Long-overdue guidelines for related business begin to take shape
November 25, 2002
By Nicole Zummach
For many years, Canadian charities that operated a related business had
only their wits and the often-cryptic Income Tax Act (ITA) to guide
them. Several points in the act were open to interpretation but any interpretation
was left solely to the discretion of the Canada Customs and Revenue
Agency (CCRA), which regulates not only business activity but also
registered charities. Thankfully, with encouragement and input from the
Voluntary Sector Initiative (VSI), the CCRA is now working to clarify
the ITA as it relates to charity operated businesses. Proposed guidelines
were published by the CCRA earlier this year and they are seeking input
from the charitable sector before anything is formalized.
Guidelines are new to the public but not to the CCRA
"We have been working on this for many years, but were given a fresh impetus
when the Voluntary Sector Initiative was formed," says Judy Torrance,
the senior project manager responsible for writing the CCRA guidelines.
"We've never actually had a formal policy [about charities' related business]
so it's new in the sense that this is the first time we will have something
out there in the public domain. However, there is nothing dramatically
novel within the guidelines themselves. We are just trying to explain
how we currently apply the law."
Under the ITA, registered charities (with the exception of private foundations) can operate a related business, but not an unrelated one. While the act does contain a broad definition of 'business', it does not define what is considered a related or an unrelated business in the charity context, apart from saying that "a volunteer-run business is to be considered a related (and hence allowable) business, even if it is otherwise unrelated to the objects of the charity."
The Department of Finance in 1976 gave three examples of allowable related businesses when provisions were first introduced.
They were: a gift store in an art gallery; a cafeteria for the use of
visitors to a hospital; and the sale of used clothes and other items.
It went on to state that an allowable business had to be "directly related"
to a charity's purpose. The fact that any profits made would ultimately
be used to support a charitable program would not be considered adequate
to qualify the business as a related one.
No resolution for certain points of contention
Some people will no doubt be unhappy with the CCRA's view on the 'destination-of-funds' test to determine whether a business is related. It does not
accept such a test, which would allow a charity to carry on any type of
business, as long as the profits from the business were used to conduct
charitable programs.
"The big issue," says Torrance, "is what the law actually says in relation
to businesses where the sole connection is that the profits go over to
the charity. There are some who interpret the case law and say that it
is permissible. Our view at the CCRA is that the case law does not say
that." She expects that a case currently in the federal court of appeal
dealing with related business will most likely have an impact on the proposed
guidelines. For now, the CCRA is standing behind its decision despite
protest from some members of the charitable sector.
Gordon Floyd, vice president of public affairs at the Canadian
Centre for Philanthropy and an advisor for the VSI's Joint Regulatory
Table, which participated in the development of the guidelines, says
they will help clarify the rules about related business but that they
really don't give charities any more scope to finance part of their operations
through business revenues. "There are quite a few people who believe the
CCRA is continuing to interpret the law much more narrowly than is justified,"
he says. "I think the Canadian government should be looking much more
closely at the experiences and practices in some other jurisdictions,
such as the United States and many countries in Europe, where charities
are allowed to generate revenues from business activities if they use
those revenues for their charitable work."
He suggests that the CCRA is overly sensitive to the possibility of complaints
from private businesses that would argue unfair competition if charities
were in the same lines of business. "To me those arguments don't hold
up. There are some areas where charities have tax advantages, of course,
but there are other areas where charities are at a real disadvantage."
So, what does qualify as a related business?
Aside from volunteer-run businesses, which are considered related because
they represent contributions of time and effort in support of a charity,
and are closer in nature to donations than they are to commercial operations,
the CCRA considers related businesses to be those that are linked to a
charity's purpose, and which are subordinate to that purpose.
A business is considered linked to a charity's purpose if:
- It supplements a charity's core programs, either because it is necessary
for the effective operation of the core programs, or it improves the
quality of the service delivered in these programs. Examples include
a hospital parking lot or cafeteria, a museum gift shop, or a bookstore
at a university.
- It is an offshoot or a by-product of a charity's core program. Examples include
an educational heritage village that sells the goods it produces,
or a church that sells a recording of its special Christmas services.
- It makes use of assets and staff during periods when they not being used to
their full capacity within the core programs. Examples include renting
out festival tents when they are not in use, renting student residences
at a university during the summer months, or renting out spaces in
a church parking lot on weekdays.
To determine whether a business remains subordinate to a charity's purposes,
there are several types of questions the CCRA asks. The more strongly
the answer to any of the questions is 'No', the more likely the CCRA is
to conclude that the activity no longer constitutes a related business.
Types of questions include the following:
- Relative to the charity's operations as a whole, does the business activity receive a minor portion of the charity's attention and resources?
- Is the business integrated into the charity's operations, rather than acting as a self-contained unit?
- Do the organization's charitable goals continue to dominate its decision-making?
- Does the organization continue to operate for exclusively charitable purposes by, among other things, permitting no element of private benefit to enter in its operations?
Any charity found to be operating an unrelated business is in breach of the law, thereby exposing itself to de-registration and the loss of its charitable status. The CCRA says it will generally concentrate its compliance efforts on charities with substantial unrelated business income - those with a gross revenue from all unrelated businesses of $30,000 a year or more. However, it stresses that this figure is only an indicator and should not be viewed as acceptance by the CCRA that charities can carry on small-scale unrelated businesses.
Next steps
The CCRA has extended the deadline for comments and feedback from October
31 until the end of the year. "The next step will be for the government
to take all feedback and evaluate it before coming out with the final
product," says Torrance, who adds that it should be completed by their
March 31 deadline. And will the final guidelines be much like this draft?
"I can't say yet. We still have the court case pending plus we are still
accepting feedback. That's why we are having this consultation, because
we are open to good points being raised." Floyd says it is certainly worthwhile
for anyone that does have views about the proposed guidelines to forward
those comments to the CCRA. "I think there is still a possibility that
these rules could be changed before they're finalized."
To view the proposed guidelines in their entirety , visit: www.ccra-adrc.gc.ca/tax/charities/consultation_policy-e.html.
Comments and suggestions can be sent to Judy Torrance by e-mail: judy.torrance@ccra-adrc.gc.ca;
fax: (613) 952-3034; or call (613) 954-0043.
