What are Canada’s guidelines for business activities by charities, and how do they compare to charitable, fundraising, and investment activities?
Understanding Business Activities for Charitable Organizations in Canada
Charitable organizations (excluding private foundations) are permitted to engage in business activities, which can serve as a significant source of income. Nonetheless, these activities are subject to specific restrictions and must comply with the regulations established by the Canada Revenue Agency (CRA).
Guidelines governing business activities
Provided that it is a related business, a registered charity (excluding private foundations) is permitted to engage in business activities. A related business refers to:
- A business where substantially all of the individuals participating are volunteers, or
- A business that is associated with and dependent on the charitable purpose of the organization.
A business can be classified as a related business if “substantially all” of the individuals participating are volunteers. For instance, suppose a local community theater (run by a charity) employs two full-time staff members, an artistic director, and a marketing manager, along with 25 volunteer ushers, performers, and backstage crew members. In this case, there are 27 people involved in the theater’s operations, and the volunteers represent approximately 93% of the total headcount. Consequently, as most individuals participating in the community theater are volunteers, it can be deemed a related business.
To obtain additional details, please refer to the CRA’s Policy Statement CPS-019 titled “What is a Related Business?”.
Is it connected to a charitable objective?
For a business to be associated with a charity’s objective, it must have a direct correlation to that objective. Four different types of connection or linkage to charitable purposes exist:
- Supplementary business activities that support charitable activities. These activities are essential for the efficient functioning of charitable operations or for enhancing the quality of services provided by the charity. For instance, a community center offers fitness classes and charges a fee for access to the gym to support its charitable goal of promoting healthy living.
- By-product business activities that stem from charitable activities. The charitable operation produces goods or services that can be subsequently sold. For example, an animal shelter makes and sells pet food as a by-product of its charitable activity of caring for animals.
- Excess capacity business activities that utilize the unused resources of a charity. For example, a non-profit daycare center offers its facilities and staff to rent after hours to host children’s birthday parties.
- The sale of promotional items that support the charity or its mission. For example, a breast cancer foundation sells pink ribbon merchandise to raise awareness and support for breast cancer research.
Tip: Organizations planning to establish a “Social Enterprise” should ensure that the regulations concerning business activities are applied to these endeavors.
Comparison to charitable activities
Although numerous activities generate revenue for a charity, merely doing so doesn’t classify the activity as a business activity. Displayed in the following table are a few distinctions between charitable activities and business activities.
| Charitable Activity | Business Activity |
|---|---|
| Charities aim to finance all or a portion of a program’s expenses through fee arrangements. | Businesses devise arrangements to generate income. |
| Charities established fees with a charitable intention, such as taking into account a user’s ability to pay. | Businesses establish fees with a market-driven objective, aiming to remain competitive with over companies. |
| Charities provide products or services to their intended recipients that might not be readily accessible to them through regular market channels. | Business typically provide products or services comparable to others previously existing in the marketplace. |
Comparison to fundraising activities
The act of soliciting donations is not classified as a business activity since donors contribute to a charitable purpose without expecting anything in return.
Most fundraising events, however, are considered business activities as they often possess commercial characteristics. For example, events like concerts, dinners, and sporting tournaments share similarities with for-profit entertainment offerings.
Nevertheless, some events exhibit more features of a fundraising activity rather than a business activity. Furthermore, fundraising events, even if they are considered business activities, may not necessarily be subject to relevant business regulations if they do not qualify as “carrying on a business.” The CRA evaluates each fundraising event on a case-by-case basis. If a charity organizes similar events repeatedly throughout the year, the CRA may evaluate them collectively and determine that their recurring nature qualifies as carrying on a business.
| Fundraising Activity/Event | Business Activity |
|---|---|
| Volunteer contribute a substantial amount of work, and numerous supplies are donated. | Work is carried out by compensated employees, and materials are procured through purchase. |
| The activity usually appeals to, or serves, supporters, who are aware of the charitable purpose and the work carried out by the charity. | The activity usually appeals to customers who evaluate the services from a commercial perspective and seek the best value at the most reasonable price. |
| Fundraising events have a distinct start and end ponit. | Business generally operate continuously or and ongoing basis. |
| Charities often hold various types of fundraising events that do not usually repeat throughout the year. | Businesses tend to host identical or nearly identical event on a frequent and regular basis throughout the year. |
Comparison to investment activities
Charities frequently generate investment income, whether from excess funds, endowments, or other assets designated to support charitable endeavors. Although both business and investment activities generate income from assets, investment activities are often passive in nature, involving asset ownership.
Outlined in the following table are several distinctions between investment activities and business activities.
Unlike investment activities, earning income from business ventures necessitates an active role in operating the enterprise.
| Investment Activity | Business Activity |
|---|---|
| Assets including saving accounts, Guaranteed Investment Certificates (GICs) bonds, and other securities are usually involved. | Involves assets such as machinery, equipment, buildings, and other productive resources used to create goods or services that are sold. |
| Ownership, such as receiving interest or dividends, leads to the generation of income. | Generates income through trading assets actively or operating and exploiting assets creatively to create goods or services that are sold. |
| Passive income, such as receiving interest or dividends, is earned. | Active participation in business operations is necessary to generate income. |
Conclusion
Understanding whether your charitable organization can operate a business and ensuring it complies with CRA regulations requires careful analysis of your specific circumstances. The distinctions between related businesses, fundraising activities, and investment income can be complex, and missteps could jeopardize your charitable status. If you’re considering launching a social enterprise, expanding your revenue streams, or simply need clarity on what activities are permissible for your organization, professional legal guidance is essential.
At Northfield & Associates, we specialize in helping Canadian charities navigate the intricate rules surrounding business activities and CRA compliance. Our team understands the nuances of what constitutes a “related business” and can provide strategic advice tailored to your organization’s mission and goals. Whether you’re establishing a new venture or reviewing existing operations, we’re here to ensure your charity operates within the law while maximizing its impact.
Don’t leave your charity’s compliance to chance. Contact us today
At Northfield & Associates our expert teams guidance on compliance requirements. Our team understands Canadian charity law and can help ensure your organisation follows proper procedures.
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Frequently Asked Questions
Canadian charities often ask us about running businesses and following CRA rules. Here are answers to common questions about charity business activities and legal requirements.
Can a charity own a for-profit business in Canada?
Yes, but only if it’s a “related business.” This means the business must be run mainly by volunteers or directly support the charity’s goals. For example, a job-training charity could run a café where clients learn work skills. Owning an unrelated business could risk your charitable status, so get legal advice first.
Can a for-profit business own a nonprofit?
No. Nonprofits and charities don’t have owners like regular businesses. They’re controlled by a board of directors who must act in the organization’s best interest. However, a for-profit business can donate to a charity, partner with one, or have representatives on the board.
What is the difference between a charity and a nonprofit in Canada?
All charities are nonprofits, but not all nonprofits are charities. Charities must have specific purposes like relieving poverty or advancing education, and they can issue tax receipts. Nonprofits include sports clubs and social groups but cannot issue tax receipts. Both types don’t distribute profits to members.
Is it legal for charities to run commercial businesses?
Yes, but only “related businesses.” The business must be run mostly by volunteers or directly support the charity’s purposes. For example, a hospital charity can run a volunteer-operated gift shop. Running an unrelated business could cause the charity to lose its status.
Can a charity legally become a business?
A charity cannot become a for-profit business and keep its charitable status. To become a business, it must give up its charitable registration, lose its ability to issue tax receipts, and pay regular taxes. However, charities can operate business activities alongside their charitable work if those activities are related to their mission.
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