Registered charities, except charities designated as private foundations, may run related businesses; however, the Income Tax Act does not define what a related business is except to state that a volunteer-run business is to be considered a related business even if there is no link between the business and the objects of a charity. Canada Revenue Agency (“CRA”) in its Policy CPS-019 “What is a Related Business” states that for charities to run a business that is not completely run by volunteers, the business must be linked and subordinate to the charity’s purposes. The method for determining this linkage is complex and is outlined below. What are business activities? In general, a business involves some form of commercial activity with the intention to earn a profit and CRA in its Policy CPS-019 outlines the criteria that must be examined to determine if an activity is a business. For each activity, you must examine:
- the intended course of action;
- the potential to show a profit;
- the existence of profits in past years; and
- the expertise and experience of the person or organization that undertakes the activity.
Programs run by a charity will remain charitable if, according to CRA, they manifest the two essential characteristics of charity altruism and public benefit. In this regard, activities such as selling donated goods or soliciting donations are not considered to be businesses. Charities that charge fees for programs will also be considered onside if:
- the fee structure is designed to defray the costs of the program rather than to generate a profit;
- the program does not offer services comparable to those otherwise available in the marketplace; and/or
- the fees are set according to a charitable objective as opposed to a market objective.
“Carrying on” a business
“Carrying on” a business occurs when the commercial activity undertaken by the charity is a continuous or regular operation. Given that charities undertake certain commercial activities throughout the year, CRA has clarified in Policy CPS-019 that the following activities would not be considered by CRA to be included in the definition of carrying on a business:
- one-time sponsorship deals;
- fundraising events that have a clear start and end point and that do not recur with such regularity and frequency that they amount to carrying on a business; and
- in most situations, deriving income from investments
Determining if a business is related and subordinate to a charity’s purposes
Even if a charity applies the profits from its business to its charitable activities this does not guarantee that there is enough of a linkage to constitute a “related business”. The nature of the business must be examined to determine whether or not there is a direct connection to the charity’s purposes. In order for a business to be linked to a charity’s purposes it must be:
- a usual and necessary concomitant of charitable programs;
- an off-shoot of a charitable program;
- a use of excess capacity; or
- selling items that promote the charity or its purposes.
Should the business activity fall into one of the above categories, you must then determine whether or not the business is “subordinate” to the charity’s purposes and as a result become a non-charitable purpose of the charity. In order to determine this an analysis of the business activities must be completed by examining, in detail, the following four factors:
- whether or not, relative to the charity’s operations as a whole, the business activity receives a minor portion of the charity’s attention and resources;
- whether or not the business is integrated into the charity’s operations, rather than acting as a self-contained unit;
- whether or not the organization’s charitable goals continue to dominate its decision making; and
- whether or not the organization continues to operate for an exclusively charitable purpose by, among other things, permitting no element of private benefit to enter in its operations.
The above examination will be very extensive and all of the factors will need to be weighed together in order to conclude whether or not the business is “subordinate” If the business is not subordinate, then it is not a “related business”, and revocation of the charity’s registered status is possible. CRA does state however, that it will give most charities the opportunity to either cease the business activities or place them in a separate taxable corporation before revoking their registration. More information on related businesses can be found online at: www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/cps/cps-019-eng.html
By Tanya Carlton
Drache Aptowitzer LLP
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