Written on February 24, 2015 – 9:19 am | by Katie Ionson
Two interesting developments occurred recently that impact the not-for-profit legal sector in Ontario. Although neither results in immediate alterations to the law, they signal possible changes which may be relevant to donors involved in long term, strategic giving.
The first of these developments is the Ontario government’s recently released report on the prospect of introducing social enterprise legislation in Ontario. In the context of the report “social enterprise” refers to a dual purpose corporation – one that would have an overriding social purpose but also be permitted to engage in for-profit activities (e.g. issuing capital to investors to raise funds, carrying on a profitable business to fund activities related to a social purpose).
Legislation providing for this type of entity could be a positive development for the not-for-profit sector. Not-for-profit organizations, including charities, are currently unable to issue shares and distribute dividends, and therefore cannot attract equity investors. There is also general uncertainty surrounding when and to what extent such an organization can engage in for-profit activities without losing its not-for-profit status. Legislation of this type is already in place in some Canadian provinces (B.C. and Nova Scotia) and the U.K.
Overall, the report favours the introduction of social enterprise legislation and contains suggestions for effective legislation. A few of the highlights include:
- Organizations should be able to raise share capital from investors seeking a financial and social return. The legislation should provide the opportunity for other stakeholders (e.g. founders, employees) to acquire equity in the organization.
- There should be constraints on the distribution of assets/profits to investors to protect the organization’s social purpose, although profit-sharing should be permitted.
- Organizations should be required to prepare an annual “social benefit report”, which would include information regarding the organization’s activities in support of its social purpose. This report would be approved by the directors, circulated to shareholders and publicly available.
The second development is less positive. In a recent technical interpretation, the CRA was asked whether a B.C. social enterprise could qualify as a non-profit organization for tax purposes if it elected to distribute all of its profits to charities, rather than investors. The CRA responded that even where the articles of the social enterprise stipulate that all profits will be contributed to charity, the entity will not qualify as a non-profit for tax purposes. This is because, in the CRA’s opinion, the choice of incorporating legislation indicates that the entity is organized for a for-profit purpose. Under the Income Tax Act, non-profit organizations must be organized and operated exclusively for non-profit purposes.
 The report can be accessed here: http://www.ontariocanada.com/registry/view.do?postingId=17642&language=en. The government has asked for the public’s feedback on the report. Comments are due May 4, 2015.
 Referred to as a “community contribution company”.
 2014-0540031E5. Not-for-profit organizations (e.g. those incorporated under not-for-profit legislation) will not necessarily qualify as non-profit organizations for tax purposes. The Income Tax Act sets out a separate test that focusses on the operations of the organization.