A registered charity can incorporate a for-profit entity to operate a business activity that is not allowed according to CRA policy. In CRA’s words, if a charity is operating an unrelated business “it is in breach of the law and could have its registration revoked” but does have the option to place the business “in a separate taxable corporation”. A charity “can retain control over the taxable corporation through share holdings or a power to nominate the board of directors.”
If a corporation is established by the charity it “can invest in the corporation on the same basis that it can invest in any other for-profit business. The charity's directors/trustees would need to satisfy themselves that the investment represents a prudent use of the charity's assets. They also need to be alert to ensure no benefit of a private nature is conferred on the corporation.”
I would interpret this to mean that an unrelated business essentially cannot leverage its association to the registered charity to try to generate profit. It would not be able to gain a competitive edge over other businesses from the use of social capital, nor can it be financed by the charity based solely on the legal connection between the two entities. Like other businesses, its financial success will be based on the goods or services it produces and sells.
Examples of businesses started by charities include low-income housing property management and a language service. The business opportunities appeared to be identified in the process of delivering charitable programs.
SE and unrelated business
A charity incorporating a separate taxable corporation would seem to the apparent answer to the SE concept of operating a for-profit activity that directs profits to a social cause. It becomes even more obvious when SE characterization is narrowed further to charities operating business activities. It appears to be the best legal option for the marketplace sale of goods and services by a non-profit to occur (perhaps the only one depending on one’s interpretation of ‘non-profit’). An unrelated business would not have to comply with CRA policy that limits sales, product production or entry to the marketplace, and one would assume all or some of the profits earned from the business would be directed to the charity through dividends and/or donations rather than all profit being directed to private shareholders.
But SE narrative and promotion seems to be focused on deeper concepts and philosophies than the potential profits from operating a business, or at least, it is only one part of the SE discussion. In my view, there likely are not many business ideas that would arise from the operation of a charitable program that would necessitate the considerable resources and attention that appears to be directed towards SE; or any reason to support unrelated business in anything other than a conventional manner i.e. financing should be based solely on the feasibility of the entity’s business plan.
Leveraging the Charity/Unrelated Business connection?
Can an unrelated business leverage its association with a charity? As mentioned in Article 7, I would caution against a business operation relying on its association to a charity to generate revenues as this effectively applies a ‘cannot fail’ condition on the company. There could also be additional implications to a charity’s reputation in the community if a portion, potentially a majority portion, of the business’ profits, were going to shareholders other than the charity. There could be accountability and transparency issues as the business would be under no regulatory obligation to divulge shareholder information, or any financial information such as payments to them. Nor would it have any regulatory scrutiny for its activities.
An even bigger issue may be the conferring of unacceptable private benefits on the company. If the company is using the charity’s name and community standing to generate revenues and profits, some of which are distributed to private shareholders, a question may arise whether it is fair that these individuals are profiting from the intentions of consumers to support the charity’s mission. If a consumer was aware that anyone other than the charity was going to benefit, they likely would not have made their purchase.
I believe the same thinking also applies to a SE idea where a company leverages its association to a registered charity to fit a ‘community business’ criterion for government supported initiatives related to public utilities.
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.
