Legislative innovations: Towards a Canada based on choice

MaRS has launched a series of white papers related to promoting social entrepreneurship in Ontario and enabling solutions to complex social problems.

The first white paper was focused on Social Venture Finance and the latest one is on Legislative Innovations. This blog details the content of the Legislative Innovations white paper.

This white paper was prepared by MaRS and Ogilvy Renault LLP with the primary objective of increasing capital directed at the community for delivering social and/or environmental benefits.

It also has two secondary objectives:

  1. to simplify and clarify the legal structures and permitted activities by creating a new form of legal vehicle
  2. to provide a brand for social enterprise, social finance and community benefit, thus providing legitimacy and enhanced profile for such activities.

Federally and in Ontario, there is currently no legal definition of a social venture, social enterprise or community enterprise and those social entrepreneurs operating social ventures have set up under a variety of different legal forms to accomplish their missions.

For MaRS, social ventures include both non-profit, revenue generating social enterprises and for-profit, social purposes businesses.

For this white paper, we recommend the use of the term community enterprise corporation (CEC) for ventures that achieve their primary social or environmental missions using business methods by applying market-based strategies to address social problems.  This definition is based on the work of Richard Bridge and Stacey Corriveau for the BC Centre for Social Enterprise:  Legislative Innovations and Social Enterprise:  Structural Lessons for Canada (February 2009).

In order to examine what could be, we start by examining what is and outline the current legal structure in Ontario and Canada:  for-profit corporations, not-for-profit corporations (NFPs), co-operative corporations and registered charities.  It’s a great primer for those new to the field and a wonderful refresher for the rest of us.

We also explore issues related to the use of a business trust as an intermediary — one of the many workarounds used by those trying to make money and make a difference.

The paper then addresses the rationale for choosing which legal structure is best for your purpose by asking the entrepreneur to consider the underlying nature and intent of profit-making activities of the operation and what the profits will be used for.

We then break down the answers to this question and consider the pros and cons of each structure based on the intention to make profit.  There is a terrific summary on the limits of each structure particularly as it comes to generating income.  It outlines the challenges faced by many and the risks to tax-exempt status if you actually make a profit.  For example, a NFP could lose the tax-exempt status if the “accumulated profits are beyond what the Canada Revenue Agency believes is required to operate the NFP or if such accumulated profits are for the purpose of funding future capital projects”.  Although social entrepreneurs can “find a way around” these challenges, they shouldn’t have to – we want to design a system that actually encourages people to make money and make a difference.

There are several pending updates to legislation in Ontario and Canada, which are outlined in the paper, along with what is expected. One such change has already happened since the publication of this paper.  Thanks to the efforts of our colleagues at Imagine Canada the disbursement quota for charities was recently lifted in the federal budget, an absolute step in the right direction.

We then look to the UK, where they’ve been operating community interest companies (CICs) since 2005 with about 3,500 currently in operation.  There’s a great opportunity to learn from our colleagues there – to find out what worked and what didn’t.  We have done this before, bringing thought leaders from both the UK and the US to Ontario to outline their experience so we can learn from it and accelerate our learning in Canada (see the Social Finance Forum for more information).

Let’s be clear, this is not an importation of the UK system, in fact there are many differences. For example, the UK has a “destination test” to determine where the profits will be directed from the revenue generating activities of charities, something we don’t enjoy in Canada. Rather, this is an attempt to bring the best practices to our social entrepreneurs, modified to meet our needs and reflecting the Canadian experience.

We do the same thing with the US discussing both low profit limited liability corporations (L3C) and B Corporations. If you’re interested in B Corporations (think: a set of ISO standards for social purpose ventures), join us on April 1, 2010 as the Sustainability Leadership Exchange, MaRS and several other partners, bring Jay Coen Gibert, B Corporation founder, to MaRS. Register here.

The paper then discusses program-related investments (PRIs). PRIs are a potential source of funding as we try to enable foundation to use their endowments (not just their grants) to support social purpose work.  See this blog from Causeway Coordinator, Adam Jagelewski for more on this topic.

We then offer an analysis of the pros and cons of the CICs and L3Cs in terms of their ability to attract investment, governance/oversight and implementation in Ontario.

Finally, we end the paper with a recommendation for Ontario and the federal government. An opportunity exists to capitalize on regulatory changes that have taken place in the UK and US and the experience they have gained implementing those changes. Their knowledge can be used as a base to effect change in Ontario that will assist social entrepreneurs to raise the necessary capital to scale their business activities.  Ogilvy Renault LLP and MaRS will present the recommendations in this white paper to the Ontario government and stimulate a dialogue between government leaders and policy makers, members of the social enterprise community in Ontario and those who have lead the way to hybrid corporate legal structures in the UK and US.

To reiterate, this paper is designed to “stimulate a dialogue” and we are pleased to have had the opportunity to conduct due diligence on the options currently available in Ontario for our emerging sector and what other countries have done to simplify the governance and operation of social ventures, provide them a brand and help them attract capital. Our recommended CEC structure may work for you or it may not, but having choices with respect to making money and making a difference should be what Canada’s all about.

Now it’s your turn, let’s hear what you have to say.

If you want to hear more about our work in social finance, social entrepreneurship and how it affects you, come along to our 2010 Information Session on Wednesday March 24. Here at MaRS from 8:30am, it will be jam packed with information and opportunities to get involved. Register today.