Many people confuse the term charity with the term not-for-profit. Technically, these are different types of organizations. A not-for-profit, as the name would imply, cannot organize its affairs in order to earn a profit. A charity on the other hand can earn profit and generally engage in business relationships outside of simply obtaining donations. Examples of such activities include gift shops in hospitals and churches, charity bake sales and even rental income of property owned by charities. However, because charities are not taxable, Parliament has legislated limits to their involvement in the business world to ensure that charities do not take advantage of this status to create an unlevel playing field with taxable businesses. 

Charities also raise funds in other ways and due to their charitable status these methods often involve the issuance of a charitable donation tax receipt. But, in order to maintain the integrity of the charitable donation tax credit mechanism, the law contains a series of complicated provisions which apply in various situations. This is clearly necessary as every donation tax receipt issued involves foregone tax revenue on the part of the government and so it is important to ensure that receipts are only issued for gifts to charity.

Business revenue

Concerns about allowing a non-taxable entity to compete without restrictions against for-profit corporations is not a trifling matter as for-profit organizations are the backbone of our economy. On the other hand, it would be unfairly capricious to deny a charity the ability to earn revenue off of its assets - particularly as the income is generally used to support charitable activities. And more to the point, there is significant revenue to be gained from involvement in the business world that can be put to good use in a charity.

Charities are restricted from carrying out business that is unrelated to its charitable purposes where that business is not substantially run by people not employed by the charity. As a result, the first exception to running a business is one that is primarily run by volunteers or by people that are effectively contracted to run the enterprise. Unfortunately most people that are involved in running a business are, by definition, paid employees. And the exception for businesses run by volunteers is effectively limited to small operations of organizations with large volunteer bases.

On the other hand, a charity may run a business that is related to the charity’s purposes and subordinate to that purpose. The first question that must be answered is whether or not the activity is in fact a business. For many organizations this determination will become necessary in separating a fundraising activity (a monthly bake sale) from a business activity (running a gift shop).

Not all commercial activity is necessarily a business. For example, there is a distinction between a bake sale and running a bakery. A business is a commercial activity deriving revenue from the sale of goods or services undertaken with the intention to profit from this activity. There are certain indicators which may be found in running a business:

a)     Intention: the purpose of the activity intended to generate a profit.

b)     The potential to show profit: just because a business is unsuccessful does not mean that the operators did not have the intention and the ability to make a profit at some point. On the other hand, if the endeavour is structured so that it could never earn a profit then presumably it is not a business.

c)     History of profit: just because an activity has fallen onto hard times, does not mean that the history of earning profit would be ignored.

d)     The expertise of the people undertaking the activity: if the people who run the activity have experience and a history of running such for-profit activities, that would be an indicator that this may also be intended to be a commercial endeavor.

Fees and frequency

It should be noted that neither soliciting donations nor selling donated goods is necessarily considered to be a commercial activity; although one could imagine circumstances where these types of activities could be part of a larger business. It should also be noted that just because fees are charged for the provision of certain charitable programs does not necessarily mean that the program will constitute a business. For example, neither rent for low-income housing, nor university tuition would qualify as a business. However, the CRA does have certain economic development policies which should be consulted if the organization intends to engage in such activities as micro finance or employment of the hard to employ.

Another issue to keep in mind is the frequency with which the activity is carried on. For example, a charity may decide to engage in an auction of purchased equipment. Conducting such an event once is unlikely to attract the CRA’s attention. However, conducting this activity on a regular basis would – assuming the other criteria are also present – be a cause for some concern. But the law in this area is not entirely clear and there is no bright line test to suggest how much activity is too much. As the line between fundraising events and business becomes more distinct, the charity will run a greater risk of attracting unwanted CRA attention.

This is an excerpt from Adam Aptowitzer’s book, Starting and Maintaining a Charity in Canada available through Civil Sector Press. Order your copy today.