MaRS Library Legal Considerations—Registered Charities
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 venture. 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.
If all of the profits of your organization will be used in pursuit of your social mission and your organization generates profits through profit-making activities which meet the definition of a “related business” (as determined by the Canada Revenue Agency, or the CRA), you will likely choose to be a social enterprise in a registered charity legal structure.
“Related businesses” are defined as activities related to or ancillary to the charitable objects but can also be unrelated activities, as long as substantially all (more than 90%) of the persons employed in the profitable activity are volunteers and not remunerated. For example, a storefront operated by a charity and staffed by its volunteers, selling donated goods may be considered a related business. If this is not the case for your organization, then you may wish to consider an alternate form of organization.
The most common form of legal structure in Ontario for a social enterprise operating as a registered charity is a Not-For-Profit Corporation
- Incorporated via Letters Patent under the Corporations Act (Ontario) or Canada Corporations Act (federal),* generally without share capital
Other forms of legal structure (for example, for-profit or co-operative corporations) could be the vehicle for an application to the CRA to become recognized as a Registered Charity. The CRA will scrutinize the Articles of Incorporation and the operation of the entity to ensure compliance with the applicable tax requirements.
According to research conducted by SiG@MaRS, it was noted that most socially-oriented organizations used a structure without share capital. While in theory a corporation incorporated under a business law statute could apply to register as a charity or be considered a non-profit organization for income tax purposes, in practice it may be onerous to demonstrate to the CRA that the relevant entity structure, governance and operational requirements have been satisfied.
Pros: This structure is most commonly understood by individuals working in the social sector in Canada and is designed to ensure that all assets of the organization are protected and used for achievement of the social mission.
- As a registered charity, the organization can issue tax receipts for donations, a considerable incentive for donors.
- Charities are generally eligible for government grants, although there may be restrictions on the types of expenses that can be funded.
- Charities do not pay income tax on their earnings.
Cons: There are significant limitations on the business activities that can be undertaken and who may be employed for those activities (mainly volunteers). As a result, these social enterprises may not be able to scale in order to fully meet the social needs they target.
Several contributing factors may limit scale:
- Limited access to investment capital, as profits cannot be distributed to members or shareholders.
- Traditional grants, while possibly a more easily accessible source of funding, tend to be unpredictable and unsustainable, making long-term planning difficult.
- Aversion to borrowing, since charity boards have a special fiduciary duty to protect charitable property and are therefore more risk averse than their for-profit counterparts.
- The inability to accumulate excess profits for future use by virtue of the disbursement quota, which requires a charity to spend 80% of the value of receipted donations from the previous year on charitable purposes.
- The “related business” provision limits the ability to earn income relative to other incorporation structures.
For registered charities, Canadian lawyers Terrance Carter and Theresa Man explored the use of intermediary entities such as For-Profit companies, Not-For-Profit companies, a Business Trust or a combination of these entities. These entities would operate on a parallel basis with a registered charity with the charitable programs run by the registered charity and the business activities managed within the intermediary entity. Carter and Man found that each option has its own pros, cons and limitations.
In Ontario, until recently registered charities operating social enterprises faced additional challenges. Consultations between the government and stakeholders as part of Ontario’s review of the Corporations Act (Ontario) have resulted in updating other legislation relevant to charitable entities through passing of Bill 212 (the Good Government Act, 2009), which received Royal Assent in the Ontario Legislature on December 15, 2009. This new legislation has brought much needed change to how charitable entities in Ontario are regulated and brings Ontario more in line with the rest of Canada.
Of particular note, the Charitable Gifts Act, Which restricted charitable entities from owning more than a 10% interest in a for-profit business, is now repealed and the Charities Accounting Act has been amended to permit charitable entities to hold real or personal property for as long as such property is being used for its charitable purposes. Other amendments provide the Public Guardian and Trustee with expanded powers to request business records and other financial information relating to any business in which a charity has substantial interest.
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.
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Bridge, R., and Corriveau, S. (2009, February). 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., and Man, T.L.M. (2008, October 24). Canadian Registered Charities: Business Activities and Social Enterprise– Thinking Outside the Box. Presented at National Centre on Philanthropy and the Law Annual Conference: Structures at the Seam: The Architecture of Charities’ Commercial Activities. www.charitylaw.ca/seminars..html, now available at http://www.carters.ca/pub/article/charity/2008/tsc1024.pdf
MaRS Discovery District. Legislative innovations: How legislative innovations may improve access to capital for Ontario’s social entrepreneurs. [white paper].
Canada Revenue Agency. (2001, August 2.) Bulletin IT-496R
Non–Profit Organizations. Retrieved November 10, 2009,
Canada Revenue Agency. Bulletin RC 4108 Registered Charities and the Income Tax Act–
Bill 202 – Good Government Act, 2009 – found here.