As reported in previous
of this Newsletter, Canada is seeing the development of new corporate forms
designed specifically to accommodate social enterprise. Legislation in British Columbia has
introduced a new form of corporation called the “Community Contribution
Company” (“C3”) and the Nova Scotia legislature has established the “Community
Interest Company” (CIC). Both the BC and Nova Scotia legislation have been passed but are not yet in force.
While there are differences in the
respective structures of C3 and CIC corporate forms, the basic features of
these forms are broadly similar. In
order to qualify as a C3 or CIC, it is necessary for the corporation to be
established, at least in part, for purposes beneficial to the community. Both C3 and CIC are permitted to issue share
capital and have private investors, but are subject to statutory limitations on
the amount of dividends that can be paid to private investors. The intention is to ensure that a portion of
the corporation’s profits are directed to the community benefit. Both corporate forms are also subject to an
“asset lock” that prevents them from giving away its assets at less than fair
market value to an organization that is not a registered charity or prescribed
form of non-profit organization.
To date, no preferential tax treatment has
been extended to either of these new corporate forms. As such, the question has remained open how
these corporate forms will be treated under the Income Tax Act or how charities and NPOs can work with or invest in
these corporate forms.
In a technical interpretation released in
January 2013, CRA has provided comments on the ability of NPOs that are tax exempt under paragraph 149(1)(l) of the Income Tax Act to incorporate and hold
shares in a C3 corporation. The
technical interpretation addresses whether an NPO can incorporate a C3
corporation as a subsidiary to carry on for-profit activities.
CRA summarized the elements that must be met
to qualify as a tax exempt NPO under paragraph 149(1)(l). In order to qualify for the exemption, the
organization must comply with the following:
- it cannot be a charity;
- it must be organized and
operated exclusively for social welfare, civic improvement, pleasure,
recreation or any other purpose except profit; and,
- it must not distribute or
otherwise make available for the personal benefit of a member or shareholder
any of its income (subject to limited exceptions).
CRA stated that because a C3 is organized to
provide profit to investors as well as social benefits, it will not qualify as
an NPO, and it will be subject to tax as a regular corporation under the Income Tax Act.
CRA also stated that where an NPO
incorporates a C3 and holds the shares of a taxable C3 subsidiary, this may not, in itself, cause the organization to lose its NPO exemption. CRA stated:
If an organization holds shares to earn
income from property, it may be considered to have a profit purpose, even if
the income from those shares is used in furtherance of the organization’s
not-for-profit objectives. However, the CRA has accepted that where an
organization that otherwise qualifies for the exemption under paragraph
149(1)(l) of the Act, engages in an income-generating activity that is carried
out in a taxable, wholly-owned corporation, and this corporation pays dividends
out of its after-tax profits to the organization to enable the organization to
carry out its not-for-profit activities, the organization may still qualify for
the exemption as set out in paragraph 149(1)(l) of the Act.
CRA confirmed that the determination of
whether the holding of shares in a C3 will affect the parent NPO’s tax exempt
status will be a question of fact to be addressed in each case.
It is noteworthy that CRA confirms
that it may be prepared to accept in at least some circumstances the
establishment of a taxable subsidiary to carry out for-profit activities. While CRA qualifies its statement by noting
that the determination will depend on the facts of each case, it is nonetheless
significant as CRA’s position on this issue has been somewhat unclear in recent
years. Organizations should ensure that
they obtain legal advice before incorporating any form of taxable subsidiary
(whether C3, CIC or otherwise) to carry out for-profit activities, but it is
helpful to have CRA confirmation that this will be acceptable in at least some
circumstances and will not jeopardize the tax-exempt status of the NPO parent.
We expect that as the new C3 and CIC
legislation matures, there will be more CRA commentary on the tax implications
of these corporate forms and how they relate to the existing rules for
charities and NPOs. Miller Thomson’s
Charities and Not-for-Profit Newsletter will keep readers updated on these