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Follow us on TwitterThe House of Commons Standing Committee on Industry, Science and Technology undertook an extensive review of the Canadian Business Corporations Act back in 2010 and recommended consultation on 4 discrete issues, one of which was the rules applicable to incorporation of socially responsible enterprise.
Much of the discussion since has focused on introducing a hybrid corporate vehicle similar to the Community Contribution Company form available in B.C. In a nutshell, these corporations are somewhere in-between a non‑profit and a traditional business corporation. They operate with a community purpose and can have shareholders. They are also subject to an asset lock that is intended to ensure that a majority of the assets are fed back into the community, as opposed to shareholders, upon dissolution.
Sounds great. The third sector has been aching for a way to attract investors. The problem is that these vehicles aren’t really an attractive investment. The asset lock ratio is fixed in the legislation so it does not correspond in any way to the actual risk of the endeavour of individual enterprises. Though there has been a lot of excitement about the introduction of these new corporate forms, they have been around for some years in B.C. with very little uptake.
The truth is that we already have an array of vehicles to house social enterprise – charities, non‑profits and co‑operatives. We have three different corporate forms which at their core are aimed at social good. The real issue is the regulatory environment surrounding charities, non‑profits and co‑ops which stifle social enterprise.
Federally, the major regulatory impediment is the confusing guidance provided by the CRA around tax exempt revenues for non‑profits. The Income Tax Act requires that non‑profits operate for a purpose other than to generate profit. For a long time, the non‑profit sector was under the impression that this meant they could pursue profit making activities to supporting their social mission – in other words a “destinations of profits test” was to be applied. To the surprise of many, the CRA clarified that any intention to generate revenues, even if those revenues were directed to funding primary social objectives, is offside the rules.
Strained budgets means the government is becoming increasingly reliant on social enterprise to fill gaps in social services, yet it is sending mixed messages to the third sector ‑ “we need you to be independent, so get enterprising, but don’t be too enterprising or you may find yourself in hot water”.
A destination of funds test, for one, would go a long way to ease this disconnect.
We have been working closely with the Ontario Nonprofit Network on a submission to the Federal Standing Committee in time for the May 15, 2014 deadline. We will be posting a link to it when it becomes available, so stay tuned.
