Is a Canadian Charity Allowed to Operate a Business?

What are Canada's guidelines for business activities by charities, and how do they compare to charitable, fundraising, and investment activities?

Understanding Business Activities for Charitable Organizations in Canada

Many registered charities raise money through commercial activities, and this can be a significant and stable source of income. But the rules are specific.

Under section 149.1 of the Income Tax Act, charitable organizations and public foundations are permitted to carry on a related business.

‍Private foundations cannot carry on any business activity at all — related or unrelated. All of these activities are overseen by the Canada Revenue Agency (CRA), and the controlling guidance is CRA Policy Statement CPS-019, What is a Related Business?

Guidelines governing business activities

Provided that it is a related business, a registered charity (a charitable organization or a public foundation) is permitted to carry on business activities.

• A business where substantially all of the individuals participating are volunteers, or
• A business that is associated with and dependent on the charitable purpose of the organization.

A business can be classified as a related business if “substantially all” of the individuals participating are volunteers. For instance, suppose a local community theater (run by a charity) employs two full-time staff members, an artistic director, and a marketing manager, along with 25 volunteer ushers, performers, and backstage crew members. In this case, there are 27 people involved in the theater's operations, and the volunteers represent approximately 93% of the total headcount. Consequently, as most individuals participating in the community theater are volunteers, it can be deemed a related business.

To obtain additional details, please refer to the CRA's Policy Statement CPS-019 titled "What is a Related Business?".

What happens if a charity runs an unrelated business?

Carrying on an unrelated business puts a charity's registration at risk. Under the Income Tax Act, a charity that operates an unrelated business faces graduated financial penalties:

• First infraction: a penalty equal to 5% of the gross revenue earned from the unrelated business in that year.
• Repeat infraction within five years: the penalty rises to 100% of that gross revenue, and the charity's tax-receipting privileges can be suspended.
• Most serious cases: the CRA can revoke the charity's registered status entirely, which means losing the ability to issue donation receipts and the exemption from income tax.

Because the consequences are severe, a charity should confirm that a revenue-generating activity is a true related business before it launches

Is it connected to a charitable objective?

For a business to be associated with a charity's objective, it must have a direct correlation to that objective. Four different types of connection or linkage to charitable purposes exist:

1. Supplementary business activities that support charitable activities. These activities are essential for the efficient functioning of charitable operations or for enhancing the quality of services provided by the charity. For instance, a community center offers fitness classes and charges a fee for access to the gym to support its charitable goal of promoting healthy living.
2. By-product business activities that stem from charitable activities. The charitable operation produces goods or services that can be subsequently sold. For example, an animal shelter makes and sells pet food as a by-product of its charitable activity of caring for animals.
3. Excess capacity business activities that utilize the unused resources of a charity. For example, a non-profit daycare center offers its facilities and staff to rent after hours to host children's birthday parties.
4. The sale of promotional items that support the charity or its mission. For example, a breast cancer foundation sells pink ribbon merchandise to raise awareness and support for breast cancer research.
   

Important — the "destination of funds" is not enough. A business does not become a related business simply because its profits are used to fund charitable work. Canadian courts and the CRA have rejected that "destination test." What matters is whether the business itself is linked to and subordinate to the charity's purpose (or run substantially by volunteers) — not where the money ends up. A charity that runs an unrelated business and donates all the profits to its own programs is still carrying on an unrelated business.

Tip: Organizations planning to establish a "Social Enterprise" should ensure that the regulations concerning business activities are applied to these endeavors.

Comparison to charitable activities

Although many activities generate revenue for a charity, generating revenue alone does not make an activity a business activity. The table below shows the main differences.

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Key difference: a charitable activity exists to deliver the mission; a business activity exists to earn income through trade.

Comparison to fundraising activities

The act of soliciting donations is not classified as a business activity since donors contribute to a charitable purpose without expecting anything in return.

Most fundraising events, however, are considered business activities as they often possess commercial characteristics. For example, events like concerts, dinners, and sporting tournaments share similarities with for-profit entertainment offerings.

Nevertheless, some events exhibit more features of a fundraising activity rather than a business activity. Furthermore, fundraising events, even if they are considered business activities, may not necessarily be subject to relevant business regulations if they do not qualify as "carrying on a business." The CRA evaluates each fundraising event on a case-by-case basis. If a charity organizes similar events repeatedly throughout the year, the CRA may evaluate them collectively and determine that their recurring nature qualifies as carrying on a business.

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Key difference: a donor gives without expecting value back; a customer pays for something received.

Comparison to investment activities

Charities frequently generate investment income, whether from excess funds, endowments, or other assets designated to support charitable endeavors. Although both business and investment activities generate income from assets, investment activities are often passive in nature, involving asset ownership.

Outlined in the following table are several distinctions between investment activities and business activities.

Unlike investment activities, earning income from business ventures necessitates an active role in operating the enterprise.'

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Key difference: investment income comes from owning assets; business income comes from running an operation.

What the CRA looks at when deciding if a business is "related"

There is no single formula. The CRA weighs the full picture, asking questions such as:

• Is the business linked to the charity's purpose, or is it just a way to make money? A hospital running a cafeteria for patients and visitors is linked; the same hospital running an unrelated landscaping company is not.
• Is it subordinate to the charitable work? The business should support the mission, not overshadow it or absorb a disproportionate share of the charity's resources and attention.
• Who actually runs it? If substantially all of the people operating the business are volunteers, it can qualify as related even if it is not otherwise linked to the purpose.
• Is it recurring and commercial? A single bake sale is unlikely to be a business; the same activity run continuously, in a commercial way, may be.

A few worked examples:

• Likely related: A museum gift shop selling books and replicas tied to its collections; a church operating a religious bookstore; an addiction-recovery charity running a café staffed mainly by program participants and volunteers.
• Likely unrelated: A charity that buys and operates a commercial parking lot unconnected to its programs; a youth charity that opens a consumer electronics store simply to raise funds.

Because the line can be fine, charities considering a new revenue stream should get it reviewed before launching. 

Can a charity use a separate business corporation instead?

Yes — and for many charities this is the cleaner path. A charity can set up (or hold shares in) a separate taxable corporation that carries on the business. The corporation pays its own taxes and can donate its profits to the charity, which keeps the commercial operation outside the charity's own activities.

There is an important limit for foundations. Under the Income Tax Act, a public or private foundation cannot acquire or maintain control of a corporation (broadly, more than 50% of the voting shares), except where it receives the controlling shares as a gift. A charitable organization generally can hold a controlling interest, provided its governing documents and provincial law allow it.

Using a separate corporation can offer liability separation and operational flexibility, but it also adds tax and governance complexity. This is an area where legal and tax advice pays for itself. 

Conclusion

Understanding whether your charitable organization can operate a business—and ensuring it complies with CRA regulations—requires careful analysis of your specific circumstances. The distinctions between related businesses, fundraising activities, and investment income can be complex, and missteps could jeopardize your charitable status. If you're considering launching a social enterprise, expanding your revenue streams, or simply need clarity on what activities are permissible for your organization, professional legal guidance is essential.

At B.I.G. Charity Law Group, we specialize in helping Canadian charities navigate the intricate rules surrounding business activities and CRA compliance. Our team understands the nuances of what constitutes a "related business" and can provide strategic advice tailored to your organization's mission and goals. Whether you're establishing a new venture or reviewing existing operations, we're here to ensure your charity operates within the law while maximizing its impact.

Don't leave your charity's compliance to chance. Contact us today at dov.goldberg@charitylawgroup.ca or call 416-488-5888 to discuss your questions about business activities and charitable operations. Visit CharityLawGroup.ca to learn more about our services, and schedule a FREE consultation to get personalized guidance for your organization's unique needs.

Frequently Asked Questions

Canadian charities often ask us about running businesses and following CRA rules. Here are answers to common questions about charity business activities and legal requirements.

Can a charity own a for-profit business in Canada?

Yes, in two ways. A charity can carry on a related business directly — one run mainly by volunteers or linked to its purpose. Or it can hold shares in a separate taxable corporation that runs the business and donates profits to the charity. An unrelated business run directly by the charity puts its status at risk, so get legal advice first.

Can a for-profit business own a nonprofit?

No. Nonprofits and charities don't have owners like regular businesses. They're controlled by a board of directors who must act in the organization's best interest. However, a for-profit business can donate to a charity, partner with one, or have representatives on the board.

What is the difference between a charity and a nonprofit in Canada?

All charities are nonprofits, but not all nonprofits are charities. Charities must have specific purposes like relieving poverty or advancing education, and they can issue tax receipts. Nonprofits include sports clubs and social groups but cannot issue tax receipts. Both types don't distribute profits to members.

Is it legal for charities to run commercial businesses?

Yes, but only "related businesses." The business must be run mostly by volunteers or directly support the charity's purposes. For example, a hospital charity can run a volunteer-operated gift shop. Running an unrelated business could cause the charity to lose its status.

Can a charity legally become a business?

A charity cannot become a for-profit business and keep its charitable status. To become a business, it must give up its charitable registration, lose its ability to issue tax receipts, and pay regular taxes. However, charities can operate business activities alongside their charitable work if those activities are related to their mission.

Can a private foundation run a business in Canada? 

No. Private foundations are prohibited from carrying on any business activity, related or unrelated. This is different from charitable organizations and public foundations, which may carry on a related business. A private foundation that runs a business risks penalties and revocation of its registered status.

What happens if a charity runs an unrelated business? 

The charity faces penalties: 5% of the gross revenue from the unrelated business for a first infraction, rising to 100% for a repeat infraction within five years, with possible suspension of receipting privileges. In serious cases, the CRA can revoke the charity's registration.

Does it count as a related business if all the profits go to charity? 

No. Using the profits for charitable work does not, on its own, make a business "related." The CRA and the courts look at whether the business is linked to and subordinate to the charity's purpose (or run substantially by volunteers), not at where the money goes.

Can a charity own a separate business corporation? 

Yes. A charity can hold shares in a separate taxable corporation that runs the business and donates profits back. Note that foundations cannot control such a corporation (more than 50% of voting shares) unless they receive the shares as a gift; charitable organizations generally can.

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