Case Study: How Open data saved Canada $3.2 Billion

Note: I’ll be on TVO’s The Agenda with Steve Paikin tonight talking about Government 2.0.

Why does open data matter? Rather than talk in abstract terms, let me share a well documented but little known story about how open data helped expose one of the biggest tax frauds in Canada’s history.

It begins in early 2007 when a colleague was asked by a client to do an analysis of the charitable sector in Toronto. Considering it a simply consulting project, my colleague called the Canada Revenue Agency (CRA) and asked for all the 2005 T3010s – the Annual Information Returns where charities disclose to the CRA their charitable receipts and other information – in Toronto. After waiting several weeks and answering a few questions, the CRA passed along the requested information.

After spending time cleaning up the data my colleague eventually had a working excel spreadsheet and began to analyze the charitable sector in the Greater Toronto Area. One afternnon, on a lark, they decided to organize the charities by size of tax-receipted charitable donations.

At this point it is important to understand something about scale. The United Way of Greater Toronto is one of the biggest charities in North America, indeed its most recent annual charitable donation drive was the biggest on the continent. In 2008 – the year of the financial crisis started – the United Way of Greater Toronto raised $107.5 million.

So it was with some surprise that after sorting the charities by 2005 donation amounts my colleague discovered that the United Way was not first on the list. It wasn’t even second.

It was third.

This was an enormous surprise. Somewhere in Toronto, without anyone being aware of it, two charities had raised more money than the United Way (which in 2005 raised target of $96.1M). The larger one, the International Charity Association Network (ICAN) raised $248M in 2005. The other, the Choson Kallah Fund of Toronto had receipts of $120M (up from $6M in 2003).

Indeed, four out the top 15 charities on the list, including Millennium Charitable Foundation, Banyan Tree, were unknown to my colleague, someone who had been active in the Toronto charitable community for over a decade.

All told, my colleague estimated that these illegally operating charities alone sheltered roughly Half a billion dollars in 2005. Indeed, newspapers later confirmed that in 2007, fraudulent donations were closer to a billion dollars a year, with some some 3.2 billion dollars illegally sheltered, a sum that accounts for 12% of all charitable giving in Canada.

Think about this. One billion dollars. A year. That is almost .6% of the Federal Government’s annual budget.

My colleague was eager to make sure that CRA was taking action on these organizations, but it didn’t look that way. The tax frauds were still identified by CRA as qualified charities and were still soliciting donors with the endorsement of government. They knew that a call to CRA’s fraud tip line was unlikely to prompt swift action. The Toronto Star had been doing its own investigations into other instances of charity fraud and had been frustrated by CRA’s slow response.

My colleague took a different route. They gave the information to the leadership of the charitable sector and those organizations as a group took it to the leadership at CRA. From late 2007 right through 2009 the CRA charities division – now under new leadership – has systematically shut down charity tax shelters and are continuing to do so.  One by one, International Charity Association Network, Banyan Tree Foundation, Choson Kallah Fund, the Millennium Charitable Foundation and others identified by my colleague have lost their charitable status. A reported $3.2 billion in tax receipts claimed by 100,000 Canadian tax filers have so far been disallowed or are being questioned. A class action suit launched by thousands of donors against the organizers and law firm of Banyan Tree Foundation was recently certified. It’s a first. Perhaps the CRA was already investigating these cases. It must build its cases carefully as, if they end up in court and fail to successfully present their case, they could help legalize a tax loophole. It may just have been moving cautiously. But perhaps it did not know.

This means that, at best, government data – information that should be made more accessible and open in an unfettered and machine readable format – helped reveal one of the largest tax evasion scandals in the country’s history. But if the CRA was already investigating, scrutiny of this data by the public served a different purpose – helping to bring these issues out into the open, forcing CRA to take public action (suspending these organizations’ right to solicit more donations), sooner rather than later.  Essentially from before 2005-2007 dozens of charities were operating illegally. Had the data about their charitable receipts been available for the public’s routine review,  someone in the public might have taken notice and raised a fuss earlier. Perhaps even a website tracking donations might have been launched. This would have exposed those charities that had abnormally large donations with few programs to explain then. Moreover, it might have given some of the 100,000 Canadians now being audited a tool for evaluating the charities they were giving money to.

In the computer world there is something called Linus’ Law, which states: “given enough eyeballs, all bugs (problems) are shallow.” The same could be said about many public policy or corruption issues. For many data sets, citizens should not have to make a request. Nor should we have to answer questions about why we want the data. It should be downloadable in its entirety. Not trapped behind some unhelpful search engine. When data is made readily available in machine readable formats, more eyes can look at it. This means that someone on the ground, in the community (like, say, Toronto) who knows the sector, is more likely to spot something a public servant in another city might not see because they don’t have the right context or bandwidth. And if that public servant is not allowed to talk about the issue, then they can share this information with their fellow citizens.

This is the power of open data: The power to find problems in complicated environments, and possibly even to prevent them from emerging.

76 thoughts on “Case Study: How Open data saved Canada $3.2 Billion

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  2. Mike

    And even when data sets are available – such as StatsCan's massive sets – they sometimes want to charge us for the privilege of receiving the detailed data. As if our taxes hadn't already paid for their collection of this information.

  3. MT

    That's great — but how many people went to jail? Steal $1000 from a private purse you end up in the slammer, steal a billion from the public purse, you get scolded.

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  5. David Eaves

    Mike – completely agree. The idea that StatsCan would charge for data that we've already paid to collect is insulting. Possible, there was an excuse when this information needed to be printed and shipped out so there were some costs of redistribution involved, but this is simply no longer the case.

  6. mtedmonton

    Playing Devil's advocate here:By your own admission:1. the CRA might have been looking at this already, but may have been building their case slowly to make sure it was iron clad.2. By exposing the fraud, you caused them to act soonerIsn't is possible you risk them having a less solid case which they could lose?

  7. David Eaves

    Mt Edmonton:Good question. I confident that having more people become aware of the fraud would not weaken the CRA's case… the CRA is concerned with punishing fraud, which is why they move slowly – to construct their case. I'm interested in the opportunity to prevent fraud. Had the data been still more available maybe the outcome could have been that 100,000s of Canadians (now having their taxes audited by the CRA) might have been spared the inconvenience (and millions of tax dollars spent doing these audits would have been spared). Moreover, those who committed the fraud may have been dissuaded to have tried in the first place…

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  9. uccemebug

    It seems that the investigating party acted with this concern in mind. With ten years of experience in the Toronto charitable arena, “They knew that a call to CRA's fraud tip line was unlikely to prompt swift action. The Toronto Star had been doing its own investigations into other instances of charity fraud and had been frustrated by CRA's slow response.”The route they took did nothing to publicize the issue, it went right back to CRA only with more impetus for action where action was not apparent.That said, I wonder just how many organizations operating in the public sphere would come crashing down with this sort of light shone on the finances. ;^)

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  11. cheve

    I do not think CRA has an unclean hand on this issue. Please remember, CRA's job is to collect tax as much as that is being allowed/regulated by the law. CRA has won a few of these case before the court; but there are many legit one that are being caught in the middle . What CRA is doing now is trying to make all the cases go away by saying all these charities are no longer qualified as charitable orgarization; thus the donations should be disallowed for all. Let us think about this for a moment. It was CRA that approved these outfits to begin with. CRA only “acts” upon it, because these tax 'scheme' is reducing the overall tax stream. I should qualify the word 'acts' above; because as far as I know, CRA are still working on a case from 2003(and it is 201o now) .

  12. Public nuisance

    Great article. There are a couple of interesting features here. One is that the fraudulent charitieswere reporting their charitable contributions on T3010s. If these were fraudulent, then the scamwas something like, “You pay me $10, and I will give you a receipt showing $100.” Then the scammers reported the $100 on the T3010, in case the CRA checked the individual's return for accuracy. This worked because the CRA assumed that the charity returns were accurate. Two, the argument for open data sounds good but it has to be balanced by privacy concerns. Tax return data is confidential (at least in the US) and protected by severe penalties against disclosure. Most people would not want any more of their data made public. In most cases,government data is data about people. Data on charities is already public. If you want to openthe tax returns of corporations, great. But I hope you are not advocating for exposing evenmore data about individuals to public on their finances made public

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  41. 123

    Unfortunately, this article has horribly misrepresented the facts (at best), or has even misstated “facts”.

    To allege fraud, which is a criminal allegation, is itself wrong prior to a “conviction” and a hearing.

    To use newspapers as “evidence” perpetuates a problem, which is being perpetrated by interested parties.

    To ignore the actual charity being done, and the various tax shelters’ structuring” makes a mockery of the allegations, which have been merely the position of the CRA.

    This was not some historic discovery by the author’s colleague. It was a registered and disclosed industry for years prior, and it was public information years before someone thought to try and compile this “evidence”.

    The very comment, “to legalize a loophole” suggests it was and is legal. Obviously the writer has extremely lintier knowledge of tax l, charity administration, and the tax shelter industry as a whole.

    I find it insulting and reprehensible to speak with such moral authority that is absent and knowledge of the facts and law.

    Like anything, there are better and worse programs. One thing is for sure…this author believes in generalizing, and accusing, with reckless disregard for the thousands of people who spend their lives ensuring that even the minutiae demonstrate compliance with the letter and the spirit of the law…something that is not even the mandate, or jurisdiction, of the CRA.

    RPGA’s (registered profitable gifting arrangements) have been, and will remain to be, the most celebrated and effective method of profitable giving, and alternative wealth redistribution made possible through the convergence of donation and taxation. Tens of thousands of people around the world will die if it ever is legislated away. And if it is legislated away, somehow, that in itself would suggest, once again, that it was al.ways legal to begin with.

    But don’t take my word for it. Simply find the legal problem. Having otherwise unknown charities outdoing the old conventional functioning charities in terms of fundraising, only denotes a hint of innovation.

    Maybe that’s why profitable giving and tax shelter arrangements are defined in the Income Tax Act…and it sure don’t say they are bad!

    And if they are, maybe some of the largest charities in the world (not only Canada), like Direct Relief International, the Salvation Army, and Ministries of the Interior of several countries, should not be accepting the lifesaving gifts that they have been from Canadian donors, who choose to use these structures, as per the advice of their lawyers and accountants. I have been doing these types of progrAms for years, with only good results! And I am not alone.

    Before you make your mind, get all the facts. I agree there is a story here. But I fear you haven’t heard the interesting side yet…just the interested side!

    Can you say Holy Spinnerama Batman?

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