The Impact of Business Activities on Your Organization
by Brent Randall
If you operate an organization that engages in business activities (which CRA defines as deriving revenues from the provision of goods and/or services), the nature and goals of this business can help determine whether charitable registration is suitable for your group.
Charities are able to engage in business activities in order to raise funds, as long as the CRA’s related business rules are met. These rules require that the business be substantially (which generally means 90%) run by volunteers, and be linked, but subordinate to the charity’s purpose(s). Not for profit organizations can only run businesses that have no intention to earn a profit.[1] As we have written previously, any profits that a not for profit organization attains must be incidental and directly connected to its objectives. Since charities are subject to stricter rules than not for profit organizations, how heavily your group depends on the funds generated from the business should be an important consideration in deciding whether or not to register as a charity.
If your organization can attain funding for its purposes without donors wanting tax receipts in return, such as through user fees, then becoming (or remaining) a not for profit may be the best option. Despite not being able to issue tax receipts for donations like charities, not for profits are still exempt from taxation. They also have more freedom than charities, as charities are restrained by their charitable purposes and activities as well as the annual spending requirements associated with them. Not for profit organizations that choose to incorporate will still be restricted by their relevant corporate law but this also affects charities.
Another option is to create a for-profit business. While this option is beyond the scope of this article, this choice may be suitable for certain situations, as the generation of profits for private individuals does not preclude an organization from fulfilling benevolent intentions.
Some businesses are structured like for-profits, but profit is not their main goal. These kinds of businesses are sometimes referred to as social enterprises. This form of business may strike an appropriate balance between financial certainty and good intentions. These businesses pay taxes on their profits, but if profits are small and put back into the organization, the tax could be minimal. Furthermore, businesses can also donate up to 75% of their income to charity, which would also ease the tax burden. These businesses are afforded flexibility that charities are not, and so this potentially small tax may be worth the trade. Community interest corporations, like those in British Columbia and Nova Scotia (which we have written about previously), are an example of businesses with clear social enterprise goals.
When deciding whether to become a charity or not, organizations need to consider where and how they will be getting the funds to operate. A registered charity’s ability to issue receipts for donations can certainly help, but it also comes with additional responsibilities and restrictions. Each organization will have its own unique strengths and weaknesses when it comes to achieving their goals, and we at Drache Aptowitzer LLP would be happy to help you evaluate your situation to find the most suitable path to take.
[1] A charity running a related business to generate profits for the charity’s use should not be confused with generating profits for the individuals in the charity, which is not allowed.