Not-For-Profits Making Profits

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"Not-For-Profits Making Profits: Legal Structures for Social Enterprises" was a presentation by Margaret Mason and Michael Blatchford (Bull, Housser & Tupper, LLP) at an event hosted by Enterprising Non-Profits (enp) on January 19, 2011, in Vancouver, BC. Social enterprises are defined as businesses owned or operated by a non-profit organization. There are different legal structures that social enterprises can operate under, and the possibility of new ones in the future (like BC's proposed Community Interest Corporations, or CIC's).Enterprising Non-Profits (enp) is a program that supports Social Enterprises. Its website(www.enterprisingnonprofits.ca) provides extensive resources for social enterprises across Canada.

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<ul><li><p>Not-for-Profits Making Profits:Legal Structures for Social Enterprise</p><p>Presented by:Margaret Mason and Michael BlatchfordJanuary 19, 2011</p></li><li><p>Overviewwhat do we mean by social enterprise?vehicles: for-profit corporation, not-for-profit corporation, charityrules for for-profit corporationsrules for not-for-profit corporationsrules for charities</p></li><li><p>What is Social Enterprise?not a term of artan entity that combines business-like activities with a social purposea not-for-profit that carries on activities to generate revenuea business with social/cultural/environmental objectivesa program or venture that fulfills a social purpose</p></li><li><p>What are the Possible Vehicles?for-profitbusiness corporationtaxablenot-for-profitnon-share corporation (society)tax-exempt in certain circumstancescharitynon-share corporation (society)tax-exemptstrict rules for business activities</p></li><li><p>For-Profit Corporationtypically incorporated as a business corporation with shareholderstaxablemay be possible to operate in ways that reduce or eliminate tax payableflexible ownership and minimal regulation</p></li><li><p>For-Profit Corporation (contd)profits/revenues may be used for social purposes if shareholders agreeshareholders can be not-for-profits/charitiescan operate with triple bottom line/sustainable principles provides greatest flexibility in operations</p></li><li><p>Not-for-Profit Corporationtypically incorporated as non-share corporation/societymembers not shareholderstax exempt if meet Income Tax Act definition of non-profit organizationcurrent CRA position is problematicnot supported by case law</p></li><li><p>Non-share vs. non-profitprovincial and federal legislation allows for the incorporation of non-share corporations a corporation without shares and without ownersthe mythincorporation as a non-share corporation = tax exempt statusthe realitythe organization must meet the definition of non-profit in the Income Tax Act to be tax exempt</p></li><li><p>NPO Tax Exemptionto qualify for the tax exemption, the organization:cannot be a charity (or eligible for charitable registration;must be organized and operated exclusively for social welfare, civic improvement, pleasure, recreation or any other purpose except profit; andcannot distribute income to members.</p></li><li><p>What does this mean?social welfare means providing assistance to disadvantaged groups civic Improvement includes enhancement of value or qualify of community or civic lifepleasure or recreation something fun!any other purpose except profit the catch all for organizations operated for other than commercial reasons</p></li><li><p>CRA View - When can a non-profit earn a profit?CRA Interpretation Bulletin IT-496R some earning of surplus revenue (i.e. profit) is generally permittedas long as use of resources is reasonable andas long as excess income is not greater than reasonable needs of organizationincome from investments generally permitted</p></li><li><p>The Lawrevenue generated which is surplus to expenses is acceptable if utilized for the non-profit purposes of the organizationGulf Log SalvageGull BayLIUNACanadian Bar Insurance AssociationBBM Canada</p></li><li><p>Recent CRA Interpretationsa number of CRA technical interpretations issued in 2009 appear to apply a stricter definition of non-profit than found in case lawprofits must be generally unanticipatedwhere 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]</p></li><li><p>Recent CRA Interpretations (contd)profit must be ancillary and incidental to the purposes of the organizationcannot intentionally earn a profit to finance future capital projectscontracts where there is a mark-up will be considered to be intentionally profitable which could jeopardize tax exemption</p></li><li><p>Non-profits: the bottom lineCRA appears to be applying a restrictive view of the definitionnot supported by existing case law which provides thatrevenue surplus to expenses is acceptable if:incidental to purposesnot using social purpose as a cloak to avoid paying taxreserves are reasonable in relation to needsthe CRA appears to have an audit initiative in this area</p></li><li><p>Charities and Business Activitiescharities can be non-share corporations, trusts or unincorporated association and in all cases the charity cannot distribute any of its assets to its memberscharities can conduct business activities provided these activities constitute a related business as defined in the Income Tax Act</p></li><li><p>Charities and Business Activities (cont.)only charitable organizations and public foundations can carry on related businessesprivate foundations are prohibited from doing so</p></li><li><p>What is a Related Business?is the activity within the scope of the charitys purposes in its constitutionif not, cannot conduct the activity without amending constitutionis the activity a charitable activity? (charitable activity can generate revenue)if yes, it is a charitable activity and not a business activity</p></li><li><p>What is a Related Business? (cont.)is the activity a business activity?is there an intention to make a profit?is there a potential to make a profit?is it a commercial activity?</p></li><li><p>What is a Related Business? (cont.)if yes, is the business activity related to the charitable purposes of the organization?if not, charity cannot perform activityif yes, then charity can perform business activity within certain limitations</p></li><li><p>Two Types of related businessa business that is substantially run (at least 90%) by volunteers; ora business that is linked and subordinate to one or more of the charitable purposes of the charity</p></li><li><p>Linked and Subordinatethe four types of "linkages" that CRA recognizes are as follows:a usual and necessary concomitant of charitable programshospital cafeteria or parking lotbook store at a university</p></li><li><p>Linked and Subordinate (cont.)an off-shoot of a charitable programsale of a popular church choirs Christmas CDa use of excess capacityuniversity renting its dorms during summer months</p></li><li><p>Linked and Subordinate (cont.)the sale of items that promote the charity or its objectssale of coffee mugs and t-shirts bearing the charitys name and logo</p></li><li><p>Linked and Subordinate (cont.)the factors which will be evidence that a business is subordinate are:relative to the charity's operations as a whole, the business activity receives a minor portion of the charity's attention and resourcesthe business is integrated into the charity's operations rather than acting as a self-contained unit</p></li><li><p>Linked and Subordinate (cont.)the organization's charitable goals continue to dominate its decision-makingthe organization continues to operate for an exclusively charitable purpose by, among other things, permitting no element of private benefit to enter into its operations</p></li><li><p>An unrelated Businesscharities that carry on an unrelated business risk their charitable registration the usual solution is the creation of a wholly owned subsidiary corporationa for-profit corporation owned by the charity to carry on the business activity which will donate proceeds up to the parent charitytaxable, but minimized through donation credit</p></li><li><p>Community Interest Corporationshybrid vehicle proposed by BC Minister of Financenot yet availablewould create a for-profit business with entrenched social purposesmay attract socially conscious investment </p></li><li><p>Community Interest Corporations (cont.)cap on shareholder dividendslimited return to shareholders on dissolutionpotential for investment tax creditcould be used as a subsidiary of a charity to carry on an unrelated business</p></li><li><p>Conclusioncharities have the least flexibility and the most restrictive rulesnon-profits have traditionally failed to file required tax returns (even when tax exempt) and ignored requirements this cannot continuegreatest flexibility and fewest restrictions in a business corporationwhile taxable, in many cases and certainly in start-up phase, will not have taxable income</p></li><li><p>Contact InformationMargaret Mason 604-641-4905mhm@bht.comMichael Blatchford604-641-4854mpb@bht.comThe information presented in these slides sets out general principles and issues only and should not be used in place of specific legal advice.</p></li></ul>