Income Tax Act S. 188.1(1) — Penalties for Unrelated Business Activity

Subject to subsection (2), a person is liable to a penalty under this Part equal to 5% of its gross revenue for a taxation year from any business that it carries on in the taxation year, if

(a) the person is a registered charity that is a private foundation;
(b) the person is a registered charity that is not a private foundation and the business is not a related business in relation to the charity; or
(c) the person is a registered Canadian amateur athletic association and the business is not a related business in relation to the association.

What This Means for Your Charity

Canadian registered charities are permitted to carry on related businesses — commercial activities that are directly linked to and support the charity's charitable purposes. However, carrying on an unrelated business exposes the charity to a penalty of 5% of gross revenue from that business, and repeat violations can lead to revocation of charitable status.

Private foundations face an even stricter standard: they are prohibited from carrying on any business, related or unrelated. Understanding the distinction between related and unrelated business is critical to protecting your charity's registration. B.I.G. Charity Law Group advises charities on structuring their business activities to remain compliant with the Income Tax Act. Contact us for a governance review.

Frequently Asked Questions

What is a related business for a charity?

A related business is one that is linked to the charity's charitable purposes or is run substantially by volunteers. For example, a hospital charity operating a gift shop staffed by volunteers is typically considered a related business.

Can a charity lose its registration for carrying on unrelated business?

Yes. While the first consequence is a financial penalty, continued or egregious unrelated business activity can lead the CRA to revoke the charity's registration entirely.