Now that we have a new federal government in Canada, one may wonder what they will do with the elephant in the room in the not for profit and charitable sector – social enterprise. As has been pointed out before in this newsletter and elsewhere, even though the provincial governments by virtue of our Canadian constitution were granted primary authority in relation to the “Establishment, Maintenance, and Management of ……. Charities”, the federal government who have been given the constitutional powers over “the raising of Money by any Mode or System of Taxation”, plays a significant regulatory role, through a few sections of the Income Tax Act, over charities and not for profit organizations. This is evident in how they are treated when they embark upon ventures such as some social enterprises. The taxation of, or tax exemption of, social enterprises revolves around the provisions of the Income Tax Act and its interpretation by the enforcer, i.e. the Canada Revenue Agency, with regard to these matters. However, opinions differ as to the meaning of these sections and confusion reigns.
Many in Canada who are starting socially conscious organizations think that the creation of a not for profit corporation or society under either federal or provincial legislation equals tax exemption under the Income Tax Act. This is far from the truth and hence the confusion. The new government in its policy has decisions to make in this regard, and it is hoped that they are made swiftly keeping in mind the following:
- Should not for profits with income generated by activities that have nothing to do with their stated not for profit purposes be taxed, or should the not for profit simply be tax exempt because it’s a not for profit as many think is the case now?
- Should registered charities be allowed to carry on businesses that are not related to their approved charitable purposes to support themselves or should the charitable status of such charities be revoked as often is the case now?
Regardless of the status of the law and the current taxation environment, curiously enough the Government of Canada does have information on its website for those seeking to start and operate a “social enterprise”. This page – http://www.canadabusiness.ca/eng/page/4337/ recently modified or perhaps created in 2015, appears to be an all-inclusive Canadian wide manual for anyone wanting to create, manage, finance and receive support for their social enterprise organization. Even though the page is entitled “Start and Grow a Social Enterprise”, the Government does not offer any specific definition of Social Enterprise but just starts off with this general question:
As a person in charge of a non-profit organization, are you thinking about starting or operating a business with the aim of furthering your mission or generating income to support your sustainability?
From that, one might surmise that a social enterprise in the eyes of Canada is a business with the aim of furthering a mission or generating an income to support sustainability. The page contains much of the same information that one would find if one were seeking to start any other regular business, however there are links to various provincial websites and legislation that are only applicable to the not-for-profit or charitable sector. Interestingly enough, the site also directs those interested to the whole notion of crowd funding which is touted as an alternative to traditional forms of financing a business. A quick look at the crowd funding page does not reveal any discussion about taxation. This is confusing.
The nuts and bolts of the social enterprise webpage, do provide a discussion on the corporate structure aspect of a social enterprise, and contain many interesting links to organizations in virtually every corner of Canada that are available to provide assistance. This, no doubt, is helpful to any one starting a social enterprise or any other business for that matter. Anyone searching for information is also directed to provinces like British Columbia and Nova Scotia which offer the hybrid vehicle of a Community Contribution Company, which is contained in their business corporations legislation that allows social cause to be the main focus of the organization, not profits for the shareholders.
Similar to British Columbia and Nova Scotia the federal government is also interested in the idea of having an incorporation structure for socially responsible enterprises. In 2014, Industry Canada conducted public consultations on the need to change the provisions of the Canada Business Corporations Act, one of which was the inclusion of such structures. No doubt, those who are trying to take advantage of a Canada wide framework for social enterprise are looking forward to seeing any amendments to that statute that might involve the ability to operate in such a structure. https://www.ic.gc.ca/eic/site/cilp-pdci.nsf/eng/h_cl00867.html#p3.5. Interestingly enough, at the end of the webpage, all links lead to taxation issues, but suffice it to say that all that the Canada Revenue Agency can offer in this area that has anything of clarity is the following sentence: The CRA tax services offices are responsible for determining if an organization qualifies for tax-exempt status as a non-profit organization. So the buck stops at the CRA level and until clarity is given to the sector in terms of clear legislation or government directives in the area of taxation, there is still a great uncertainty as to where social enterprise will fit in within the Canadian taxation structure.
In hopes that the new government could act quickly on this issue, they could consider the following options with regard to the whole issue of social enterprise which seems to be evolving organically anyway:
- They can ignore it or continue to study it like the previous government did, issuing no directives or clarity for the sector, leaving people inside the regulators office, i.e. the CRA, with the ultimate clout subject to the oversight of the courts.
- They could adopt the United States approach, where the IRS in that country simply collects what is called “unrelated business income tax”. This explained by the IRS as follows: Even though an organization is recognized as tax exempt, it still may be liable for tax on its unrelated business income. For most organizations, unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption. An exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990-T. An organization must pay estimated tax if it expects its tax for the year to be $500 or more. https://www.irs.gov/Charities-&-Non-Profits/Unrelated-Business-Income-Tax
- The new government could adopt a made in Canada solution that combines the ability of the charitable and non-profit sector to be self-sustaining while reducing red tape that is involved in complying with an uncertain regulatory environment and balancing the right of the taxation authority to collect taxes with fairness in its practices and collection procedure.