2. Overview
1. Social Enterprise – What is it?
2. Legal Structures Available and rules that apply
3. New Ontario Not-For-Profit Corporations Act –
what impact does it have on your organization
and on the potential for your organization to
embark on social enterprise?
3. 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
4. Social Enterprise
Social enterprises are revenue-generating businesses
with a twist. Whether operated by a non-profit
organization or by a for-profit company, a social
enterprise has two goals: to achieve social, cultural,
community economic or environmental outcomes; and,
to earn revenue. On the surface, many social enterprises
look, feel, and even operate like traditional businesses.
But looking more deeply, one discovers the defining
characteristics of the social enterprise: mission is at the
centre of business, with income generation playing an
important supporting role. (Centre for Community
Enterprises)
5. The Centre for Community Enterprises
A social enterprise is an enterprise, owned at
least in part by a non-profit organization, that is
using entrepreneurial methods to accomplish
social goals and providing its profits to its
owner(s) for use in continuing their core
missions.
6. The Centre for Community Enterprises
(Cont’d)
A social enterprise applies an entrepreneurial approach
to addressing social issues and creating positive
community change
or
A social enterprise is a revenue-generating business with
primarily social objectives whose surpluses are
reinvested for that purpose in the business or in the
community, rather than being driven by the need to
deliver profit to shareholders
7. From the U.K.
• Social enterprise has six defining characteristics:
– Having a social purpose or purposes.
– Achieving the social purpose by, at least in part, engaging in
trade in the marketplace.
– Not distributing profits to individuals.
– Holding assets and wealth in trust for community benefit.
– Democratically involving members of its constituency in the
governance of the organization.
– Being independent organizations accountable to a defined
constituency and to the wider community.
8. What is Social Enterprise?
• An entity that combines business-like activities
with a social purpose
– a not-for-profit that carries on business activities to
generate revenue
– a business with social/cultural/environmental
objectives
– a specific charitable program or venture that fulfills a
social purpose
9. Structures
1. Business Corporations,
2. Tax-exempt non-share capital corporations
(“non-profits”),
3. Registered charities, or
4. New Hybrid entities (CCC’s).
10. Business Corporation
• Typically incorporated as a business corporation
with shareholders
• Taxable
– may be possible to operate in ways that reduce or
eliminate tax payable
• Profits/revenues used for social aims may/may
not be distributed to shareholders
– shareholders can be not-for-profits/charities
11. Business Corporation (cont.)
• Operates with triple bottom line/sustainable
principles
• Provides greatest flexibility in operations
12. Not-for-Profit
• Typically incorporated as non-share
corporation/society
– members not shareholders
• Tax exempt if meet Income Tax Act definition in
ss. 149(1)(l)
• Currently CRA is questioning whether such
entities can intend to make a profit
13. 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.
14. 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
15. CRA Interpretations
• A number of CRA technical interpretations
issued in 2009 appear to apply a stricter
definition of “non-profit” than found in case law
– profits must be “generally unanticipated”
– “where the organization 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” [emphasis added]
16. Recent CRA Commentary
• Profits can be earned if they are incidental and
arise from activities that are undertaken to meet
the organizations not-for-profit objectives
• Earning profits to fund not-for-profit objectives is
not itself a not-for-profit objective
17. Recent CRA Commentary (Cont’d)
• Capital contributions and incidental profits
should be accumulated only if to fund specific
capital projects or to meet operating costs
• Maintaining operating reserves or bank accounts
required for ordinary operations is okay –
incidental income on such accounts or reserves
is also okay
• Limited fundraising is also okay – cannot
become a “purpose” of the entity
18. Ontario Tax Conference (2011)
• Questions for CRA re Audit of NPOs:
– Many tax practitioners have non-profit organizations
(NPOs) as clients, and many of these clients are
undergoing an audit. Can you discuss this project?
– Can you provide some more information on what the
next steps will be on this issue?
19. CRA Response
• Research project that is being used both as an
educational tool and as a means to gather
intelligence about a particular sector.
• In cases of serious non-compliance the CRA will
re-assess.
• Over 3 fiscal periods CRA will examine
approximately 1440 files to determine the future
of the NPO compliance program.
20. CRA Response
• NPO can earn incidental profits.
• NPO can maintain reasonable operating
reserves.
• NPO should not operate a business in
competition with for profit businesses.
• NPO should not be used for personal or tax
planning purposes.
21. CRA NPO Initiative - The Status
• Project of the CRA to review a relatively large
sample of NPOs with respect to their compliance
with S.149(1)(l) of the Income Tax Act (the "Act")
• Auditing about 1400 Non Profit Organizations
• Educations letters issued in first two years but
stopped now – audits will continue
notwithstanding
22. Implications for Social Enterprise
• Social entrepreneurs used tax exempt non share
capital corporations to pursue social enterprise
• Tax exempt NPO’s were thought to be less
constrained by rules under the Income Tax Act
than charities
• Flexibility to earn a profit however may be
problematic today
23. Implications for Social Enterprise
• Social enterprises often founded in
entrepreneurial strategies to achieve social
benefits
• Consistent with 149(1)(l) or not?
• Charities may have greater flexibility to earn
profits from related businesses to support
charitable purposes than NPO
24. Implications for Social Enterprise
• Surpluses generated from activities directly
linked to non profit objectives (i.e. community,
recreation or social welfare purposes ) may be
okay if used to expand the activities of the entity
but otherwise any “profit” may taint the NPO and
make it taxable
• Uncertainty requires consideration of other
structures.
25. Charities
• All charities must be non-share capital and
cannot distribute income to members
• Charities can earn revenue and operate profit
making activities provided these activities are
related to their otherwise charitable purposes
26. Charities and Related Business
• Limited entitlement to carry on related business
– only charitable organizations and public foundations
– not private foundations
• The term “related business” is not specifically
defined
27. Charities and Related Business
• Section 149.1 does provide that “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;
• Substantially all means ≥ 90%
28. What is Related Business?
• No other statutory reference
• Case law:
– Alberta Institute on Mental Retardation v R
– Earth Fund v Minister of National Revenue
– House of Holy God v A.G. of Canada
29. What is Related Business? (Cont’d)
• Case Law ultimately rejected the destination of
funds test in Canada but hasn’t clearly stated
what fits
• CRA Guidance CPS-019 outlines Current
Charities Directorate view
30. CPS-019 What is a Related Business?
• Broad and flexible interpretation
• Public charities can raise revenues from
charitable activities and/or related business
activities
31. CPS-019 What is a Related Business?
(Cont’d)
• So what is a related business?
– it is a business activity that is both linked to a charity’s
purpose and subordinate to that purpose
• First question – is it a charitable or business
activity?
• Second question – Is it linked and subordinate?
32. Nature of Activity
• 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
33. Nature of Activity (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
34. Linked and Subordinate
• CRA says that a related business must be linked and
subordinate to a charity's charitable purposes.
• 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
– (iii) A use of excess capacity
– (iv) The sale of items that promote the charity or its
objects
35. What is subordinate?
• 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
36. What is subordinate? (cont’d)
– (iii) The organization's charitable goals
continue to dominate its decision-making
– (iv) 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
37. Implications for Social Enterprise
• Charities can pursue social enterprises and earn
surpluses which are exempt from tax provided
the enterprise is a related business
• Charities have operated related businesses for
years
• If enterprise is related the charitable structure
may be more flexible than a non profit
organization
38. Community Contribution Corporation
(B.C.)
• First seen in U.K. (CIC’s) and U.S. (L3C’s)
• Possible new hybrid corporation under the
Business Corporations Act (B.C.)
• Combines socially beneficial purposes and a
restricted ability to distribute profits to
shareholders within traditional business
corporate law framework
39. British Columbia Community
Contribution Corporation (“CCC’s”)
• Similar to UK model
• Asset lock
• Amendments to the Business Corporations Act
• Must have a community interest purpose
• Special accountability provisions
• No public regulator
40. CCC’s
• Bill currently before BC legislature to create
‘hybrid’ social enterprise structure
• Creates a for-profit business with entrenched
social purposes – no special tax status at this
point
• Designed to attract socially conscious
investment
41. CCC’s (cont.)
• Cap on shareholder dividends or floor on
distributions to purpose (or both)
• Limited return to shareholders on dissolution
• Taxable, but potential for investment tax credit
• Could be used as a subsidiary of a charity to
carry on an unrelated business
42. Implications for Social Enterprise
• Uncertain
• Surpluses earned in a CCC would be taxable
• Social enterprise in a CCC may be able to
attract investors
• Difficult to know how much this structure will be
used until introduced
• Will Ontario introduce a similar entity??
43. NOT-FOR-PROFIT CORPORATIONS ACT,
2010
• Royal Assent received October 25, 2010
• In force day to be named – (July 1, 2013?)
• Draft regulations - fall 2012?
• Guides
• Repeals Part III of Corporations Act (Ontario)
44. Implications for Social Enterprise
• ONCA states that nor for profit corporations can
engage in commercial activities where the profits
are reinvested in the corporations not-for-profit
purposes
• Question of tax exemption is not impacted by
this because it is determined by rules of the
Income Tax Act
• All organizations must come into compliance
45. APPLICATION
Ontario Corporations without share capital
– Previously under the Corporations Act
(Ontario)
– Letters Patent – Ontario
– Ministry of Government Service
– Not Canada Corporations Act, Industry
Canada
46. TRANSITION
• Automatic
• No action to continue
• ONCA applies the day the statute is named into
force (July 1, 2013?)
• Governance documents three year grace period,
then deemed amended to the extent necessary
47. RECOMMEND AMEND GOVERNANCE
DOCUMENTS
• Effect of deemed compliance can be unclear
– Example, member delegate voting. ONCA says at
least one class must vote
– Deemed compliance, does every member of all class
now vote? Are the delegates a class of members?
• Gain certainty by amending by-laws and
amending and restating articles
48. KEY DIFFERENCES IN ONCA
1. Powers of a Natural Person
2. Public Benefit Corporation
3. Member rights strengthened
4. New audit requirements
5. Delegate voting not allowed
6. Directors need not be members
49. ULTRA VIRES
• Formerly limited to objects
• Powers of a natural person
• Are purposes necessary?
– To be listed in the corporations’ Articles
– Registered charity status (Income Tax Act)
50. WHAT IS A PUBLIC BENEFIT
CORPORATION?
• A charitable corporation; or
• A non-charitable corporation that receives more
than $10,000 in one financial year from
– any level of government; or
– gifts from persons other than members, directors,
officers or employees of the corporation
• Effective at AGM
51. CONSEQUENCES OF PUBLIC BENEFIT
CORPORATION
• Stricter audit requirements
• On wind-up must distribute assets to a similar
Ontario corporation
• Not more than 1/3 of directors can be employees
52. CHANGES TO MEMBERSHIP CLASSES
• Non-voting members vote & class votes on
fundamental change & changes to membership
classes
• Consider:
– dilution of membership voting rights
– limiting who can become a member
– categories of supporters where need non-
voting category
53. AUDIT REQUIREMENTS
• Ontario thresholds (Public Benefit):
– Audit required unless members pass an extraordinary
resolution
– No audit required where gross annual revenues are
less than $100,000
– Engagement where gross annual revenues are
between $100,000 and $500,000
– Audit is mandatory where gross annual revenues are
above $500,000
54. STEPS - OVERVIEW
• Review current governance documents
• Draft by-laws
• Draft restated articles
• Obtain director and member approval
• Submit to MGS, CRA and PGT
55. REVIEW CURRENT GOVERNANCE
DOCUMENTS
• Consider existing by-law and letters patent
• What is working?
• What needs to be changed?
• What is possible under the ONCA?
56. ARTICLES
• Replaces letters patent
• Corporation name, purposes, location of
registered office, prescribed information
• Restate articles if want to change or comply with
ONCA
• Must conform with ONCA (not just deemed
compliance)
57. ARTICLES (Cont’d)
• Articles of Amendment
• Special resolution (change name, provisions
regarding members, number of directors,
purposes, dissolution clause, notice to
members, voting method)
• class votes (membership rights)
58. BY-LAWS
• Will need to amend to conform with ONCA
• Effective once passed by a resolution of the
directors
• Members pass at next meeting to remain
effective
• Can pass before the ONCA, to be effective on
the date that the ONCA comes into effect
59. PUBLIC GUARDIAN AND TRUSTEE
• There remains uncertainty as to whether the
Public Guardian and Trustee will review
applications to establish a charity under the
ONCA – likely not
• However PGT will likely review documents filed
to amend or change a charity’s incorporation
documents (not bylaws) – The PGT has
particular interest in the charitable objects
60. REGISTERED CHARITIES
• Must file new articles, by-laws with CRA
• Question whether current charitable purposes
need updating
• If changing, CRA may request activities
description
61. NEXT STEPS:
Do you have membership class changes to make
before July 1, 2013?
• If yes, act as soon as possible to pass
documents before July 1, 2013
• If no, recommend governance review – articles
and by-laws
62. What is Social Enterprise?
• An entity that combines business-like activities
with a social purpose
– a not-for-profit or charity hat carries on business
activities to generate revenue
– a business with social/cultural/environmental
objectives
– a specific charitable program or venture that fulfills a
social purpose
63. Conclusion
• There is lots of scope for organizations to pursue
social enterprise under the rules
• Careful consideration has to be given to
structure used for social enterprise given the
myriad of rules that apply
• All organizations must come into compliance
with the ONCA
64. Thank you!
Susan M. Manwaring
smanwaring@millerthomson.com
416.595.8683
