Not-For-Profit Social Ventures

You have an idea for a business activity that will generate a blend of social and/or environmental benefits and revenues for your organization. You are ready to launch a social venture. Under current legislation in Ontario, there is no legal structure that combines some of the benefits of both the for-profit and not-for-profit worlds. Your organization must carefully consider the current legal environment and existing legal structures and requirements associated with for-profit, not-for-profit, registered charities and co-operative corporations, before you set up your organization in Canada.

If your priority is to achieve scale in your business activities, generating significant service or product revenues for your cause, you will likely rule out a registered charity structure, choosing instead to utilize a not-for-profit organizational structure (“NFP”). NFPs can engage in profit-making activities provided that the activities are compatible with the not-for-profit objects of the NFP, and the profits are used exclusively for promoting its stated goals. Indicators that an NFP may be operating an impermissible profit-making business include the following:

•  operation in a normal commercial manner;
• goods and services are not restricted to members and their guests;
• operation on a profit basis rather than a cost-recovery basis; and
•  the business is operated in competition with taxable entities carrying on the same business. If one of these situations would be the case for your organization, then you may wish to consider another form of incorporation.

Not-For-Profit Corporations

• Incorporated via Letters Patent under theCorporations Act(Ontario) orCanada Corporations Act (federal)*, generally without share capital

Pros: This structure is more commonly used in the social sector and so long as the main purpose of the entity is not-for-profit, it can accumulate excess profits from year to year. NFPs are generally tax-exempt so long as they are organized and operated exclusively for social welfare, civic improvements, pleasure or recreation, or any other purpose except profit. NFPs will lose their tax-exempt status if income is payable to or available for the benefit of members or shareholders, or if the entity has the ability to declare or pay dividends. NFPs are generally free to borrow money and repay principal and interest to lenders.

Cons: The organization cannot issue tax receipts for donations, making it more difficult for NFPs to receive support from potential donors versus registered charities. But NFPs can still accept donations and some organizations receive a significant number of donations from supporters who believe in the particular cause and are willing to forego the tax receipt. At the same time, NFPs cannot attract investment from traditional investors, since distributing earnings would result in the loss of their tax-exempt status. In addition, NFPs are in danger of losing their tax-exempt status if they are too financially successful and their accumulated profits go beyond what the CRA believes is required to operate the NFP or if such accumulated profits are for the purpose of funding future capital projects.

*New legislation entitled theCanada Not-for-profit Corporations Actwill replace Parts II and III ofCanada Corporations Act. Once proclaimed into force (which date is yet uncertain), all new not-for-profit corporations at the federal level will be established under theCanada Not-for-profit Corporations Act, and all existing federal non-share capital corporations that are subject to Part II of theCanada Corporations Actmust apply for continuance under this new statute. Please see”Pending updates to Ontario / Canadian legislation” section of MaRS Discovery District Legislative Innovations white paper for additional information.

References

Bridge, R.& Corriveau, S. (2009). Legislative Innovations and Social Enterprise: Structural Lessons for Canada. BC Centre for Social Enterprise. Retrieved November 10, 2009, from  www.centreforsocialenterprise.com/f/Legislative_Innovations_and_Social_Enterprise_Structural_Lessons_for_Canada_Feb_2009.pdf

Carter, T.S.& Man, T.L.M. (2008).Canadian Registered Charities: Business Activities and Social Enterprise– Thinking Outside the Box.Retrieved August 17, 2009, from www.charitylaw.ca/seminars..html

 MaRS Discovery District. Legislative Innovations. white paper

Canada Revenue Agency. (2001).Bulletin IT-496R Non–Profit Organizations.Retrieved August 17, 2009, from Canada Revenue Agency Website: www.cra-arc.gc.ca/E/pub/tp/it496r/it496r-e.html

CRA, Technical Interpretation 2009-0337311E5

Tags: incorporation, not-for-profits, social-entrepreneurship, social-innovation