Not-for-Profits Making Profits

Presented by:

Susan Manwaring and Margaret Mason

May 10, 2010

Overview

What do we mean by “social enterprise”?

Vehicles: for-profit corporation, not-for-profit, charity

Rules for for-profit corporations

Rules for not-for-profits

Rules for charities

What is Social Enterprise?

Not a term of art

Social/mission driven organization

A business with social aims

A program or venture that fulfills a social aim

What are the Possible Vehicles?

For-profit Business corporation Taxable

Not-for-profit Non-share corporation Tax-exempt in certain circumstances

charity Non-share corporation Tax-exempt

Business Corporation

Typically incorporated as a business corporation with shareholders

Taxable

May be possible to operate in ways that reduce or eliminate tax payable

Business Corporation (cont’d)

Profits/revenues used for social aims may/may not be distributed to shareholders Shareholders can be

not-for-profits/charities Operates with triple bottom

line/sustainable principles

Provides greatest flexibility in operations

Not-for-Profit

Typically incorporated as non-share corporation/society

Members not shareholders

Tax exempt if meet Income Tax Act definition

Current CRA position

Non-share vs. non-profit

Provincial and federal corporate statutes are in fact directed at the creation of non-share capital entities. In other words the corporation does not have owners who hold an equity interest

This is generally thought to make them non-profit but this is not necessarily the case

An org. is tax exempt if:

(a) It is not a charity,

(b) It is organized exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit,

(c) It is in fact operated exclusively for the same purpose for which it was organized or for any other purpose in (b), and

(d) It doesn’t distribute to members.

What does this mean?

‘Social welfare’ means – providing assistance to disadvantaged groups

‘Civic Improvement’ includes – enhancement of value or qualify of community or civic life

‘Pleasure or recreation’ – something fun!

‘Any other purpose except profit’ – catch all for orgs operated for other than commercial reasons

IT-496R

Para 8. – ‘An association may earn income in excess of its expenditures provided the requirements of the Act are met.’

Para 9 – ‘The amount of accumulated excess income considered reasonable……..is a question of fact…..

IT-496R (cont’d)

Para 9 - ‘…….when an association requires time…….to accumulate surplus …….to buy a capital asset for use in its non-profit activities…….the tax exempt status should not be affected’

New Technical Interpretation

‘the word “exclusively” indicates……none of those purposes may be to earn a profit. Thus where the org. intends…….to earn a profit it will not be exempt…….even if it expects to use or actually uses the profit to support its not-for profit objectives.’

New Technical Interpretation (cont’d)

“..earning a profit …does not prevent the org…..from being 149(1)(l) entity. However the profit must be ancillary and incidental to the purposes……” ….i.e. an org might budget with intention of …no profit but make a profit – probably okay…but if org. intended to make a profit – not okay

New Technical Interpretation (cont’d)

“In our view if a 149(1)(l) entity could intentionally earn a profit to finance future capital projects……..and we accepted that this did not indicate a profit purpose, than any business where members did not require income distributions could accumulate wealth on a tax free basis…..”

New Technical Interpretation (cont’d)

Re a procurement contract:

“if the organization planned to earn a profit when it entered into the contract - …..if the contract specifically contemplated a “mark-up” the organization would not qualify for the tax exemption”

Charities

All charities must be non-share capital and cannot distribute to members

Charities can earn revenue and operate profit making activities provided these activities are related to their otherwise charitable purposes

Destination test is not available in Canada so irrelevant if funds do good

Charities (cont’d)

Limited entitlement to carry on related business

Only charitable organizations and public foundations

Not private foundations

Ontario-specific issues

Charities (cont’d)

Analysis:

Is the activity a charitable activity? (charitable activity can generate profits)

Is the activity a business activity?

If no, (and presuming the activity is charitable) charity can conduct activity without restriction

Charities (cont’d)

If yes, is it related to charitable purposes?

If not, charity cannot perform activity

If yes, then charity can perform business activity within certain limitations

Charities (cont’d)

“related business”, in relation to a charity, includes a business that is unrelated to the objects of the charity if substantially all persons employed by the charity in the carrying on of that business are not remunerated for that employment;

Charities (cont’d)

CRA says that a related business must be linked and subordinate to a charity's charitable purposes

Charities (cont’d)

The four types of "linkages" that CRA recognizes are as follows:

i. A usual and necessary concomitant of charitable programs

ii. An off-shoot of a charitable program

Charities (cont’d)

ii. A use of excess capacity

iii. The sale of items that promote the charity or its objects

Charities (cont’d)

The factors which will be evidence that a business is subordinate are:

i. Relative to the charity's operations as a whole, the business activity receives a minor portion of the charity's attention and resources

ii. The business is integrated into the charity's operations, rather than acting as a self-contained unit

Charities (cont’d)

ii. The organization's charitable goals continue to dominate its decision-making

iii. The organization continues to operate for an exclusively charitable purpose by, among other things, permitting no element of private benefit to enter in its operations