Not-For-Profit – Hot Topics 2 of 4
An area of rapid growth in Canada in the not-or-profit sector is Social Enterprise. This is defined as an undertaking that generates revenue in a business-like activity that has been set up to support or accomplish a social or beneficial purpose.
Often NPOs, facing reduced funding, and lower donation or membership levels, are considering revenue generating activities as a means of accomplishing their mission. At first glance, a social enterprise seems like an attractive opportunity for NPOs to seek new mechanisms to pursue their social good while easing their independence on the generosity of others. The reality for NPOs is, of the 3 core sources of revenue: funding, donations and earned income, only earned income has the potential to grow.
One challenge NPOs face in considering a social enterprise is that, historically, they have focused on generating a net social return for their efforts. They have not, however, typically focused on generating a financial return. This adjustment to their mindset is not easily done. A social enterprise is seen as a means to develop a model that provides a blended return i.e. both social and financial.
Examples of social enterprises include:
Habitat for Humanity ReStore: The Charity runs a retail operation for surplus building supplies. Proceeds go back to Habitat to support new home builds for low income families.
St. John’s Bakery: Un-incorporated bakery run by a Charity. They provide employment and job skills to unemployed, mentally challenged and immigrants. http://www.stjohnsbakery.com/
A-Way Express Courier – Courier service. They have been in business for 60 years and use public transportation to deliver packages instead of private vehicles. http://www.awayexpress.ca
There are 4 ways to structure the social enterprise.
- Program of the Registered Charity – This is run within the mandate and operations of the Charity and is not set up as a separate entity. There is a benefit that the activity is tax exempt and the organization can issue tax receipts for donations of funds received.
- Program of the Not-for-profit – This is run within the mandate and operations of the NPO and is not set up as a separate entity. There is a benefit that the activity is tax exempt, however the NPO cannot issue tax receipts, as they are not a registered charity
- For Profit entity – An incorporated entity is established either as a standalone or subsidiary of the organization. The organization owns the shares of the for profit entity and therefore has a controlling interest in it. That entity would pay income tax.
- Hybrid entity – Available in BC and Nova Scotia and being considered by Ontario, this is a taxable entity that combines private investment and social enterprise. There are limitations on the returns available to investors.
Care needs to be taken when NPOs and Charities are looking to get into profit generating activities i.e. taxable revenue generating streams. For registered charities, the activity must align and support the mission of the organization. You are encouraged to speak with CRA; they will provide feedback and preapproval of the activities you can undertake. If you are not aligned with your mission and have profitable activities, there is the risk of sanctions or revocation of the organization’s registration. If you are a not-for-profit, but not a registered charity, you cannot operate with the purpose of generating profits or compete with for-profit businesses.
With 20 years of experience, Christa Casey has become an expert in auditing not-for-profit organizations. In January 2010, Christa was appointed as Welch’s Director, Not-for-Profit Sector. Prior to this, Christa was a Quality Assurance Manager. Her previous and current positions require a high level of technical competence while staying informed of all developments in accounting and auditing standards.
Garth Steele, CPA, CA – Audit & Indirect Tax Partner
With over 20 years of experience as a Partner at Welch, Garth has an exhaustive list of Not-for-Profit audit experience. In addition to auditing NPOs, Garth’s forte is Commodity Taxes (GST, HST, PST) and Payroll Taxes (CPP, EI, EHT, WCB). For the past 20 years, Garth has been a tutorial leader and lecturer for the CPA Canada In-Depth GST Course, as well as an instructor for CPA Ontario’s annual Professional Development program.