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Federal Finance Minister Jim Flaherty was in Toronto on Feb. 7, 2014, to get a new pair of shoes from Andrew Violi, president of Mellow Walk.Peter Power/The Globe and Mail

The Conservative government will further tighten charity rules in its upcoming budget to block money laundering by criminals and terrorists, but some charities fear Ottawa will cast a wider net to stifle its critics.

Finance Minister Jim Flaherty said Tuesday's budget will include new measures aimed at stopping criminals from exploiting Canadian charities. He also rejected accusations that his government is targeting its political foes.

"If the critics of the government are terrorist organizations and organized crime, I don't care," he said.

The Canada Revenue Agency has been warning Canadian charities – particularly those operating in parts of the world where cash transactions are common – that they could become vulnerable to exploitation.

Mr. Flaherty's comments suggested the budget will address this issue.

"There are some terrorist organizations, there are some organized crime organizations, that launder money through charities and that make donations to charities and that's not the purpose of charitable donations in Canada," he said. "We are being increasingly strict on the subject. You'll see some more on Tuesday."

What has some Canadian charities nervous is that Mr. Flaherty has previously mused about further changes to the rules on political activity. Mr. Flaherty's 2012 budget included new sanctions related to enforcing the rule that no more than 10 per cent of a charity's resources can be spent on political activity.

Since the 2012 budget, environmental groups such as the Pembina Foundation, Tides Canada and Environmental Defence have been more frequently and aggressively audited by the Canadian Revenue Agency.

The increased audits came amid complaints – echoed by top government officials including Natural Resources Minister Joe Oliver – that environmental charities were accepting donations from foreign foundations with the explicit goal of slowing oil-sands production and defeating pipeline proposals such as Enbridge Inc.'s Northern Gateway project.

Mr. Flaherty warned in December that the government would revisit the issue in the budget.

Toronto-based Environmental Defence has been undergoing an audit that began in 2011, and then became focused after the 2012 budget on the question of whether it was exceeding its limit of political activity.

Environmental Defence executive director Tim Gray said his organization has been careful to limit its advocacy work, though critics argue its education and research are in fact political and aimed at criticizing the Harper government's environmental record.

"Generally, [the CRA] is redefining what has been considered charitable activity and saying it is political," Mr. Gray said. "There is a bit of a chill in the sector, for sure."

But Mr. Gray said the new interpretation of the rule could hit other charities, such as those doing research on social policy or even Mothers Against Drunk Driving (MADD), which advocate on public policy issues.

Tides Canada – which funnels money from foreign foundations to charities in Canada – has been undergoing an audit since shortly after the 2012 budget. Tides Canada also has its own charitable programs in research and education.

The Calgary-based Pembina Foundation has received a notice that an audit will commence this spring. The foundation is separately incorporated from the Pembina Institute, which does undertake political advocacy within its research mandate.

Mr. Flaherty's comments Friday came after his traditional pre-budget event of buying a pair of shoes.

The minister made his purchase at the factory of one of the few remaining Canadian shoe manufacturers, Mellow Walk Footwear in suburban Toronto.

The government has lowered expectations that the budget will include major new spending or tax cuts. Rather, the focus will be on erasing the deficit by 2015-16.

With a report from Richard Blackwell in Toronto

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