This is the second of a series of excerpts from David Oyler’s feature article “How Does Social Enterprise Translate to the Charitable Sector?” The entire article will be posted on his website after the final instalment on Hilborn Charity eNews.
Discussing legal structures and legislation in this article is unavoidable, as social enterprise (SE) in name alone presumes a marriage of business with charity; of capitalism with social good. This seems to be contradictory to regulatory policy that reflects a philosophical view that those concepts are different, if not opposite, and need a clear legal line drawn between them.
It is important to start by recognizing that:
Are registered charities and nonprofit organizations (NPOs) the same thing?
The need for clarity around this question is precipitated by the frequent mention of NPOs and use of the term ‘non-profit’ in SE definitions, narrative, and resources, and the tendency to view registered charities and NPOs as interchangeable, or “cousins,” as one SE promoter puts it, in the arena of social program delivery. I believe it is not well understand that these are defined and treated differently under the Income Tax Act, and being an NPO is not a prerequisite for obtaining charitable status.
A key distinction is that an NPO cannot be a charity, which in theory puts organizations with public benefit missions (i.e. those that would qualify to be registered as a charity) under a higher and social outcome-based level of external scrutiny.
In my opinion, CRA’s stringent accountability and transparency requirements are necessary, as registered charities are in essence using public funds and resources to deliver their programs and services. Conversely, I see NPO’s in a neutral light; while their purposes are not for-profit or business oriented, neither are they beneficial to the community or public when compared to charitable ones.
Legal considerations aside, I would recommend to organizations with public benefit missions to seek charitable status from a strategic perspective. Along with the ability to issue tax receipts and receive funds from charitable foundations, it should also afford a higher level of public trust leading to more success in solicitation efforts. Additionally, it has been opined in legal circles that the rules around revenue generation for charities are much clearer.
Use of the term “nonprofit” by SE promoters is not necessarily limited to the legal context used to describe organizations that meet the conditions in the Income Tax Act for NPO’s. It is used more broadly to describe organizations that aspire to “social profit” distribution (rather than private shareholder distribution) to either the community at large, to a charitable/public benefit purpose, in a more democratic manner, or to a marginalized group of people.
Federal versus provincial incorporation and regulation
Legislation for incorporation and regulation on provincial and federal levels also seems to add to the misunderstanding of charities and NPOs, which in turn contributes to the presence of nonprofit-related topics in SE resources.
For example, provincial NPO legislation specific to operating commercial activity is often listed or mentioned, particularly in sections covering potential SE legal structures. The premise that, unlike federal regulations, unrestricted business activity by NPOs and registered charities is encouraged at the provincial level is also brought up in SE narrative. That in turn can fuel, or be fueled by, conflict of interest criticism directed towards Canada Revenue Agency as being both tax collector and administrator of tax-exempt entities.
I don’t believe it is well understood that, regardless of wording in various provincial NPO legislation, NPOs must meet the federal conditions to be exempt from income tax, and registered charities must comply with CRA policy. I have not heard of any conflict of interest claims or any calls from legal experts for changes to CRA policy specific to revenue generation based on the premise that the policy only serves to protect tax revenues. In my view, I see the CRA rules as reflective of charitable nature and when understood, reasonable and rational. I am not sure an independent charities commission would develop policy that would be significantly different from CRA’s.
Disclaimer: I am not a lawyer nor connected with the Canadian Revenue Agency. I am not offering any opinions as to what types of activities would or would not be in compliance with federal or provincial/ territorial regulations.
Oyler Consulting works with registered charities and non-profit organizations to increase their effectiveness and capacity to deliver their programs and services. Services include practical guidance on Canada Revenue Agency policy for registered charities, helping organizations build successful fundraising programs, program and service development, and social enterprise. Visit www.oylerconsulting.ca; contact David Oyler by email.