How to Structure Community interest corporations
By Brent Randall
This past May, British Columbia became the first province in Canada to approve a new business model that is focused on the social economy rather than profit. The province’s Business Corporations Act will be amended to include definitions and provisions relating to “community contribution companies”. Nova Scotia has recently done the same, as the Community Interest Companies Act, received Royal Assent on December 6, 2012. The Nova Scotia provisions are largely based on British Columbia’s Act. Both Acts are based on concept first introduced by the United Kingdom in its Companies (Audit, Investigations and Community Enterprise) Act 2004.
Community interest corporations (CICs) can be structured like any other corporation in that they can be limited by shares or guarantee. This allows not only new corporations to be formed as CICs, but also existing corporations to become designated as a CIC. One key difference is that a CIC must have a purpose that is either beneficial to society at large, or “a segment of society that is broader than the group of persons who are related to the community interest company”. These purposes include the provision of health, social, environmental, cultural and educational services. Interestingly, Nova Scotia specifically disqualifies political purposes from this list, while British Columbia does not.
Another important difference between a standard corporation and a CIC is that the declaration of dividends is limited in a CIC, ensuring that a significant amount of the profit realized by the CIC goes back into its operations rather than the pockets of its shareholders. All dividends that are declared must be approved not only within the company but also by the Regulations to each Act as well. Upon dissolution of a CIC, an “asset lock” is triggered, which ensures that profits remain in the company and/or are directed toward community interests.
Additionally, the directors of a CIC must report about the company’s activities and spending each year, not unlike how charities must send CRA annual T3010 reports regarding their operations. An interesting aspect of these reports is that they will also require the company to explain how the activities it engaged in in the previous year have benefited society.
Clearly, CICs have a lot in common with charitable organizations. Both must be organized based upon certain approved purposes, cannot be focused on achieving pecuniary gain for its members, and must demonstrate annually that they continue to operate in accordance with their prescribed objects. Of course, CICs and charities are not the same thing, for a few significant reasons. Such differences may help determine which structure best meets the goals of a particular organization.
To begin, the acceptable purposes for which a company can be declared a CIC are much more flexible than the charitable objects that a charity must be aimed at fulfilling. While we cannot know how stringently “purposes beneficial to society” will be construed in the CIC context, it is likely that the interpretation will be more liberal than the CRA’s consideration of charitable objects. One key reason for this likelihood is based on another important difference: CICs are not tax exempt, and cannot issue tax receipts, while charities can.
Another difference is that CICs are always corporations, while charities may or may not be. This underscores the motivation of the legislatures for introducing CICs, as the goal is to create socially responsible, community oriented corporations rather than outright charitable entities.
While investors in CICs will be able to receive returns on their investments, these returns will be limited by Regulations, and so those with goals of realizing social benefits, not profits, will see CICs as a worthwhile endeavour.