OTTAWA - The committee that keeps an eye on the Canadian Security Intelligence Service has chastised the spy agency for breaking the rules in a probe of suspected extremists.

The Security Intelligence Review Committee's annual report says CSIS had a source gather information on possible homegrown radicals without proper authorization.

The review committee also urges improvements to help CSIS manage its growing activities abroad and to help shore up Canada's security policy after concerns arose about a major military project in North Bay, Ont.

In addition, it reiterated a call for the spy service to implement recommendations from a federal commission of inquiry into the case of Maher Arar, an Ottawa engineer who was tortured in a Syrian jail over false terrorism accusations.

The review committee, composed of civilian appointees, examines CSIS operations and handles complaints about the spy agency. The committee is expected to soon complete a review of the case of Omar Khadr, a Canadian being held by the U.S. in Guantanamo Bay, Cuba, for allegedly killing an American soldier in Afghanistan.

In its examination of the homegrown extremists case, the committee found that an Ontario CSIS official directed the source to spy on an unspecified "sensitive institution." The spy agency's senior executive must sign off on operations involving institutions in the academic, political, media, religious and trade union fields.

"It was a question of their interpretation of what kind of authority was required," said Susan Pollak, the review committee's executive director. "But we didn't see eye-to-eye."

CSIS is worried about people raised in Canada who convert to extremist interpretations of Islam. The watchdog said the spy agency was too vague in outlining its concerns about this threat.

Some of the committee's recommendations flowed from its review of CSIS's role in helping rescue members of a group known as the Christian Peacemakers who were kidnapped in Iraq in 2005.

The report says CSIS assisted by providing access to the information of other intelligence agencies operating in Iraq, and provided some information collected by sources operating in the region.

At the same time, the committee says the rapidly unfolding episode "illustrated the challenges" CSIS will face as it increases activities abroad, including whether the spy service has appropriate ministerial guidance, and the need for advance preparations.

"SIRC noted two instances in which information was not communicated effectively, although there was no evidence that this affected the overall quality of the operation," says the report.

Still, CSIS advised the committee that based on lessons learned overseas, new procedures were being developed.

Canada's participation in the war in Afghanistan has noticeably altered CSIS, which supports the government's efforts there, said Pollak.

"The role of CSIS is evolving, is changing. I thought it was important for us to examine how well they've prepared for this, and where there might be a need for them to address policy gaps and such matters in their operations overseas," she said.

"I think it's a pretty well-run organization and I think they're certainly aware of the challenges of the world they're living in and working in."

The report also says CSIS should seek clarification about its role in probing incidents under federal security policy after concerns emerged during construction of the Defence Department's new complex in North Bay as part of its NORAD modernization program.

The committee says CSIS did not receive enough information from Defence to "investigate various security concerns related to the NORAD facility fully and proactively."

CSIS had no immediate comment on the report.

A spokesman for Public Safety Minister Peter Van Loan, cabinet member responsible for CSIS, did not return a phone call.