Charities and “Related Business” by rt3463df


									Charities and “Related Business”

                                 Richard Bridge

 Production of this capacity building workshop for charities has been made possible by a
                 financial contribution from the Canada Revenue Agency

                                  With the support of:
         What is Related Business?
• Income Tax Act prohibits “unrelated business
  activities” by all charities.
• Charitable organizations and public foundations are
  permitted to engage in “related business activities”.
  Private foundations may not.
• The ITA does not fully define either term.
• Canada Revenue Agency Policy Statement CPS-019

       Charities and Related Business
The policy issue: competition and tax fairness
• Should charities be able to compete tax-free?
• In most other countries, unrelated business is permitted, but
  the charity will be taxed on unrelated business income like a
  private business.
• Related business income is usually tax exempt.
• In the UK, there is a destination test. As long as the income
  from unrelated or related business supports a charity‟s
  purposes, it is tax exempt.
      Charities and Related Business
The ITA does clarify in section 149.1 that:
• “ “related business”, in relation to a charity, includes a
   business that is unrelated to the objects of the charity if
   substantially all persons employed by the charity in the
   carrying on of that business are not remunerated for that
- CRA views „substantially all‟ as 90% or more (by head count,
   not hours).

                    The Case Law
2 Cases:
Alberta Institute on Mental Retardation – Federal Court of
   Appeal (1987)
• The Institute worked with Value Village. All of the revenue
   that the Institute received was used for charitable purposes.
• The court adopted the UK “destination test”. It was a “related
   business” because the business income was used for charitable

                    The Case Law
Earth Fund v. the Queen (2003) FCA
• The organization was created to raise money for charities by
  holding international internet lotteries.
• Court rejected the “destination test” – concluded it was a
  commercial business, not a “related business of a charity. The
  organization could not be registered as a charity.
• Alberta case not overturned. Limited practical guidance from
  the Court.
• The legal meaning of “related business” is not completely
  clear from the ITA and case law.

              The CRA‟s Guidance
• Two kinds of “related business”
   – Those that are run substantially by volunteers.
   – Those that “are linked to a charity‟s purpose and
     subordinate to that purpose.”

• Charities must have exclusively charitable purposes. Business
  cannot become a purpose in its own right.

              The CRA‟s Guidance
“Business” involves commercial activity – deriving revenue from
  goods or services – with the intention to earn profit.
Factors indicating business:
   – Intention to make profit
   – Potential to show a profit
   – Past profit
   – Expertise of person doing the work

               The CRA‟s Guidance
3 important things that are not “business”
• Soliciting donations
• Selling donated goods
• Fees charged for charitable programs and services. Factors:
       • Fees set to defray costs of the program, not make profit;
       • Comparable services not available in the market;
       • Fees set according to charitable - not market - goals.

              The CRA‟s Guidance
Fundraising events:
• Considered “business activity”, but not “carrying on” a
  business if they are not continuous.
• A charity that holds the same event frequently (a weekly
  raffle) may be “carrying on” a business.

              The CRA‟s Guidance
• Investments – not “business” if passive
• Partnerships – are considered “business”

                  Related Business
Must be linked to the charity‟s purposes.
•   4 types of connections or linkages:

1)   “A usual and necessary concomitant of charitable programs”
     e.g. hospital parking lot, museum gift shop, university book

                  Related Business
2) “An off-shoot of a charitable program”

Assets that are a by-product of a charitable activity, e.g.:
   – Heritage village selling the produce or flour it grows or
   – A church that records its choir and sells CDs

                   Related Business
3) “A use of excess capacity”
   The use of assets or staff when they are not being used at full
   capacity for charitable work. e.g.:
    – An arts charity renting out its tents when not using them
    – A university renting its residence rooms in the summer
    – A church renting out its parking lot during the week

                   Related Business
4) “The sale of items that promote the charity or its objects.”

e.g. t-shirts, golf balls, pens with names and logos. Posters
   displaying the charity‟s work, etc.

                   Related Business
Business must be subordinate to a charity‟s purpose. It must not
   become a non-charitable purpose in its own right.
   “This requires looking at the business activities in the context
   of the charity‟s operations as a whole.”
4 factors or indicators:

                   Related Business
a) “Relative to the charity‟s operations as a whole, the business
     activity receives a minor* portion of the charity‟s attention
     and resources.”
     *(“minor” is not defined)

b) “The business is integrated into the charity‟s operations, rather
     than acting as a self-contained unit.”

                  Related Business
c) “The organization‟s charitable goals continue to dominate its

d) “The organization continues to operate for an exclusively
     charitable purpose by, among other things, permitting no
     element of private benefit to enter its operations.”

                Unrelated Business
For a charitable organization or public foundation carrying on an
    unrelated business:
1st infraction: 5% penalty on gross unrelated business revenue
    earned in a taxation year.
2nd infraction: 100% penalty on that revenue and suspension* of
    tax-receipting privileges.

  *Suspension is for 1 year. Revocation of registration is
                 Unrelated Business
• CRA says: “before proceeding to revocation, a charity should
  normally be invited to wind-up the unrelated business or to
  place it in a separate taxable corporation.”
• A charity may invest in the taxable corporation. As with other
  investments, the directors must conclude that it is a prudent
  use of the charities assets.
• A charity must not subsidize the business. Investment does not
  include grants, gifts, free use of the charity‟s resources.
• Profits can flow to the charity (up to 75% of net profits can be
  donated to the charity; only the remainder is taxed).

                 Unrelated Business
• A charitable organization can retain control over the taxable
  corporation through share holdings or a power to nominate the
  Board of Directors.
• Careful record keeping is critical (minutes and financials).
• A foundation must not acquire more than half of the voting
  shares of a taxable corporation, unless the shares are donated
  to the foundation.

(Ontario charities cannot own for-profit corporations.)


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