We have collected the most frequently asked legal questions here. Please review this list before asking a new question. Thank you to the Pro Bono Students Canada at UBC for compiling answers to many of the questions listed here. For further information, please visit their website at www.ubcpbsc.com.

1. What are the tax and liability issues that a community organization would face if they are being given a piece of land that will be used for the community and that land has both a covenant on it and quite a substantial mortgage?
2. We are trying to come up with a name before we incorporate it under the Society Act. What legal issues may arise when naming a social enterprise?
3. Can a charity develop a social enterprise with a service that will not be directly related to its mission, nor serving a specific marginalized population? The businesses main intent would be for other purposes such as expanding its resource base.
4. We are a non-profit organization. Can we run a business?
5. Will we lose our charitable status if we operate a business?
6. How does the Canada Revenue Agency define a business?
7. What is a related business?
8. Can we run the business as a separate entity?
9. How do we know if our organization is ready to start a social enterprise?
10. We are a non-profit exploring the option of starting a separate business in which we will offer a service to our current members, in which profit will be distributed back to our charity organization. What are the liability concerns regarding the board of our current charity if our new organization fails and just how connected can these two organizations be?
11. Can a member of the Board of Directors of a charity make a loan to the charity for use in their social enterprise, and earn interest on the debt without triggering any CRA issues?
12. I am a newly appointed Executive Director of an organization and a social enterprise. On our board we have a director who is receiving income as an instructor in the society's social enterprise, is this allowed?
13. Do all BC registered societies have to make annual filing to CRA? Either the T-2 Corporate filing and/or the T 1044 if conditions are met?
14. We have reviewed all of the questions above and have determined that we are ready to start a social enterprise. What next?

Frequently Asked Questions

1. What are the tax and liability issues that a community organization would face if they are being given a piece of land that will be used for the community and that land has both a covenant on it and quite a substantial mortgage?

There would be no tax effect on the organization. However, the donor may be deemed to have realized fair market value and have their own tax issues. The mortgage would be payable from the land (if not otherwise serviced) but unless a novation is signed the organization is not liable for any shortfall (beyond the value of the land net of costs to realize on the mortgage). A novation is an agreement replacing one party to a contractual agreement with another. There may be cash flow issues regarding the mortgage and there may be accelerations etc. if not kept current.

Beyond the liabilities that would exist in the event of a novation agreement being in place, the organization receiving the donation should be aware of any liabilities that flow from the covenant in place on the land. Covenants can be in the form of obligations as to the use of the land, as well as the more common restrictions on the use of the land. This should be explored further.

Finally the organization, in becoming the owner of the property, is taking on potential liability for any environmental contamination. At the very least a Phase 1 Assessment would need to be done before agreeing to take ownership. Each situation will be fact specific and the donor may well retain environmental liability but depending on the terms of the gift the recipient may agree to indemnify the donor as a condition of the gift. In such circumstances the liabilities may outweigh the benefits.

2. We are trying to come up with a name before we incorporate it under the Society Act. What legal issues may arise when naming a social enterprise?

When incorporating a non-profit the Registrar only looks at entities incorporated under B.C.'s legislation. There could be existing non-profits, businesses, partnerships, or sole proprietorships in other provinces or states that may have the same name. Even if the entities have different purposes (eg. a social enterprise versus a for-profit) if they provide similar services and are competing there may be a legal issue.

For this reason, trademark registration and branding should always be considered prior to incorporation. Applying for a trademark is approximately $1500-$2500 but if another business contests the application the costs can increase dramatically. Trademarks are used in connection with goods and/or services and distinctiveness is extremely important. If a name similar to your desired name is already in use, would a reasonable person actually confuse the two operations? You must consider how big and well known the other entity is, and whether your social enterprise would benefit from the name association.

3. Can a charity develop a social enterprise with a service that will not be directly related to its mission, nor serving a specific marginalized population? The businesses main intent would be for other purposes such as expanding its resource base.

A charity is only entitled to carry out a business which is related to its charitable purposes. If the proposed enterprise is not a related business, it is not legally possible for the charity to conduct the business. The only way that the charity is able to move forward is for the business to be in a separate legal entity. That separate legal entity, because its purpose is to earn a profit, must be a for-profit corporation and will therefore be taxable.

4. We are a non-profit organization. Can we run a business?

Yes, several options are available to a non-profit organization depending on: 

•  The type of business you are intending on operating and its relation to your non-profit organization and its mission
• Whether or not it is a registered charity

5. Will we lose our charitable status if we operate a business?

No, your charitable status will not be affected if your business complies with the guidelines and policies established by the Canada Revenue Agency (CRA).

6. How does the Canada Revenue Agency define a business?

The CRA defines "business" in the context of a charity as a "commercial activity - deriving revenues from providing goods and services - undertaken with the intention to earn a profit."

7. What is a related business?

Two types of commercial enterprises can be undertaken within the tax-exempt structure of a charity:

• A Related business is a commercial enterprises that is linked to the purpose of the charitable organization and is subordinate to that purpose or, one that is run substantially by volunteers.
• A Business that is a charitable program is a commercial enterprise where the operation of the business serves to benefit a community or specific population in need. For more detail, please refer directly to the CRA policy.

8. Can we run the business as a separate entity?

Yes, a non-profit or charity can operate a business outside the structure of the parent organization by:

• Setting up a separate non-profit or co-operative organization to run the business, or
• Setting up a separate for-profit business.

9. How do we know if our organization is ready to start a social enterprise?

It is important to undergo a full examination of your organization's assets, resources, structure and governance in order to determine whether you are in a situation to undertake a business venture.

Some important questions:

• Does your organization have charitable status?
• What are the main sources of funding for your organization?
• What resources are available to the non-profit organization and how are they funded? (i.e. staff, facilities, equipment)
• Have you spoken to the Board of Directors and are they supportive?
• Does your organization have any specific assets or expertise that would give it an advantage in the delivery of this product or service?
• What is the main reason for starting the business? Is it to provide employment or training to a client group? To raise revenue for your parent non-profit? To advance the mission of your organization?

10. We are a non-profit exploring the option of starting a separate business in which we will offer a service to our current members, in which profit will be distributed back to our charity organization. What are the liability concerns regarding the board of our current charity if our new organization fails and just how connected can these two organizations be?

Managing two organizations can be administratively challenging. The first thing I would suggest you consider is whether this is really a business activity, and if so, whether it might be a "related business" activity that charities are entitled to conduct.

If it is concluded that the activity really is a business activity and does not qualify as a related business, then and only then should you be thinking about creating a second organization.

The two organizations will be separate legal entities but the drafting of the bylaws/articles of incorporation of each will determine the amount of control, and therefore the potential for "look through" liabilty that the "parent" might have. But it is important to understand what type of liabiltiy you're talking about - if one organization goes bankrupt, then, generally speaking, the other organization is not responsible for it.

If however you are talking about something like a tort liabilty where one organization might get sued, then if the governance structure provides that the parent completely controls the child, then liabilty might flow up the line for the torts of the child. The degree of control ranges along a spectrum from absolute control to none - the trick is to structure the bylaws to ensure that the parent has enough control to stop the child if it goes "rogue" but not so much that there is a liabilty look through. You need some legal advice as this is a pretty complicated area.

  

11. Can a member of the Board of Directors of a charity make a loan to the charity for use in their social enterprise, and earn interest on the debt without triggering any CRA issues?

This is a deceptively complicated question. It involves not only consideration of the requirements of the Income Tax Act but also of the fiduciary obligations inherent in a director's position and potentially rules that may found in the legislation of the incorporating jurisdiction. For the purposes of this response (which is not legal advice!) I have presumed that you are incorporated under the Society Act.

First one must consider the conflict of interest provisions of that Act. The charity is considering entering into a contractual relationship/transaction with a director - this triggers the conflict of interest provisions which requires a director to disclose his or her interst in the proposed transaction to each and every other director. The director cannot vote on the decision whether or not to enter into the transaction and should not (although there is no legal prohibition) participate in the discussion. If the Board considers the issue and then decides to enter into the transaction then that is fine; the conflict is, in essence, "purged".

With respect to the Income Tax Act the loan must be specifically disclosed on the charity's annual tax filing (the T3010B). The interest rate to be paid must be "normal" that is it must be at or below the normal commercial rate that would be paid in a similar situation. If it is higher than normal, then an "undue benefit" question might arise which could lead to penalties under the Act.

Bottom line - get some legal advice!

12. I am a newly appointed Executive Director of an organization that runs a social enterprise. On our board we have a director who is receiving income as an instructor in the society's social enterprise, is this allowed?

 

In summary, if the by-laws are a typical Schedule B Society Act bylaws the director cannot be remunerated for their duties as a director. They can be remunerated for their activities in another capacity so long as it is disclosed and the Board addresses the conflict. The organization:

 

1. can reimburse a director's expenses when on board business;
2. cannot pay a director's fee just for being a director;
3. can, if services are provided by a director, pay the director for those services IF before the services are performed (because it is a contract or "transaction" as referenced in the Society Act conflicts section) the director discloses his or her conflict to EACH director and the other directors vote in favour of the transaction.

 

However, the restriction on paying a director a fee is only in standard by-laws and not in the Act so the by-laws (as is usually the case) need to be carefully scrutinized.

It is not uncommon for a director to be an employee of the same society. It is not necessarily the best practice as it can confuse the roles and can create tensions but if carefully documented can work. It is probably good practice to not only have the director abstain from voting on his/her own employment contract (required by the Act or his/her income is disgorgeable back to the Society) but also to leave the room during the discussion of the terms. Obviously the non-interested directors will be liable to account if they do not act in the best interests of the society in coming to a reasonable contract. If they approve overpaying a friend they are not acting in the best interests of the society. It is also important in the employment contract to separate and delineate the employment and director roles so that termination as a director is not constructive dismissal as an employee. And if all members of the board are conflicted the members can approve the contract by a special resolution if it is a reasonable and fair contract.

Here the situation sounds slightly different. As I understand it, the director of the parent society is an employee of the social enterprise below it. It is not clear if that enterprise is incorporated. If the social enterprise is not incorporated then the above analysis applies as the enterprise while functionally separate is part of the society. If it is incorporated the conflict remains, albeit less direct, but could arise at the subsidiary level if not at the parent level.

If not already properly authorized, the employment contract could be ratified by disinterested directors with the employee leaving the room (or at the very least, abstaining).

13. Do all BC registered societies have to make annual filing to CRA? Either the T-2 Corporate filing and/or the T 1044 if conditions are met?

It depends on the form of the social enterprise. If it is an incorporated society and does not have charitable registratino, then yes, it MUST file a T2 Corporate Tax Reeturn, and if the threshold is met for the T1044, then that return as well. If the social enterprise is an incorporated society but is ALSO a registered charity, then it only files the T3010B Information Return for Charities. 

  

14. We have reviewed all of the questions above and have determined that we are ready to start a social enterprise. What next?

It is very important for your non-profit to seek legal advice about how to structure your enterprise. It is particularly important if your organization is a registered charity, as you do not want to put your charitable status at risk. These questions and answers are just a starting point for your organization. You must obtain legal advice from a lawyer before you begin operating your social enterprise.