Often, charities launch new businesses to supplement charitable programs, to maintain a certain level of restricted net assets, or to be independent from government funding or grants. Whatever the case may be, it is imperative for charitable organizations to review the nature of their new businesses and whether they fall within the provisions of s.149(2) of the Income Tax Act (ITA). S.149(2)(a) stipulates that the Minister may revoke the registration of a charitable organization for any reason described in s.168(1) of the ITA or where the organization carries on a business that is not a related business of that charity.
“Related business” is defined in s.149.1(1) of the ITA as a business that is run substantially by volunteers even if the business is not related to the purpose of the charity.
So, what if the charity’s business is run by people other than volunteers, such as employees of the charity? Would the business be considered not to be a related business? For such determination, the CRA sets out its views on the matter in Policy Statement CPS-019. It outlines whether an applicant organization or an existing registered charity is carrying on a related or unrelated business. Pursuant to CPS-019, there are two kinds of related businesses:
- Businesses that are run substantially by volunteers,
- Businesses that are linked to a charity’s purpose and subordinate to that purpose.
If the new business is run substantially by employees of the charity, there is a series of tests you will have to go through to determine whether your charity is carrying on a related or unrelated business. The decision tree is illustrated in Appendix A. Sale of promotional items such as pens, T-shirts, hats, posters and mugs clearly displaying the charity’s name and logo by employees of the charities would be a related business through promotion of the charity and/or the Charity’s objects. However, without the charity’s logo or name, sale of these items would likely be considered to be an unrelated business. Rental of a church’s parking space during the week would be a related business through use of the excess capacity of the parking lot. However, if the rental is during Sunday-morning congregation time, this would no longer be a related business.
Should the organization happen to carry on an unrelated business, it is not the end of the world. The Welch LLP Tax Group can assist in rectifying the situation so that the charity will not be in breach of the law and have its registration revoked. A common solution is to have the charity invest in or establish a separate taxable corporation and have the unrelated business carried on by the newly established taxable corporation.
When you are in doubt, please talk to one of our Welch LLP Tax Group members who can help you to determine whether the charity is carrying on a related or unrelated business as well as the possible need to re-structure the make-up of your organization.
Decision-tree for identifying an unrelated business run substantially by employees of the charity (reproduced from CRA Policy Statement CPS-019)
- Is a particular activity a business carried on by the charity?
- Is the activity commercial in nature? Does the charity derive revenue in consideration for the provisions of goods or services?
- Does the charity intend to profit from the activity? The mere presence of a fee charged to the users of a charitable program does not confirm an intention to profit.
If no to either question above, the activity is not a business.
If yes to both questions:
- Is the income-earning activity simply the sale of donated goods?
If yes: the income-earning activity is not a business.
If no: Is the income-earning activity carried out on a systematic, regular basis?
- If no: the income-earning activity is not carrying on a business.
- If yes: the income-earning activity is carrying on a business.
- Are the business activities linked to the charity’s purpose?
If no: the charity is carrying on an unrelated business.
If yes: Are the business activities subordinate to a dominant charitable purpose?
- If no: the charity is carrying on an unrelated business.
- If yes: the charity is carrying on a related business.