Content about related business is perhaps the most referenced CRA policy in SE resources. It is mentioned often as it presumably opens the door to unrestricted business activity for charities as long as a ‘connection’ can be established. If a SE is mission-related, i.e. it delivers an essential service or a employs marginalized population, then funding and donations can seemingly be solicited to support a SE’s ‘double bottom line’.
It has been acknowledged in some SE resources specific to legal structures that many organizations operating a self-identified SE mistakenly believe they can operate a charitable program as a related business to generate surpluses. This is likely the result of:
The common practice in charitable and non-profit sector statistical analysis to place revenues derived from both charitable programs and related business in one category usually called ‘Earned Income’ can also contribute to this dynamic.
What is a Related Business?
CRA indicates there are two kinds of related businesses:
CRA lists four forms of connection or linkage that have been identified; three of which appear to occur or emanate from the delivery of charitable programs. There are very specific conditions and circumstances that a charity can leverage to generate surplus revenue but nothing that can be broadly applied to charities or applied at all to for-profit entities. Neither does it provide an opportunity for capital investment; in theory, one of the advantages of operating a SE. The ‘destination of profits’ test is effectively negated by CRA as their policy states “the fact that the profits from a business are applied to a charitable purpose is not sufficient to constitute the necessary linkage.”
In my view, related business is not the medium to operate unrestricted business activity its prevalence in SE resources would seem to indicate. It is operated under specific circumstances that prevent the compromise of charitable outcomes and risk of social capital. CRA policy is not in place simply to ensure charity-run businesses do not compete unfairly with for-profit entities or earn an excess amount of tax-free revenue. Instead it stewards charitable resources and activities that provide a public benefit, and in doing so, reveals the financial realities of operating an activity with a for-profit intention that makes unrestricted business activity strategically disadvantageous for registered charities.
Legal input and opinions
Content from members of the legal community on CRA’s related business policy and potential alternative organizational structures that allow for-profit activity is quite prevalent in SE resources. I believe this creates an impression of credibility for SE to be viewed as a viable business option despite legal content not being complimented with any context as to what SE actually is beyond referencing various nebulous definitions and characterizations.
In my review of numerous SE resources, I have not found any definitive legal opinion that SE, however it is defined, can or should be operated by registered charities. One legal opinion does define SE but appears to limit it to being strictly a ‘business’ as defined by CRA thus cannot be operated by a charity unless it fits into CRA’s related business criterion.
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. Visitwww.oylerconsulting.ca; contact David Oyler by email.
