Charity as a Vehicle for Social Enterprise

By: Kate Lazier and Natasha Smith

In our previous article we provided an overview of the various legal structures in which to carry on a social enterprise.   This article considers more fully how a charity can engage in social enterprise within the charity itself.

Why Use a Charity?

Canadian registered charities benefit from favourable tax treatment.  A registered charity is exempt from tax on its income and charities have the ability to issue charitable donation receipts (which incentivizes giving).  Charities also have the ability to receive funds from other registered charities (which results in access to another source of capital).  

Charities and Social Enterprise

Many charities are attracted to social enterprise because they would like to generate revenue, rather than simply rely on donations from individuals, corporations and government.  However, registered charities are subject to more restrictions on carrying on business then both non-profit organizations and for-profit corporations.  In particular, registered charities are limited in the types of business activities they can conduct.    Depending on the type of business activities a charity wishes to undertake, these rules can present a significant obstacle for those charities that wish to generate revenue within the charity itself.

Charitable Activities

It is important to note that not all revenue generating activities will be considered “carrying on business”.  Revenue generating activities which are carried on in pursuit of the charity’s central mission may not be considered business activities, but rather charitable activities.   For example, a charity that has as its purpose the provision of low-cost housing and that generates revenue from providing low-cost housing may be carrying out its charitable activity and not carrying on a business.   Similarly, a private school that generates funds from tuition is likely carrying out its educational charitable activity and not engaging in a business activity.  Therefore, where the social enterprise is itself a charitable activity, then the charity can carry out the activity directly.

Related Business

CRA takes the position that a “business” generally consists of commercial activity – deriving revenues from goods and services – undertaken with the intention to earn a profit.  Charities that are designated as charitable organizations or public foundations are permitted to conduct “related” business activities.   However, private foundations are prohibited from carrying on any business activities.  A private foundation that carries on any business and any other charity that carries on an “unrelated” business can be subject to intermediate sanctions and revocation of its charitable registration.

CRA has set out its guidelines for how it interprets the question of “related” versus “unrelated” business activities in its published policy statement CPS-019.

What may come as a surprise is that just because the profits of a revenue generating activity are used for a charity’s charitable programs, does not mean that the activity is a related business.

There are two types of related businesses.  First, if a business is operated substantially (90% or more) by volunteers, then it is a related business.  Second, CRA considers a business activity to be a related business where it is “linked and subordinate” to the charity’s charitable purposes.  CRA’s policy sets out the detailed criteria that CRA will consider in determining whether a charity’s business activity meets the test.  If CRA determines that a charity’s business activity is sufficiently linked and subordinate to its charitable purpose, the charity will be permitted to carry on the business activity as a related business.

In order to be “linked” to a charity’s purpose, the business activity must: (1) be a usual and necessary concomitant of charitable programs, such as a hospital parking; (2) be an off-shoot of a charitable program, such as selling recordings of church services; (3) make use of excess capacity, such as renting out university facilities during the summer; or (4) involve the sale of items that promote the charity or its charitable purposes, such as the sale of t-shirts with the charity’s branding.  

The activity must also be “subordinate” to a charity’s purpose.  CRA states that this means the business activity must: (1) constitute only a minor fraction of the charity’s overall activities – the courts have held, for instance, that a charity organized for the sole purpose of operating a lottery would not be operating a related business albeit the fact that the proceeds from the sale of lottery tickets would be donated to other registered charities;  (2) be integrated into the charity’s operations, rather than acting as a self-contained unit; (3) be subordinate to the organization’s charitable goals – this means that the charity’s charitable purposes must continue to dominate its decision-making; and (4) not confer onto any person a private benefit, in other words, the organization must continue to operate for an exclusively charitable purpose.  For example, if the business also involves for-profit corporations the relationship between the parties must be fair.


Charities need not shy away from engaging in new revenue-generating models such as social enterprises.  If the social enterprise is a charitable activity or a related business and it meets the public benefit test, then the charity can carry the social enterprise within the charity itself.   Where the social enterprise does not meet this criteria, then the charity may still benefit from a social enterprise by having it operate in a separate entity owned by the charity.  Given the risk of losing charitable status, it is important to properly structure a social enterprise that is intended to generate revenue for a charity.  A charity that is not sure whether an activity is permitted should seek legal advice.