Allowing Charities to "Do More Good" through Carrying on Unrelated Businesses

By Larre, Tamara | Canadian Journal of Nonprofit and Social Economy Research, Spring 2016 | Go to article overview

Allowing Charities to "Do More Good" through Carrying on Unrelated Businesses


Larre, Tamara, Canadian Journal of Nonprofit and Social Economy Research


INTRODUCTION

Canada's tax treatment of entities combining for-profit and nonprofit goals has been criticized as falling behind the social enterprise (SE) movement (Canada's National Advisory Board to the Social Impact Investment Taskforce [CNAB], 2014; Hayhoe & Valentine, 2013). In Canada, the taxation issues surrounding SEs in general have been largely unexamined by academics, and the literature coming out of the United States has been divided on the issue of their appropriate tax treatment (Malani & Posner, 2007; Mayer & Ganahl, 2014). This article endeavours to address the narrower question of whether the restrictions on commercial activities carried out by charities should be changed in order to allow charities to more easily carry on a SE and, if so, then how.

The vast majority of Canadians view charities as making important contributions to quality of life (Lasby & Barr, 2013). As governments have provided fewer services in recent decades, charities have increased their role in providing public goods and services (Burrows, 2009). The federal government has encouraged this through increasing tax incentives, such as the first-time donor tax credit and favourable tax treatment for certain donations of capital (Canada, Department of Finance, 2013, 2015). Although many charities already see themselves as operating a social enterprise (Lasby, 2013), their ability to do so is restricted under the Income Tax Act. Charities could contribute even more to society with additional sources of funding, such as through successful business operations.

Although governments have recently encouraged donations to charities through changes in tax legislation, charities are very heavily regulated and have, in recent years, been subject to intense scrutiny. For example, the previous federal government appeared to have stepped up its audits of charities, particularity where it viewed the charities as carrying out a political agenda (Floyd, 2015). An argument to allow charities greater freedom in their operations conflicts with this suspicious view of charities, and it would therefore seem unlikely that charities will be given carte blanche to enter into the economic mainstream. On the other hand, the recognition that the role charities play is important to society through favourable tax changes indicates a willingness to support charities. This article recognizes the complex situation of governments, as both beneficiaries and regulators of charities, and proposes that current restrictions be loosened, but along with safeguards to protect against the negative implications that are associated with charity-run businesses.

The article proceeds by reviewing the current restrictions on the ability of charities to carry on a business, followed by a policy analysis. Drawing on Canadian and U.S. literature and industry-led reports, the article concludes that there are good reasons to clarify and relax these restrictions, based on the ability of charities to make positive contributions to society. At the same time, the literature has identified some concerns with permitting charities to carry on a business. This article identifies core policy objectives underlying these concerns and recommends measures that can help to address them. It also describes and evaluates a number of policy options for implementing these measures. This analysis leads me to conclude that all charities except private foundations be permitted to operate small businesses that are disclosed to donors.

CURRENT IMPEDIMENTS TO CHARITIES OPERATING A BUSINESS

Registered charities are offered two important income tax benefits under Canada's Income Tax Act (ITA, 1985): an exemption from tax (ITA, 1985, s.149(1)(e)), the ability to issue receipts to entitle donors to a tax credit (in the case of individuals; ITA, 1985, s.118.1) or a deduction (in the case of corporations; ITA, 1985, s.110.1(1)), and the ability to receive transfers or donations from other charities (usually charitable foundations). …

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