By: Sukhdeep Singh Sembi
As our readers know the new government has taken steps to revamp the restrictions on political activities by charities, by dismantling the political activities audit program and by promising a new approach following consultation with the public and members of the charities industry. It is important however to note that the changes may not only effect the charity realm.
There are other corporations which too prohibit any form of political activities, one such example are Community Interest Corporations (CIC) from Nova Scotia’s Community Interest Companies Act (“CICA”). Since the CICA includes no definition of “political activities” we are left wondering if the CRA’s soon to be changed approach would be utilized. CICs, which are governed by the Registrar of Joint Stock Companies in Nova Scotia, are at risk of having their status revoked if they fail their purposes or participate in political activities.
The current situation has created a shroud of uncertainty over the relatively new sector. Social enterprise companies, such as CICs, attempt to bridge the gap between not-for-profit corporations and for-profit corporations. They may provide the perfect blend of social purpose combined with profit earning for corporations who do not wish to be burdened by the restrictive operating requirements for charities.
Having their origin in the U.K. in the early 2000s, social enterprise corporations have been adopted in Canada and the United States. British Columbia was the first province in Canada to provide such a corporate structure by creating Community Contribution Companies, in 2012.
Community Contribution Companies (C3s) and CICs have three fundamental differences that separate it from a typical for-profit corporations; 1) a community purpose, 2) dividend restrictions, and 3) asset locks.
Each C3/CIC must identify a community purpose, which must either be a purpose beneficial to society at large or to a segment of society that is broader than the group of persons who are related to the C3/CIC. The limitation on community purposes are significantly less strict than charitable purposes. It must be noted that C3/CICs are not tax exempt and cannot issue tax donation receipts. Directors’ must be guided by the community purpose articulated in the company’s articles.
To further the community purpose the C3 is limited in the amount of profit distributable to shareholders, ideally resulting in the reinvestment of the profit to further their societal benefit. The British Columbia Business Corporations Act limits C3s to distributing only 40% of their profits annually, however, C3s are allowed to carry forward unused amounts indefinitely. This provision allows for reinvestment of earnings during the start-up and maturity years, allowing for much larger dividends to be distributed to shareholders in later years. CICs however are not allowed to carry forward undistributed profits to shareholders.
C3/CICs also possess asset locks, which upon dissolution limits the distribution of assets, requiring either all or 60% of the assets remaining to be transferred to one or more qualified entities. Only 40% of the remaining may be distributed to the C3/CIC’s shareholders. Furthermore, C3/CICs are not limited to operating only in British Columbia or Nova Scotia.
The aforementioned features make C3/CICs an attractive middle path between for-profit and not-for-profit corporations. But like charities, the social enterprise sector is eagerly waiting for the new governments approach to political activities.