Canada's federal legislation on the incorporation of NPOs, concerning regulations that apply when incorporating.

The federal government's instructions to incorporating your business

The federal government's instructions to create a registered not-for-profit corporation in accordance with NFP Act.

CRA's brief description of NPOs and forms to file as one, typically for tax exemption purposes. Includes links to forms and publications concerning NPOs and CRA

CRA's comparision of Charities and NPOs.

The first time the CRA recognizes social eneterprise as Community Economic Development activities. Included in the discussion of charitable registration. "The law in Canada does not recognize community economic development (CED) as a charitable purpose. However, activities related to CED (CED activities) may be charitable when they directly further a charitable purpose." Social Enterprise is an example of CED."

A guide to assist NPOs increase their knowledge about the legal framework in Atlantic Canada, includes sample bylaws for NPOs, definitions of legal terms. "An incorporated nonprofit can earn a profit, but the profit must be used to further the goals of the group rather than to pay dividends to members. Most nonprofit corporations, however, are not involved in commercial enterprises that intend to generate an excess of revenue over expenses." (p.9)

Concerns recommendations to federal government to allow the expansion of the social economy. The following recommendations are made: 1. Should ensure that all forms of incorporation have equal access to existing gov't supported business development tools. a. Raises the question, who does and who doesn't? 2. Should play a lead role in strengthening the SE sector creating one or more strategies to support non-profit SE and co-op development. This seeks to ensure supports are getting the best return 3. Should create and fun on-going learning opportunities in social economy business planning, incubation, and acceleration. 4. Should create and support an Impact Investment Fund, in partner w/ private, institutional and philanthropic investor 5. Create tax credit incentive for blended value businesses, inclusive of all types of incorporation. 6. Should adopt social procurement practices to ensure social, economic, and environmental values are calculated. Should unbundle large procurement and service contract, allowing SE businesses the ability to bid

The NS Societies Act prevention of society incorporation for the purpose of carrying on any trade, industry or business is applied broadly to include organizations w/ charitable or NPO purposes that intend to charge for fee services in order to generate revenue to pay staff and other costs on a break-even or non-profit basis (p.4) Canada has disjointed and broken Charity system, leaving it to the provinces. It then usually falls back to the gap ridden Income Tax Act. The acts says charities can be engaged in related business, but offers no definition When choosing between US and UK models for organizational form for SEs, says that there's no need. Further, a new structure may undermine current structures

Creates the Registry of Joint Stock Companies under which NPOs, charities, companies have to register under. See s.3 of the Act.

Governing legislation for the incorporation of NPO to create a corporate entity. The effect is separating owners and creating a distinct legal entity with its own rights and obligations. Reasons for incorporating include: Person asset protectin, adds credibility and name protection, various tax exemptions may apply. s.3 of the Act says that the purpose is to be for charitable, social, professional, recreational, sporting, etc., the categories listed in s.4(o) of the Companies Act. This suggests that the object of the potential NPO cannot be for "carrying on any trade, industry or business". s.3(2) says that if there are any other acts in which incorporation can occur under (excluding Companies Act), that incorporation cannot be made under Societies Act. Schedule B includes mandatory bylaws required by NPOs incorporated under this act.

Exclusion of liability for volunteers working in the scope of their responsibilities from civil litigation.

New piece of legislature that created the possiiblity for incorporation as a Community Interest Company, bridging the gap that existed between NPOs/Charities and Business Corporation. CIC is not included under Societies Act or Companies Act.

Notes on the legal structure of NPOs in Canada (p.107). Types of Businesses defined by CRA (2010): 1. Charitable Program a. Business is a charitable program in its own right - CED i. Can be operated tax-exempt 2. Related Business a. The nature of the business is linked and subordinate to the charity's purpose or business by volunteers i. Can be operated tax-exempt 3. Unrelated Business a. The nature of the business is not connected to the charity's purpose i. Cannot be housed within the organization's structure, but can within the legal structure and owned by parent organization. It will be subject to taxation. CRA considers four main heads of charitable purpose: relief of poverty, advancement of education, advancement of religion, other purposes beneficial to the community. This is significant for taxation purposes. CRA: "business" in the charity context includes "commercial activity - deriving revenues from providing goods and services - undertaken with the intention to earn a profit". Criteria established by the courts - Intended course of action: Is the rational to generate a profit - Potential to show a profit: does the activity have the potential to yield a profit - Existence of a profit: has the activity actually generated a profit - Expertise and experience of the person or organization that undertakes the activity. - Other factors include continuous service, where fundraising often has clear start and end. Charging fees does not mean a business is non-charitable. Operating a business in a charity: CRA doesn't accept the destination of funds theory, and don't care is the funds generated are being used to support the charitable programs. CRA recognizes that programs operated by community economic development (CED) combining economic and social goals, may be considered a charitable program of the organization. Relevant factors to consider include: - Relief of unemployment: CRA would allow a training business. - Relief of poverty through operating stores: CRA would allow a business that provides low-cost necessities. - Relief of people with disabilities: CRA would allow what it refers to as a “social business.” - Relieving suffering in economically challenged communities: CRA would allow some community businesses or community professional/commercial services in “economically challenged communities.” Things to consider in your decision: - Primary purpose of the business (profit v serve clients) - Amount of control organization wants to maintain over the enterprise - Scale of business and potential for growth - Your need to access capital and external finances - Level of risk and liability your organization/board is willing to take - Potential effect on community imagine and reputation, including potential perception of unfair competition from private enterprises Options of incorporation 1. In-house: No separation. Business activity is housed in the charity's legal structure. Most appropriate for small and beginning enterprises. The organization ahs more control over managing and operating the enterprise, including the focus on the social purpose. a. Downside is that there's no protection from liability and business assets may be exposed to risks from the enterprise. 2. Separate entities (ie, for-profit subsidiaries, separate non-profit societies, co-ops, joint ventures/partnerships) a. For-profit subsidiaries: separate taxable corporation. Organization can own/control the corporation and be the ultimate beneficiary. CRA requires a firewall between the two (eg, separate membership, distinct names, separate book keeping) i. Allows greater focus on business purpose ii. Easier to attract board members and staff with appropriate expertise iii. Limits liability iv. Greater access to capital and financing, but they won't be able to access grants due to non-charitable status v. May reduce images of unfair competition in private sector b. Separate non-profit societies: Incorporating enterprise as a separate non-profit society. Parent can maintain control by appointing the board and offers a degree of separation. i. Allows parent to disengage if they no longer wish to continue after its objectives have been breached c. Co-ops: Man co-ops are also considered social enterprises, and therefore co-op can be a great organizational approach for your enterprise. Are enterprises owned by their members, who use and benefit from the services offered by co-operatives and can provide virtually any product or service, and can be for-profit or non-profit. Can be a charity if: i. They're established for charitable purposes and not for benefit of members ii. No financial benefit to members iii. Upon dissolution, the remaining assets transferred to qualified recipient d. Joint Venture/Partnerships. If charity becomes limited partner in business, they're considered to be carrying on a business.

A discussion of proposed policy changes, perspectives, and direction to take for the facilitation of a stronger SE system in Canada. Below are exerpts from the report. "Central to this process is the importance of constructing public policy that enables the Social Economy to maximise its potential to create unique socio-economic and environmental outcomes, and connect to state and private sector activities in ways that contribute to those outcomes. We argue for a normative vision of the Social Economy as part of a movement to create a people centred economy. Next we argue for the importance of the Social Economy as a tool to create positive social, economic and environmental outcomes." - Will address initiatives at the municipal, provincial, and federal level. On the Social Economy sector: "In Canada alone, this sector represents $79.1 billion or 7.8 percent of the GDP (larger than the automotive or manufacturing industries), employing over 2 million people (or over 11.1 percent of the economically active population (Imagine Canada, XXX). In fact, Canada’s non-profit and voluntary sector is the second largest in the world. " To incentivise environmental sustainability (p.18): - Provide tax incentives, program support and procurement advantages to Ses that contribute to reducing carbon emissions, enhancing waste management and water safety. On poverty reduction, employment creation and social inclusion: "Toye and Infanti (2004) reviewed the literature on social exclusion and poverty and note that policies to combat social exclusion range from “weak models, which focus on excluded individuals and their reintegration into dominant society, to strong models, which emphasize the role of exclusionary forces and advocates for structural reforms to diminish their impacts”" "Co-operative businesses typically have a longer lifespan and lower insolvency rate than their non-co-operative counterparts (Birchall and Ketilson, 2009). Further, membership and employment in co-operatives has actually increased during the current economic crisis, further pointing the potential of this sector. " Place-based strategies: Despite the positive outcomes of CED organization, there are policy barriers that include access to programs and a lack of childcare, policy related barriers faced by the organization in service deliver (eg, cookie cutter programming), and community barriers (unemployment, poor housing) - Most place-based solutions to poverty (government policies) are targeted only at the level of individuals and provide single-issue supports. - This top down approach tends to discourage horizontal integration of policies, making it difficult for organizations to engage a diverse range of local stakeholders and combine various program options needed to offer and sustain the comprehensive strategies. Reducing poverty is a multi-faceted approach that policy has attempted to address in a singular, commodity-type fashion. (p.22). Policy Instruments to Support the Social Economy: Recommend that governments build on procurement models that advantage social enterprises. - Recommends tax credits be provided to co-ops and their members and SEs that invest in their sector. Not many SEs are denied access to program and policies such as the Federal Development Bank's loan guarantee program Consider the reframing of SE as more than an instrument to achieve policy objectives, but as an equal partner.

Very useful document on the social enterprise regulatory and legislative schemes, comparing and contrasting Canadian and UK legal forms for social enterprise. "The non-profit corporation is a popular legal form for Canadian social enterprise, and the legal form used by incorporated charities, which are discussed later. Non-profits are largely incorporated under provincial company law, but their tax status is governed by federal tax law. Provincial incorporation laws vary" (p.9) Federal tax law limit NPO freedom to make profits, CRA rules permit some surplus revenue as long as the use of resources is reasonable and excess income isn't greater than the reasonable needs of the organization. This limits NPO ability to accumulate reserves to grow the organization. Also provides them less collateral to offer banks when securing loans. - Non-distribution role makes them equally unattractive to investors One legal option - to set up arms-length subsidiaries to generate profits. They're typically for-profit. Current set up for SEs is that governance deters those who want to both run and direct their enterprises. Social entrepreneurs therefore have to choose between directing the organization for no remuneration or managing but with loss of control "The CRA’s Charities Directorate closely regulates charities, making their administrative burden high. In addition to specific restrictions on operating a business, charities’ scope of activity is limited by the narrow range of permissible charitable purposes, the public benefit test the charity must meet, and other general requirements. Both the assets and income of charities are also subject to a firm asset-lock that prevents these from being distributed to individuals for their personal benefit – both when the charity is operating and when it is dissolved (CRA 2008). For example, when a charity dissolves or reverts to simple nonprofit status, it must either pay the CRA 100% tax on its profits, or gift those assets to a qualified donee. By contrast, some provincial laws do not lock non-profits’ assets at dissolution or conversion, but allow them to pass into private hands (Blumberg 2013). Charities are also required to spend a minimum of 3.5% of their investment assets a year on their charitable activities" (p.14) - Primary benefit is tax entitlements, they're exempt on their income, and can raise form individual + corporate donations. - Charities have been allowed to operate businesses since 1976, but the range of activities is limited - CRA allows charities to operate related businesses directly, and unrelated businesses at arms length. - At arms length must operate separately from the charity, can't buy charity assets at below-market rates as it would amount to a subsidy CED (community economic development) charities: if social purpose fits within certain CED purposes, can enjoy similar benefits Co-ops: Cooperatives are considered social enterprises in Canada because, although businesses, they are required in law to meet the needs of their members, rather than external shareholders, and they do not distribute profit based on share-ownership (p.20). For-profit Ses: can't receive donates, no tax breaks to support their social ends, but can donate up to 75% of their profits to charities and other eligible organizations. Proposals to Improve Existing Legal Forms (p.26): - Increase access to financial resources, new incentives to increase charitable donations - Tax breaks for investment in social enterprises along the lines of NS tax break for SEs and organizations w/ social purposes. It's argued that this would allow SEs to choose their own legal form. - Loosening restrictions on NPOs making profits, or by allowing non-charitable enterprises access to charitable tax benefits by deeming certain purposes or activities akin to charitable purposes Nova Scotia CIC framework (p.31/32) - Requires explicit community purpose, which is broader than charitable purposes. - Community purpose is to be written into their corporate articles - Assets are locked - distribution of profits is capped. As dissolution, assets must be transferred to eligible organizations - Must submit annual community interest reports that provide a 'fair and accurate description' of how they've benefitted society or advanced - Are taxed as regular for-profit corps. - Similar to UK, is registered under Joint Stock Companies in NS - NS has SE Loan Guarantee for local credit union loans to NFP, NPO, Co-ops, and Social Purpose businesses. Covers up to 90% of loans to $150,000 UK CIC Framework (p.39) Most NPs incorporate as companies limited by guarantee. These include charities, development trusts, community enterprises, and some co-ops. - Are limited liability companies, operate like standard for-profits. - Are owned by and distribute profits to members rather than external investors. They can raise loan capital, but not share. - Downside is that members can change articles at any time, so social purpose isn't secure - Similar charity operation limitations as in Canada. Distinguishes between trading conducted as part of the charity's core purposes and activities, and trading not directly related (non-primary purpose trading) ○ Not directly related charities have to house them at arms length. Like canada, must be completely separate entities ○ Charity trading arms are taxable but can gift 100% of their profits to their parent charity tax-free. UK Gift Aid allows companies to gift charities money on which the company's already paid tax, but the charity can claim the pre-tax value of the gift on its own tax, adding about 20% value to the gift. This makes it more lucrative and attractive in UK than in CDN. Prior to CIC, must for-profit SEs incorporated as companies limited by shares which offer the same freedoms and constraints as CDN for-profit corps. They have Trusts and LLPs as well. What SEs Need: - Access to financial resources, gov't consultation and policy reports all identify it as one of the main barriers to growth CICs in UK: Legal requirements include - Community interest test, must carry on activities that a reasonable person would consider to genuinely benefit the community - Asset lock, distribution of profits and assets is restricted to ensure that most financial resources are used to advance social purposes ○ Dividend cap per share at 5%, while distribution on total profit at 35%. In 2010, the dividend cap raised to 20%, then removed altogether in 2013. ○ Asset transfer only to another asset-locked body - Community interest report - Regulatory oversight Note, many CIC still rely on government funding.

An online portal to the Registry for those wishing to apply for incorporation under Companies Act, Societies Act, or CIC Act. Note, the link to "Licenses, Permits and Forms" is broken. The link brings up a 404 error page.

A hub for applying for incorporation, contains an outlined instruction of the process and links to various forms that must be included and where to submit them.

The provincial regulations concerning Community Interest Companies. Please see CIC Act, s.21 for the clarifying definition of "community interest report" and "community purpose".

Defines social enterprise as: “a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners" Because SEs are not legal form, but a purpose of a business, there are multiple legal forms that may be taken: - Community Interest Company ○ Created specifically for social enterprise sector. Created in 2004. Required by law to have provisions to enshrine their social purpose, specifically with an 'asset lock' and a cap on maximum dividends that can be paid out ○ May convert into a charity, or into community benefit society, or dissolve. One established, is prevented from converting into a standard ltd. ○ Setting up CICs is the virtually the same as Ltds, except they must include a community interest form. - Limited Company ○ Most common form is the private company, limited by either share or by guarantee. Subject to stricter regulatory requirements, higher transparency to shareholders and public are exchanged for limited liability - Industrial and Provident Society (IPSs) ○ Two types, Co-operative societies and Community Benefit Societies. - Unincorporated (unincorporated association, trust, or combination of the two) ○ If unincorporated, profits are taxed as an income of the individuals involved. They would normally be treated as self-employed and would be required to use self-assessment tools to calculate taxes. Unincorps are similarly treat, though many are liable for corporation tax - Limited Liability Partnerships (LLPs) ○ Separate legal personality similar to a company. They enjoy limited liability but the partnership is transparent for tax purposes. Though not designed for SE, is a good avenue to achieve it as they are flexible. Partners need only decide a majority proportion of the profits be dedicated for a social purpose Important to remember that partner salaries are normally treated as profit in LLP account, where in companies they would be part of operating costs. This can be misleading for investors, especially where businesses are just starting off and salary costs are limited.

Similar to the NS Societies Act, is the legislative document for the incorporation of charities. Note that in UK, NPOs are more often referred to as "company limited by shares" or "limited by guarantee".

Similar to NS Companies Act , however, UK has included a provision for community interest companies, as opposed to having separate legislation. Registration of companies goes through Companies House in UK, while in NS registration goes through Registry of Joint Stock Companies