculpatory evidence was disregarded or never made it to the assessment. It concludes that once the audits were initiated, the CRA did not maintain a focused examination on terrorism financing.
The second report, written by Michelle Gallant, a University of Manitoba professor specializing in money-laundering law, terrorist financing, and taxation law, examines the regime of the CRA audits, with specific focus on its audit of the Muslim Association of Canada. It concludes that the current rules carry huge risks for charities as they risk “over-inclusion” by “failing to accurately discern between suspicious activity and authentic legitimate activity.” These rules also carry a considerable risk of guilt by association as charities found themselves “in the unenviable position of making decisions about what actors, or actions, the regulator might think are linked to terrorism.”
The third report was written by Anver M. Emon, a professor of law and history at the University of Toronto. The significance of this report lies in its big-picture analysis of the whole regime. It delineates how the non-profit sector is located within the elaborate and expansive anti-money-laundering and anti-terrorism-financing (AML/ATF) regime in Canada and the nexus points between the sector and other stakeholders within the ecosystem. The key message from this report is just how entrenched the AML/ATF regime is in the government machinery, and how introducing meaningful reform will require considerable leadership.
More specifically, the report focuses on two major risks that the regime creates conditions for: one is the financial exclusion through financial de-risking protocols that expose the sector, and particularly charities, to denial of important banking services, and the second is “humanitarian de-risking” as “the sector prioritized AML/ATF sanctions risk assessments over principled humanitarian action.”
Both of these de-risking domains are the result of a complex ecosystem that is optimized for risk avoidance and not necessarily fairness. Lack of transparency around them increases the likelihood of errors and foments suspicion of unfair practices that can lead to systemic biases. Notably, Muslim-led charities in Canada are increasingly forced to conduct “humanitarian de-risking,” and in some cases choose to withdraw entirely from high-need regions.
Broadly, these reports and the stories they tell crystallize two facts: first, government overreach and the unchecked use of administrative discretion can lead to many undesirable consequences, such as institutionalization of systemic biases, marginalization of racialized communities, undermining of fundamental rights, erosion of Charter-protected freedoms and rights, and the withering of the norms of fairness. Secondly, they expose the many flaws of the current regulatory regime: its overregulation, its susceptibility to government interference, its vulnerability to arbitrariness and discrimination, its lack of an effective and accessible robust judicial review process, and its rigidity for reform. They also raise serious doubts about the regime’s capacity to provide the sector with the environment to grow and express its full essence and potential. The key takeaway from these reports is that change in the current regime is overdue.
A promise to modernize
Surprisingly, in its spring 2026 economic update, the government promised to modernize the framework for the charitable sector in 2026/2027. Indeed, on October 8, the Department of Finance and the CRA announced the launch of a consultation process about ways to modernize the federal framework governing registered charities. Based on the government articulation for this consultation, the focus remains on tactical issues related to improved efficiency on the administration of charities.
The sector should take this opportunity to push for a broader reformation of the regulatory regime, not just how the rules are administered. This should culminate in advocating for an environment that breaks from the “prevention of harm” orthodoxy and anchors this endeavour around modernizing the regulatory system itself so that it moves beyond the compliance-based model to one that is enabling and adaptive.
Creating an enabling environment requires a shift in how the government views the sector, as well as how the sector interacts with the government. The government needs to shift the long-standing view of the sector as a service-delivery partner to one that positions the sector as a third sector that is neither the government nor the private sector but one that fulfils a unique mission that intersects with both.
We need . . . a decade-long sustained course of action that engages all levels of governments.
The real value of the sector should be measured not by static service-delivery metrics, but by its contributions to the vibrancy of Canadian society. A core attribute of those contributions is their distinctiveness from the government. This independence must be enabled by an environment that is not only unconstrained by government controls and influence, but also allows innovation and experimentation without fear of reprisal or coercion. The sector should advocate for an environment that by design enables democratic participation, encourages challenging government policies, and celebrates advocating for the sector’s priorities even when they are in conflict with those in power.
To meet this generational opportunity for major reform, as a sector we need to come up with a different approach and deep resolve to commit to a decade-long sustained course of action that engages all levels of governments, conducting grassroots mobilization of our communities, building coalitions across the progressive movements, and not shying away from challenging the current systems and rules.
Short-term actions
In the short term, the focus should be on reducing the harm of the current anti-money-laundering/anti-terrorism-financing regime. Three changes may address some of its current excesses:
1/ Demand an amendment to the Income Tax Act to permit appeals of CRA decisions to the Tax Court of Canada. The lack of such robust judicial review has impeded the natural evolution of the charities’ jurisprudence in Canada. Sector leaders have demanded this amendment for decades: the Ontario Law Reform Commission in 1996, the Broadbent Panel of 1998, the Voluntary Sector Initiative in 2003, and, more recently, the Special Senate Committee on the Charitable Sector in 2019 and the Advisory Committee on the Charitable Sector in 2020. Now is the time to codify this change within the act.
A case in point: Michelle Gallant argued that a trial de novo before a court, in a full consideration of the audit, might have faulted the CRA and vindicated the Muslim Association of Canada from the allegations made within the charity’s CRA-RAD audit.
2/ In matters related to terrorism-related charges, “courts” must have jurisdiction to review the provisions and supervise the application of all counter-terrorist measures. Further, to reduce potential systemic bias, the courts should apply the more objective “probable grounds” standard and the balance-of-probability test.
3/ The sector must pressure the federal government to address the prevalence of the financial exclusion. One of the recommendations is to demand that regulatory agencies like the Office of the Superintendent of Financial Institutions, the Bank of Canada, and any other federal regulators of financial institutions and payment services must adopt financial inclusion as a prudential principle of financial regulation.
Mid-term actions
In the mid-term, the sector needs to build its capacity to challenge CRA decisions and directives. Over time, the CRA has effectively established the outer limits of the operative definition of charity predominantly through the use of administrative tools such as the issuance of directives and guidelines (for example, guidance about making grants to non-qualified donees, on advancement of education and charitable registration, on public dialogue and development activities, and on the public benefit test, which was updated in 2013 and more recently in 2026). While these directives presumably serve as interpretations of the law to facilitate its administration, they should not be normalized as replacement of it.
To guard against such an eventuality, the sector should prioritize building internal capacity to launch legal challenges to counter the CRA’s excessive use of discretion. Part of this capacity is the creation of a collective whose prime mandate is to support charities’ access to the judiciary system. The collaboration between the Public Law Project and Lankelly Chase Foundation in the United Kingdom might provide a blueprint for establishing such an initiative. Through strategic litigation, this collective can protect the sector from government overreach, challenge the regulator, and expand the civic space.
The sector can also lobby the government for the reinstatement of the Court Challenges Program, which was cancelled in 2006. This program found increased utility after its expansion in 1985 to include challenges to federal legislation, policies, and practices related to equality rights under Section 15 of the Charter, and the fundamental rights in Section 2 and Section 27 (the multiculturalism clause).
Long-term actions
In the long-term,the sector must fight for a major overhaul of the current regulatory regime to build an enabling environment. Arguably, the most ambitious proposal for reform is the one advanced by Adam Aptowitzer. It advocates for a new federated Canadian charities council that regulates all non-tax-related aspects of the charity system, while the CRA retains jurisdiction over the tax components of operating as a charity. Structurally, Aptowitzer proposes that this council be similar to the current CRA Board of Management. Key to this proposal is addressing the limitations imposed by the Constitution, which grants authority for the regulation of charities to the provinces. Such limitations prevent the federal government from setting up either a legislative regime or an administrative process with which to regulate the sector directly. It proposed a cooperative model that enables the coordination between the federal and provincial governments to overcome this.
While this would bring Canada’s regulatory regime closer to other Commonwealth jurisdictions like the United Kingdom and Australia, moving this model from conception to reality would require leadership and imagination. As a first step, the federal government could establish a federal task force on the social sector to lead this effort. This could be modelled similarly to the Nielsen Task Force or the Romanow Commission on the future of healthcare. This task force could develop a road map for the creation of the federated council. More broadly, the Council of Ministers of Education could offer a working model for how to set up the federated charities council.
Ultimately, the sector has to play a key role in pushing for these reforms and ensuring that the new regime creates an environment that enables the expression of its ethos and values. One that fosters the growth of a social sector and empowers it to reclaim a larger role in building a more resilient society that can thrive in this new and yet-to-be-built future.
In the next article in this series, I will explore how to reimagine the role of civil society in the age of mega-donors and how to address the growing philanthropy paradox of addressing social deficits while not challenging the power structures that created them in the first place.
