Charitable Business Activities: What You Can and Can’t Do

When most people decide to start a charity, they have a big dream to make a difference in the world. They know they want to help, but they’re not always entirely sure how they plan to do that.

That can complicate things for these organizations, because under Canadian law and tax regulations, there are actually quite a few limitations on what you can and can’t do. To make matters worse, if you cross the line on these limitations, even unintentionally, you can lose your charitable registration status.

One area that is particularly tricky is the business that your charity can be involved in. So, let’s take a closer look at why you might want to be involved in business, and what the rules are.

Why Do Charities Want to be Involved in Business?

The law in Canada says that a registered charity (either a charitable organization or public foundation) may be engaged in business related to its purpose or mission.

Of course, charities’ purpose or mission is to effect positive change in the world, and one of the most fundamental ways to do that is to provide financial support to organizations or individuals.

That means that charities need to generate revenue, and one way to do this is to be involved in some kind of business. That’s where things get tricky.

What Are “Related Businesses”?

One of the complexities of generating revenue for a charity while still staying on the right side of the regulations governing them is how to earn money.

When it comes to the definition of “related businesses” in the charities context, there are two specific situations that apply:

1.      If the business is “subordinate” to your primary activities, which means it’s not the primary focus of your work and,

2.      If it is run 90% or more by volunteers

That’s still pretty broad and open to interpretation though. Which means that many people and organizations struggle to determine if the business they are planning to run to support their charitable work will meet the requirements.

Things That Are NOT Considered a Business

The first type of activity we should look at are things that are not considered a business when done by a charity, and there are actually quite a few things that fall into this category, including:

·        Reselling items that have been donated to the charity.

·        Fund raising activities that rely on asking for and receiving donations.

·        Fundraising events, so long as they are not a frequent or regular activity.

·        Investing the charities funds and receiving income from those investments

·        Charging fees for services, provided that the funds raised are used to pay for the operation of the service.

All of the things on this list can be done without being considered business activities and will not cause any risk to your charitable registration status.

Things That ARE Considered a Business

Of course, for the rule about business conducted by charities to exist, there must be circumstances where you might cross this line. These include:

·        Operating a gift shop, paid parking service for your operation, or a restaurant or café on the site of your organization

·        Selling products with your organization’s logo on them

·        Renting out space in your building or parking lot

These activities should all be directly related to the activities of your charity, but they can be done and used to generate funds for your organization.

Employees and Your Charity

If you need to hire employees for your charity, that’s actually great news! It means you’ve probably come a long way from registering your charity, and you’re well on your way to achieving your goals. In fact, you might even change the world.

But, while growth, including needing to hire people to help with the day to day of your organization is a good sign, it does also raise a few new questions and problems.

Here’s what you need to know about employing people to work in your charity.

Hiring and Screening Employees

One of the biggest problems many employers face in Canada is balancing their employees rights to privacy with the protection they are entitled to under The Privacy Act.

The rules about what employers can and cannot ask their prospective hires also differ from one province to the next, and by employer type. So, in some places, you may be allowed to ask if your potential employee has a criminal record, but elsewhere you might not.

The same goes for credit checks. Unless the job is directly related to working in finance or arelated industry, it might not be relevant to the job, and asking for one might contravene the Act.

Generally, when it comes to employees and privacy in Canada, any screening, background checks or surveillance by employers must be relevant to the job, disclosed to the employee, applied consistently, and obtained through legal and credible means.

This includes things like drug and alcohol testing, and even looking up employees on social media.

Of course, even though you can’t be excessively invasive with your employees, you should also know that any negative behavior that they might indulge in (and any press that accompanies it) can and probably will reflect on your organization. That might not affect your organization in any fundamental way, but it can be a public relations nightmare. So, make sure you have clearly defined policies governing employee conduct, and that you apply them consistently.

Remuneration and Charity Employees

Many charities only employ a handful of directors and trustees and rely on the donated time of volunteers to get a lot of their work done. However, if you are paying those directors and trustees, you need to know that the CRA has set strict guidelines for how much they can earn, and what kind of earnings they are entitled to.

You can read more about this on the Government of Canada website which also has information about undue benefits, and how employee remuneration affects your tax returns.

It’s also important to note that the CRA does pay close attention to the earnings of charity directors and trustees, and they will take action if they suspect something is amiss.

Volunteers

Many charities rely on volunteers to get their good work done. But it’s also interesting to note thatjust the act of encouraging volunteerism can be considered a charitable purpose, and that organizations that do that can become registered charities.  

If volunteers incur expenses while working for a charity, and are not reimbursed for those expenses, they are also seen as a gift to the organization, and the rules about gifts and donations would apply.

Which means that while it’s fine for charities to make use of volunteers, they do need to be knowledgeable about the regulations, and how they apply.

Policies First

A charity is like any other business. There are all kinds of legislation that governs what you can and can’t do, including when you hire employees. Some of that legislation is specific to charities, but some applies generally. Some is managed at the federal level, but there is also provincial level legislation to consider.

The best advice is the same as it would be with any business. It’s always best to know the rules before you need to apply them, and to have policies drawn up before you need to use them.

Spend some time before you need to hire employees or take on volunteers, and make sure that you’ve dotted all the i’s and crossed all the t’s. It will undoubtedly save you a lot of time, money, and effort later. Stay abreast of changes in legislation too.This is a good business practice, but it will also ensure that your charity stays in good standing, and on the right side of the law. 

When in Doubt, Ask

As with most of the regulations and legalities related to registering and running a charity in Canada, these guidelines are quite vague, and can be open to interpretation. Sometimes, that interpretation can put even people and organizations with the very best intentions on the wrong side of the law.

If there is ever any doubt that the business activity you are planning or considering to support your charitable work is acceptable, always ask. A little preemptive research or a few questions to the right people can make all the difference.

Remember that even if you make a good faith decision with the very best intentions, if you make the wrong choices, you can put your charitable registration at risk. So, you always want to have as much information as possible before you move forward.

A great resource that expands more on this concept is hosted on the Canada Revenue Agency’s website.