The Income Tax Act allows charitable organizations and public foundations to carry on related business activities, which means running a business heavily involving volunteers or having a link to the charity’s purpose. This is more often referred to as social enterprise activity.
Basically, a social enterprise is an organization that uses the sale of goods or services to better the community, as opposed to generating profits for the shareholders. They do not have to be run exclusively by charities or not-for-profit businesses. Ben and Jerry’s ice cream was one of the first social enterprises with a commitment to distribute a fixed percentage of their bottom line to charities each year.
Match social enterprise to your charitable objectives
To avoid violating the Income Tax Act, if a charitable organization decides to start a social enterprise, it is extremely important they relate the new initiative to their charitable objectives and purposes.
The same goes for a public foundation. Should a public foundation decide to start a social enterprise, they would need to ensure their beneficiaries are qualified donees, which would primarily be registered charities. Otherwise, they run the same risk as the charitable organization starting non-related business activities.
The Ottawa Citizen published an article in July about social enterprises. The article focused on the entity re:Purpose, a jewelry and craft boutique operated by Operation Come Home. The store employs troubled teens to teach them the skills they will need to launch their own careers.
re:Purpose is one of five social enterprises run by Operation Come Home, each one designed to help troubled youth gain workplace experience. The five businesses brought in more than $120,000 in 2013, while providing jobs for many of Ottawa’s at-risk teens.
Social enterprise appeals to the hearts of investors and business people who want to make a profit and, at the same time, make a positive impact in the community. Just be sure you speak with an advisor before beginning one to ensure you remain compliant with the Income Tax Act.
Further information on related business activities can be found here.