MaRS Library Legal considerations—Not-for-profit Social Enterprises in Canada
You have an idea for a business activity that will generate a blend of social and/or environmental benefits and revenues for your organization. You are ready to launch a social enterprise.
Under current legislation in Ontario, there is no legal structure that combines some of the benefits of both the for-profit and not-for-profit worlds.
Your organization must carefully consider the current legal environment and existing legal structures and requirements associated with for-profit, not-for-profit, registered charities and co-operative corporations, before you set up your organization in Canada.
Should you choose NFP or charitable status?
You will likely choose a not-for-profit organizational structure (“NFP”) if your priority is to achieve scale in your business activities, generating significant service or product revenues for your cause.
Not-for-profits can engage in profit-making activities as long as those activities are compatible with the not-for-profit objects of the NFP, and the profits are used exclusively for promoting its stated goals.
Signs that an NFP may be operating an impermissible profit-making business include:
- operation in a normal commercial manner
- goods and services are not restricted to members and their guests
- operation on a profit basis rather than a cost-recovery basis
- the business is operated in competition with taxable entities carrying on the same business
If one of these situations would be the case for your organization, then you may wish to consider another form of incorporation.
- Incorporated via Letters Patent under the Corporations Act (Ontario) or Canada Corporations Act (federal)*, generally without share capital
This structure is more commonly used in the social sector and so long as the main purpose of the entity is not-for-profit, it can accumulate excess profits from year to year.
NFPs are generally tax-exempt so long as they are organized and operated exclusively for social welfare, civic improvements, pleasure or recreation, or any other purpose except profit.
NFPs will lose their tax-exempt status if income is payable to or available for the benefit of members or shareholders, or if the entity has the ability to declare or pay dividends. NFPs are generally free to borrow money and repay principal and interest to lenders.
The organization cannot issue tax receipts for donations, making it more difficult for NFPs to receive support from potential donors versus registered charities.
But NFPs can still accept donations and some organizations receive a significant number of donations from supporters who believe in the particular cause and are willing to forego the tax receipt.
At the same time, NFPs cannot attract investment from traditional investors, since distributing earnings would result in the loss of their tax-exempt status. In addition, NFPs are in danger of losing their tax-exempt status if they are too financially successful and their accumulated profits go beyond what the CRA believes is required to operate the NFP or if such accumulated profits are for the purpose of funding future capital projects.
The Canada Not-for-profit Corporations Act
The Canada Not-for-profit Corporations Act (NFP) replaces Part II of the old Canada Corporations Act and sets new rules for federally incorporated not-for-profit corporations in Canada. It came into force on October 17, 2011, and all registered Canadian not-for-profits must make the transition to compliance with the new act by October 17, 2014. The Act is intended to:
- Make clear rules governing the internal affairs of federal not-for-profit corporations
- Reduce red tape and establish simplified processes
- Allow more flexibility, such as amalgamations, for not-for-profit corporations
- Create a more objective standard for conduct on the part of directors and boards
For more information about the Act and advice on making the transition, consult Industry Canada’s page on not-for-profit corporations.
Interested in learning more about social innovation and social entrepreneurship? Visit the SiG Knowledge Hub.
Bridge, R. & Corriveau, S. (2009). Legislative Innovations and Social Enterprise: Structural Lessons for Canada. BC Centre for Social Enterprise. Retrieved November 10, 2009, from www.centreforsocialenterprise.com/f/Legislative_Innovations_and_Social_Enterprise_Structural_Lessons_for_Canada_Feb_2009.pdf
Carter, T.S.& Man, T.L.M. (2008). Canadian Registered Charities: Business Activities and Social Enterprise– Thinking Outside the Box.Retrieved August 17, 2009, from www.charitylaw.ca/seminars..html, now available at http://www.carters.ca/pub/article/charity/2008/tsc1024.pdf
MaRS Discovery District. Legislative Innovations. [white paper]
Canada Revenue Agency. (2001). Bulletin IT-496R Non–Profit Organizations.Retrieved August 17, 2009, from Canada Revenue Agency Website: www.cra-arc.gc.ca/E/pub/tp/it496r/it496r-e.html
CRA, Technical Interpretation 2009-0337311E5