Leslie Milton, CPA, CA, LPA, Associate Partner
Social enterprise is becoming a more and more popular tool for non-profit organizations and registered charities. Social enterprises are programs run by an organization to generate income, as well as to achieve social, cultural, and/or environmental goals.
So the question has to be asked: Is it easier to run a social enterprise as a charity or as a non-profit organization (NPO)?
Consider these points:
- A charity can issue donation receipts, but NPOs cannot. Having this ability could be critical if the organization needs to rely on donations to fund start-up costs and operations. Donation receipts are also attractive to donors.
- A registered charity is unable to compensate potential investors, because a charity must operate exclusively for the charitable purposes under which it was established. However, it might be possible to establish the social enterprise as a subsidiary of your organization, which would allow all shareholders to receive dividends, including the founding charity/shareholder. Your lawyer will be a good resource here.
- A social enterprise needs to be established, first and foremost, for non-profit objectives or purposes — such as providing employment opportunities for the mentally ill — and not primarily to make a profit. If you are classified as a charitable organization for income tax purposes, as opposed to a public or private foundation, you can carry-on a “related business”. Otherwise Canada Revenue Agency (CRA) can assess a five per cent (5%) penalty against the business’s gross revenue. It is imperative that a social enterprise initiative is both consistent with charitable objects and with CRA’s rules.
- An NPO cannot be operated for any for-profit purposes. For CRA, the use of any profit is irrelevant. For example, even if you operate a program at a profit and use the proceeds from that program to fund your other programs, this is still considered a for-profit purpose. This makes it difficult to operate a profitable social enterprise within an NPO structure.
So what is the answer? Unfortunately, there is no perfect structure, and the answer varies from organization to organization. As your organization explores the social enterprise revolution you should consult your accounting and legal advisors to be sure you have fully considered the legal, tax, and accounting implications associated with your social enterprise.
It is also very important to understand there is no guarantee of success in establishing a social enterprise. Like any business, without community support, you may not have the funds necessary to start or continue a new initiative.
