This Muslim association's lawsuit shows a major gap in Canada's tax law — it doesn't understand Islamic charity

Muslim-led charities have complained about unfair scrutiny by Canada’s regulatory agencies ever since the 9/11 terror attacks. They point to exhaustive auditing, national security agencies scrutinizing their organization’s foreign correspondence, and the threat of charitable status revocation as clear-cut Islamophobia.

For what may be the first time ever, one such charity – the Muslim Association of Canada (MAC) – is suing the Canada Revenue Agency over how it conducted an audit. “From the very beginning, the practices of the Audit have been both Islamophobic and dictated by systemic biases,” wrote MAC executive director Sharaf Sharafeldin in an open letter on the charity’s website from April 2022. “Had such an approach been taken with any other faith-based organization other than Islam, it would, without a doubt, be regarded as discriminatory.”

The details of the 2015 audit by the CRA aren’t public, and MAC’s legal team is fighting to keep them secret “because its inclusion in the public record would pose a serious risk to an important public interest, specifically privacy defined in reference to dignity.” A spokesperson for the CRA declined to comment on the specifics of the case. According to MAC’s lawsuit filed in Ontario Superior Court, the CRA took issue with how MAC used its charitable status to run religious and social programming, correspond with Muslim groups outside of Canada, and run an Islamic endowment to fund its charitable activities. If the CRA’s audit is upheld, the lawsuit alleges, MAC could lose its charitable status.

The case won’t go to trial for months, at least, but some experts on Islamic civil society and the charitable sector more broadly are perplexed at why the CRA is taking MAC to task. Islam is not unique among world religions in treating acts of charity as a religious obligation for the faithful. Nor is MAC’s idea of using an endowment to generate charitable income. While the CRA’s evidence for threatening to revoke MAC’s charitable status is currently unclear, the rigidity of Canadian charity law – and systemic bias against Muslim-led charities – may be to blame.

‘The trustee is God’

Through its 13 local chapters across Canada, MAC runs 20 different mosques and community centres. According to its lawsuit, the charity serves 55,000 people each week through 15 community centres, 10 full-time schools, 20 weekend schools, and four childcare centres. Running all of these activities requires a lot of money, so MAC relied on an ancient form of Islamic philanthropic system called a waqf.

In Arabic, waqf simply means ‘endowment’. Muneeb Nasir, executive director of the Olive Tree Foundation – a Canadian charity run as a waqf – says the practice goes all the way back to the Prophet Mohammed, who encouraged his followers to use proceeds from their lands to benefit the local community. Generally speaking, a waqf is an endowment of property that is held in trust and used for a charitable purpose, especially poverty alleviation or education. As Nasir puts it, the trustee is God – and the beneficiary is all of humanity. “It functions, for all intents and purposes, very similar to the endowment in the Western world,” Nasir says.  

One of the issues the CRA cited in its 2015 audit was the fact MAC was using a waqf to buy property and renovate it to generate rental income. The profits from that rent were then used to support the organization’s charitable endeavours. Using one, the MAC lawsuit argued, “is integral to MAC for the exercise of Islam, and is being restricted by the Audit”. The lawsuit argues the CRA’s objection to it is a violation of the organization’s religious freedom.

The official audit letter isn’t public, so it isn’t clear exactly why the CRA had an issue with the MAC’s waqf. “They may consider MAC to be running a business,” Nasir says of the CRA, “but most churches have daycare centres” he points out. “The income from that is used to support the activities of the church. This is not unusual for religious institutions.” The Olive Tree Foundation is a registered charity, so it doesn’t appear as though having one would be fundamentally at odds with Canadian law.

How the waqf was used within the parameters set by MAC’s charitable purpose could matter a great deal to the CRA – one of the other key aspects of the lawsuit. “If you tell me that they’re renting and buying property, and they’re renting it out to the poor so they can have a place to live – that can be fulfillment to their [charitable] purposes,” says Adam Aptowitzer, an Ottawa-based non-profit and charity lawyer. “But if they’re buying property and they’re renting it out to whoever and they’re using the tax-free status to shelter the profits on the assumption that they can use the profits for social purposes – that’s not the law.”  

Prayer and basketball

The CRA didn’t just take issue with the MAC’s use of a waqf to fund their charitable activities. According to the lawsuit, the agency took issue with the type of charitable activities MAC was running in the first place. MAC’s mosques also operate as community centres. “In order to advance its religious purposes, MAC’s practice is to allow members and adherents who are associated with external organizations to meet in MAC facilities in compliance with the Income Tax Act,” the lawsuit reads.

In his open letter, Sharafeldin also denounced the idea that the CRA should decide what does and doesn’t constitute the practice of Islam. He writes that MAC is involved with youth activities, Eid celebrations, award events, community groups, and sports activities. According to Sharafeldin’s interpretation of the CRA’s audit, the agency decided these initiatives aren’t charitable activities because they aren’t explicitly codified in Islam. “The CRA has imposed its authority to evaluate Islam as it chooses, and using such a flawed interpretation, the CRA then arbitrarily evaluated how Muslims should understand and practice their own faith.”  

Nasir is troubled by the fact the CRA seems to be taking issue with MAC running social programming despite being a religious organization. “The CRA is saying, in the case of MAC, that the social activities they are running don’t fall within the mandate of a religious charity,” he says. “If they run a basketball tournament in their mosque, it’s not considered a part of their charitable status. I’m not sure why they would just single out MAC for that. A religious institution is for religious services – but it’s also for the social uplift of their community.”

On top of the CRA’s scrutiny of MAC’s charitable activities, the lawsuit says, it also took issue with the Muslim charity’s correspondence with like-minded groups around the world. The CRA may also have suggested MAC was controlled in part by the Muslim Brotherhood, a fundamentalist Islamic group, because MAC received a total of four unsolicited conference invitations from a senior member. “Any religious organization will maintain contacts and engage in correspondence, meetings, conferences, visits with individuals around the world belonging to the same denomination,” MAC’s lawsuit says. “But in the case of MAC, the CRA perceives such perfectly normal interactions as sinister, deceptive, and evidence of MAC furthering the goals of a foreign organization.”

Under Layered Suspicion, a report by the University of Toronto’s Institute of Islamic Studies and the National Council for Canadian Muslims, found patterns of what it called “potential structural biases and prejudicial policies” around the activities of Muslim-led charities. These include casting “Muslims, and their lifestyles and activities, as inherently foreign or outsider. It renders tenuous the very notion of a ‘domestic Canadian Muslim.” Islamophobic assumptions behind MAC’s correspondence could very well be the reason for the 2015 audit.

But as Aptowitzer and other experts point out, Muslim-led charities aren’t the only religious organizations that receive undue scrutiny over alleged ties to violence abroad.The issue of MAC’s audit may ultimately lie with how the CRA goes about identifying an organization’s charitable purposes and activities.

The letter of the law

When the CRA registers a new charity, it asks for two very important pieces of information: its charitable purposes, and its charitable activities. The former may be a long-term objective (“advancing the Islamic faith” would be one) and the latter is a more day-to-day description of its work. This could include operating a mosque or running a childcare centre. There are four broad categories of charitable purposes recognized by the CRA: ‘Advancement of religion’, ‘Advancement of education’, ‘Relief of poverty’, and ‘Other purposes beneficial to the community.’

Arguably, MAC’s work as a religious organization which provides poverty relief, afterschool programming, and education fits into all four – but it can only choose one main charitable purpose. Paloma Raggo, an assistant professor at Carleton University who studies charities, says the process of assessing whether a charity is actually doing charitable work can be rigid. In MAC’s case, she says, the CRA likely doesn’t consider its social work to be ‘advancement of religion’. “Failing to understand that particular context makes you not appreciate the meaning of charity for particular groups,” Raggo says. “That’s a really unintended consequence of adopting this very bureaucratic approach.”

Under Layered Suspicion says Canadian regulators find it hard to label activities that aren’t formatted along Christian ideals and practice as “religious” in nature. “This bias has the potential to create suspicion about the ways Muslim-led charities advance their religion for purposes of charity law in Canada,” the report says. (While Christianity does espouse charitable giving, the Islamic practice of zakat – or alms-giving – is second only to prayer in religious significance.)

When Muslim-led charities donate money to Islamic humanitarian relief efforts around the world, they may also have difficulty proving it isn’t for something nefarious – and the CRA might immediately assume that it is. In some Global South countries, paperwork the CRA relies on to prove the legitimacy of a donation may not exist. This is a problem other religious organizations in Canada face, too. “I’ve had Jewish charities accused of helping the Israeli Defence Forces,” Aptowitzer says. “The CRA will immediately assume the money is going towards something negative, rather than giving the benefit of the doubt, or simply saying it doesn’t have enough information to answer the question.”  

Going to trial

MAC isn’t looking for money out of its lawsuit against the CRA. Rather, it wants another audit conducted in a way that doesn’t infringe on what it describes as religious discrimination. This could be a long shot. (As Raggo notes: “You can’t have an audit and decide on how you’re going to be audited. It really has to be done by an external entity to your organization.”) 

However, Raggo does think the CRA, along with social impact organizations and academics, should start working together more closely on resolving these tensions within the law. “The challenge we have is that the policies we have and the structures we have are not flexible or nimble,” Raggo says.

Regardless of the lawsuit’s outcome, Muslim-led organizations are still concerned about the fairness of Canadian regulators when it comes to auditing their books. It also affects how willing Muslims themselves are to donate to Islamic charities. After 9/11, Nasir says, donations from the Muslim community fell tremendously over concerns that giving to a Muslim-led charity might put them under suspicion.

And Nasir says that worry hasn’t gone away. “This still sort of lurks in the minds of Muslims,” he says, “when they make donations.”

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