Is Social Enterprise or Community Economic Development considered charitable under Canadian law?

November 23, 2008 | By: .(JavaScript must be enabled to view this email address) Mark Blumberg
Topics: Canadian Charity Law

This entry discusses whether social enterprise, social innovation, social financing or community economic development (CED) is charitable.

The short answer is “it depends”.
The slightly longer answer is that “social enterprise”, “social innovation”, “social financing” or “community economic development” (CED) mean very different things to different people and one needs to determine exactly what the organization will have as objects, what activities it proposes to undertake, what are the intentions of those activities and also is there a “private benefit” (and if so how much), is there a political purpose, and are non-qualified donees being funded, to know whether the organization and activities is charitable.

Craig and Marc Kielburger, children’s rights activists recently wrote in the Toronto Star in an article entitled “Businesses that keep giving back” (http://www.thestar.com/News/article/257322) that:
“Increasing numbers of entrepreneurs are creating businesses designed to give back to their communities. From international fair trade initiatives to local recycling co-operatives, they are turning the field of social action on its head. …  “social entrepreneur” is an umbrella term that can mean so many different things – everything from the founder of an ethical business to the head of an innovative community development program – they are all defined by a desire for social change and the creativity to make it happen.”


In terms of understanding possible definitions of “social enterprise”, “social innovation”, “social financing” or “community economic development” (CED)  I turn to Wikipedia.

Social Enterprise

“Social enterprises are social mission driven organizations which trade in goods or services for a social purpose. Their aim to accomplish targets that are social and environmental as well as financial is often referred to as having a triple bottom line. Social enterprises are profit-making businesses set up to tackle a social or environmental need. Many commercial businesses would consider themselves to have social objectives, but social enterprises are distinctive because their social or environmental purpose is central to what they do.  Rather than maximising shareholder value, their main aim is to generate profit to further their social and environmental goals. ... It could be that the profit (or surplus) from the business is used to support social aims (whether or not related to the activity of the business, as in a charity shop), or that the business itself accomplishes the social aim through its operation, for instance by employing disadvantaged people (social firms) or lending to businesses that have difficulty in securing investment from mainstream lenders.  ...”

Social Innovation

“Social innovation refers to new strategies, concepts, ideas and organizations that meet social needs of all kinds - from working conditions and education to community development and health - and that extend and strengthen civil society.  Over the years, the term has developed several overlapping meanings. It can be used to refer to social processes of innovation, such as open source methods. Alternatively it can be used to innovations which have a social purpose - like microcredit or distance learning. The concept can also be related to social entrepreneurship (entrepreneurship isn’t always or even usually innovative, but it can be a means of innovation) and it also overlaps with innovation in public policy and governance. Social innovation can take place within government, within companies, or within the nonprofit sector (also known as the third sector), but is increasingly seen to happen most effectively in the space between the three sectors.”

Social Financing

“Social finance is an approach to managing money that delivers a social dividend and an economic return.  Social finance includes community investing, microlending, and sustainable business and social enterprise lending. Philanthropic grantmaking and program-related investments also fall under the umbrella of social finance.  These approaches to investment and funding share the focus of stimulating positive social and environmental returns for investors and the larger world.”


Community Economic Development

“Community Economic Development (CED) is action taken locally by a community to provide economic opportunities and improve social conditions in a sustainable way. Often CED initiatives aim to improve the lot of those who are disadvantaged. An aspect of “localizing economics,” CED is a community-centred process that blends social and economic development to foster the economic, social, ecological and cultural well-being of communities. It may form part of an ESCED [Ecologically Sustainable Community Economic Development] initiative.  Community economic development is an alternative to conventional economic development. Its central tenet is that: “... problems facing communities—unemployment, poverty, job loss, environmental degradation and loss of community control—need to be addressed in a holistic and participatory way.”

One of the most frequently cited examples of social enterprise is the Grameen Bank.  Grameen Bank was a for-profit micro-finance community development bank that was started by Muhammad Yunus in Bangladesh.  It has provided many small loans to the poor, especially women, and Yunus and the Grameen Bank won the Nobel Peace Prize in 2006 for his work. It has also inspired many other micro-finance initiatives.  It is also the only for-profit entity to ever win a Nobel Peace Prize!  Over 90% of the shareholding of the bank is held by the millions of poor borrowers. 

Many businesses, either deliberately or not, by their existence and operation are “doing good”.  However, that does not mean that all businesses are charities.  There are so many ways that individuals or businesses can do good that is not within the definition of charity.

As an aside, we should just remember corporate social responsibility.  Companies are no longer talking about the mantra of maximizing shareholder value but are also concerned with the social and environmental impact of their operations.  For some corporate social responsibility is making a donation from a corporation to a charity.  For others it is a lot more and includes the phrase “triple bottom line” which was coined by John Elkington in 1994.  “Triple bottom line” refers to ‘stakeholders’ of a company, not just shareholders.  What is the effect of the company’s operations on others.  In this age of branding doing good and being seen to be doing good also can result in shareholder value – however, that is not the point of triple bottom line.  Triple bottom line is first Fair business practices – such as not using child labour, not exploiting workers, safe work environment, ‘fair trade practices’.  Second, sustainable environmental practices such as reducing energy use, reducing pollution and packaging, and arranging for the corporation to dispose of its own products instead of relying on others to do so.  The third element is profit and there is nothing wrong with having a healthy bottom line, especially if the business has a positive effect on those it deals with and the environment.

To understand the relationship between social enterprise, social innovation, social financing or community economic development (CED) and whether it is charitable it is very useful to review RC4143 “Registered Charities: Community Economic Development Programs”.  RC4143 was prepared by CRA after a consultation process created by the Muttart Foundation brought CRA and those interested in CED to discuss the issues in 1997.  Here is a copy of RC4143 Registered Charities: Community Economic Development Programs  RC4143 sets out the Charities Directorate of CRA’s position on this subject.  If a project fits within what the courts and CRA view as being charitable then it may be possible for the social entrepreneur’s organization to be registered as a charity with all the attendant benefits and restrictions.

A ‘social entrepreneur’ interested in making the world a better place can use a number of different legal vehicles and each has its own advantages and problems.

Sole Proprietorship

It is an easy form to run a business.  Fill out a 1-page form and pay $80 in Ontario to register a business name and you are up and running.  The business registration is valid for 5 years.  You only need yourself.  Although it initially sounds good except for very simple part time local enterprises the sole proprietorship does not have limited liability and the individual who sets up the sole proprietorship is responsible for all debts, claims, losses etc.  A sole proprietorship can do “good” but cannot be a registered charity.

Partnership

A partnership occurs when two or more entrepreneurs enter into an agreement to work together on a business.  Partnership is similar to a sole proprietorship in terms of no limited liability.  Except in certain circumstances, this is probably the worst way to carry on a business or enterprise because you may be personally on the hook for your own actions and those of your partner.  A business partnership can do good but also cannot be registered as a charity.

For-Profit Corporation

Whether it is a federal for-profit corporation (CBCA) or a provincial incorporation (such as Ontario’s OBCA), the corporate vehicle is quick to set up and the legal costs are usually in the range of $1000-$1200 ($500-1000 for legal fees with disbursements of a further $500.)  For-profit corporations can be set up in minutes versus 2-4 weeks for non-profit corporations.  A for-profit corporation has limited liability and therefore the shareholders are not personally liable for the actions of the corporation and the directors are only liable in certain narrow categories of liability (such as not remitting source deductions or environmental contamination).  For-profits offer lots of flexibility in terms of structure and they can retain their earnings and reinvest them or can dividend them out to shareholders or can use other traditional methods such as bonuses to employees.  Unless a restriction is placed in their articles of incorporation a for-profit corporation has all the powers of a natural person and is not restricted to operating within objects, as required generally for non-profits.  For-profits need to file returns each year, however they have none of the restrictions that are placed on charities and can be involved in politics, obviously running a business, they do not need to be concerned with the registered charities obligations and limitations with respect to foreign operations, disbursement quota etc.  A for-profit can do good but also cannot be registered as a charity

Non-Profit Incorporation
A non-profit corporation has limited liability, a board of directors, and members.  It has lots of flexibility - although unless it is a “registered charity” as discussed below it cannot issues official donation receipts.

Non-Profit Incorporation with Registered Charitable Status
There are 83,500 registered charities in Canada. It typically takes 6-12 months to incorporate and obtain charitable status, far longer time than to set up a for profit or non-profit.  The time, energy and cost required can be significant. Another item that some people are surprised about is that for a charitable organization or public foundation you need to have a board of directors with at least 3 arms length.  With a private corporation you can have one person who is the director, officer and shareholder.

In order to be a charity the objects of the corporation need to be charitable.  In the 1891 Pemsel case there were identified four heads of charity namely: relief of poverty; advancement of education; advancement of religion; and other purposes beneficial to the community. The Income Tax Act, Court decisions and positions of the Canada Revenue Agency have over time expanded the definition of what is charitable. For an organization to be a charity, its objects need to be exclusively charitable. Also it cannot undertake any partisan political activities. A charity is also severely restricted in terms of the non-partisan political activities that it can undertake. If the organization’s objects and activities are not charitable it still may be useful to set up a non-profit or for profit limited liability corporation to conduct the activities.

In terms of funding the operation if you are only interested in obtaining Canadian corporate sponsors (as opposed to individuals) you may not need a corporate entity (non-profit) and a charitable registration because some businesses can write off certain reasonable business expenses for promotion, sponsorship etc. and they will not require a donation receipt. If you anticipate only receiving government funding you may not need to be a charity, perhaps being a for-profit or non-profit corporation will be sufficient from the government funder’s perspective.

If however you want your social enterprise to be issuing official donation receipts for contributions then you need to ensure that it fits within the parameters set out in RC4143 Registered Charities: Community Economic Development Programs. 

 


GlobalPhilanthropy.ca was created by Mark Blumberg, a lawyer at Blumberg Segal LLP in Toronto, Ontario, Canada.  If you require legal services with respect to non-profit (tax exempt) organizations or charities in Canada he can be contacted at or at 416-361-1982 x. 237. To find out more about legal services that Blumbergs provides to Canadian charities and non-profits please visit the Blumbergs’ Non-Profit and Charities page at http://www.blumbergs.ca/non_profit.php or http://www.globalphilanthropy.ca

 

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Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.

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