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Making a difference while making a dollar: Social innovation and entrepreneurship for the nonprofit sector

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In the Liberal government’s 2015 mandate letter to the Ministry of Revenue after the elections, Prime Minister Justin Trudeau seemed to acknowledge a need for more dialogue and better interaction with the nation’s charitable sector.

The letter, addressed to Minister of National Revenue Diane Lebouthillier, contained the following section, mandating the minister to:

“Allow charities to do their work on behalf of Canadians free from political harassment, and modernize the rules governing the charitable and not-for-profit sectors, working with the Minister of Finance [emphasis added]. This will include clarifying the rules governing “political activity,” with an understanding that charities make an important contribution to public debate and public policy. A new legislative framework to strengthen the sector will emerge from this process.”

Many sector leaders and stakeholders’ ears perked up with the nod given by the Prime Minister that indicates changes to how charities operate or generate revenue could conceivably be expanded under the Income Tax Act.

Conversations around this have been ongoing, and sometimes heated. But it remains clear that the sector could soon be freer to pursue new avenues of revenue generation for various causes and services for the greater good.

Pursuing social impact

In Toronto, Susan Manwaring, a partner at the Miller Thomson law firm, is also the National Chair of its newly named Social Impact Group (formerly titled the Charities & Not-for-Profit Group).

A longtime leader in assisting nonprofits and social enterprise, she notes that the landscape and philosophy of many sector organizations and innovators is changing.

“People are really focusing on what the impact of organizations is. Asking themselves, ‘How do we do good and how do we find new ways to do it?’” she says. “As government revenues have become more challenging [for charities and nonprofits] organizations are really striving to find new and different ways to raise money and generate revenue; and doing it within the legal framework – which in itself is one of the biggest challenges, as the laws around this haven’t changed much.”

Which is why that line in the aforementioned mandate letter is providing cautious hope to some about opening up the rules for charities and nonprofits to pursue revenue streams they could not access before.

“What we will hopefully see more of – and we are starting to – is that [granting] foundations are realizing they can invest in the activities of social enterprises, charities and nonprofits; not only by making grants, but by actually freeing up some of their investment dollars and either lending those or creating a social impact bond, or working with the nonprofits to advise them of these options,” Manwaring says. “In these ways, a foundation might get repaid by the charity if successful, but more to the point, it gives charities access to capital that they have historically found difficult to get.”

Manwaring notes that her group is working with the federal government to modernize the infrastructure for nonprofits. At time of writing, she had not yet spoken with newly installed Canada Revenue Agency (CRA) Charities Directorate Director General Tony Manconi. However, all items related to improving supports for the charitable sector are "on the table" with the government, Manwaring said.

She adds: "We're still not sure what the mandate letters for this new government mean as they apply to charities. But if they want to change, update or modernize the infrastructure for nonprofits...does it mean we will open up [possibilities for] revenue-generation and enterprise activity for charities and nonprofits in a way we haven't been able to pursue in the past? This is something people want to at least talk about. But if they do want to do that, there will have to be changes to the Income Tax Act. There are rules in the Act that make it difficult for [granting] foundations to invest in a nonprofit. They can grant to charities, but with nonprofits it's more difficult. So is the government going to give us a broader public benefit tax that will allow us to use assets to try and have impact but not just to invest in banks?”

Storming the hill

In Ottawa, Jonathan Wade, president of Social Delta, a social enterprise consultancy, says sector stakeholders pushing for changes to the Income Tax Act to allow for more revenue-generating opportunities may be misguided.

He says that a recent conversation with “senior government bureaucrats” in the Ministry of Finance and the CRA lead him to believe that the restrictions on business activities for charities is “overstated and largely misunderstood.”

Wade also sits on the board of the Social Enterprise Council of Canada.

“For years I warned charitable clients of the restriction. However, I’ve come to learn that the strict interpretation of the ‘related business clause’ by most charitable boards is more a function of their caution and tendency to be risk averse than of any real government restriction on business activities,” Wade says.

He adds: “I believe that revising the Act to provide clear instruction for revenue generating activities for charity owned/run social enterprises is a worthwhile long-term endeavour. However, legislative change will take time. In the short term, there are legitimate ways to start and run a business from within the charitable structure. If the business is financially successful such that it starts to overwhelm the charity’s budget, then the business can be ‘rolled out’ into a private business wholly or partly owned by the charity.

“Is running a social enterprise from a charity complicated now? Yes, a little. However, it is still very possible and legal for a charity to run a social enterprise. The Income Tax Act provides more of a chill on business activities for charities than an actual restriction. I’ve asked everyone I know who runs a social enterprise from within a registered charity, and I’ve yet to find even one example where a charity’s registration has even been threatened — let alone revoked — as a result of commercial activities.”

Still, there are other ways besides social enterprise for charities to raise needed funds to carry out their social missions.

Bond...Impact Bond

Another tool increasingly available to help finance nonprofits is the Social Impact Bond. It is a lending mechanism that works through a three-party system: a lender, an organization that will use the funds for impact and, according to Manwaring, “typically a government body that backs the borrowing. If the organization that is doing the ‘impact’ work is successful - in measurable terms - then the government agrees to repay the lender. So the bond is based on outcomes that the charitable organization has agreed to in the loan agreement with the investors.”

This lending tool, and the contract a charity must enter into, is not for everyone, she cautions. “A social impact bonds is a great tool for some things, but not for everything; because you have to have a measurable outcome that you can tie to payments."

For his part, Wade suggests social impact bonds aren’t his favourite option to help boost capacity in the sector.

Also known as “pay-for-performance” programs, he says that Social Impact Bonds are developed with the principle that the funder (typically a government) will pay a set of investors (typically, but not always private sector) a return on their investment in a social service activity of business.

“An executing agency - typically a nonprofit or consortium of nonprofits - gets the money from the investors to actually do the work and if they are successful in achieving a set of pre-approved social metric benchmarks, then the government pays the investors their initial capital plus interest, prorated depending on the scale of the performance metrics. The whole process is made possible through an independent intermediary that manages the money and the reporting, and gets paid whether the social outcomes are achieved or not,” Wade notes.

But there are three main challenges to this methodology, he points out.

1. “This concept works well when the social problem is relatively simple. For example, training of an able-bodied but socially disadvantaged individual has a high probability of helping that individual get employment. However, a person with multiple barriers to employment is likely not to get a job as easily. Therefore, it is less likely that a SIB will be established for the most marginalized in society.

2. “Social investors will obviously choose to invest in a social program with a higher likelihood of success - at which time they will get paid for their social investment - than in a less likely environment where they may even lose their capital.

3. “The risk for the work of the executing agency or consortium is born by the investors. If the program doesn’t work, the investors lose out. The government is insulated, the executing agency has been paid, [as has] the intermediary.”

Whither social innovation revenue?

Wade suggests a tried-and-true formula for social innovation success: social enterprise selling goods and services in the marketplace.

“My experience with so many nascent social enterprises is that they spend a lot of early stage time seeking grants or investors to scale up when they actually need to become active in the market,” he says. “I’m not a strict proponent of iterative business start-ups, especially for nonprofits and charities who are cautious about spending the agency’s money - but I do believe that both revenue and experience is gained by commercial activity, however modest to start.”

While Wade concedes that money for start-ups “is scarce” – particularly for a social enterprise with “modest expectation of generating revenue” – he advises that any organization committed to social enterprise should only launch its initiative if it has “sufficient reserves to at least start the work or it can potentially access grant money from “one of the growing number of progressive grantmakers.”

He suggests that anyone looking to launch a social enterprise can apply for loans, entrepreneurship grants, and seek out private support.

“Even without a charitable number, socially progressive ideas can in fact raise donations or...capital from social investors, local governments, or others,” Wade says.

Andy Levy-Ajzenkopf is a professional writer living in Toronto. He can be reached at aajzenkopf@yahoo.com.

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