Guilt by association and the related business rules

publication date: Dec 21, 2011
author/source: Adam Aptowitzer
Many people are aware that charities can engage in related business only where the business activity is (in the Canada Revenue Agency's view) both related and ancillary to the organization's charitable activities. On the other hand, charities can engage in any business activity so long as "substantially all persons employed by the charity in the carrying on of that business are not remunerated for that employment" (i.e. they are volunteers). Adam Aptowitzer photo

Are contracted professionals "employed"?

I recently came across a situation in which a charity had substantial real estate holdings. The reasons for its holdings were varied but in all cases it required the aid of various professionals and contractors to help with the acquisition and maintenance of the buildings.

For example, the organization hired a lawyer to help with the real estate transfer documents, hired accountants to help keep track of the monies and hired contractors of various types to help in the fit-ups and maintenance of the building.

Eventually, the charity was revoked for failure to file. Upon its application for re-registration, the CRA raised the issue that the organization was engaged in an unrelated business activity because it had engaged the services of these employees. In other words, it considered the use of the lawyer, accountant and contractors as people who were paid for their employment.

But the words "employment" and "employee" are loaded terms in tax law, and as a result they have specific definitions. While the drafters of those definitions may not have contemplated their use for the related business rules, the fact is that the definition does apply here as well.

Even a related business may pay professionals

Fortunately for charities, the typical lawyer, accountant and contractor fall outside the usual tax law meaning of employee, and so paying professionals for their work would still allow the organization to fall within the exemption for a business run substantially by volunteers.

Nevertheless, the related business rules are quite complicated. Being run by volunteers is not carte blanche to conduct activities as one wishes, despite the fact that the wording of the law would lead one to believe that this is true. I would recommend that any charity engaging in such activities consider consulting with counsel how to best structure any business arrangement.

Adam Aptowitzer of Drache Aptowitzer LLP is a charity law lawyer with a national practice based in Ottawa. He has been published in Canadian Taxpayer, Canadian Fundraiser (now Canadian Fundraising & Philanthropy) and the Not-for-Profit News. He has also published a widely distributed study on the regulation of Canadian charities with the C.D. Howe Institute.

As a speaker, he has presented to the National Symposium of Charity Law, the C.D. Howe Institute, the Association of Fundraising Professionals, the Canadian Association of Gift Planners, the Ottawa Estate Planning Council and various large and small Canadian charities. He has also given expert advice on Parliament Hill. Adam is an executive member of the Canadian Bar Association's Charity and Not-for-Profit Law section.

For speaking engagements and consultations, contact him at 613-237-3300 or visit

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