Updating tax policy
NEW WAYS FOR CHARITIES AND NON-PROFITS TO GENERATE REVENUE
Most charities and non-profits rely on government grants and public donations for a significant percentage of their overall funding. Both sources can be difficult to predict over the long-term. That complicates planning decisions and creates a need for regular fundraising and grant-writing, which take time and money and distract from the organization’s social aims.
To diversity their income sources and improve financial sustainability, charities and non-profits often turn to earned revenue models. However, the Canada Revenue Agency’s current interpretation the Income Tax Act leaves very little room for these enterprises. To prevent charitable status being misused, the CRA permits only minor business activities that are directly related to the organization’s stated mission. Non-profits are not permitted to earn a surplus, even if that surplus would be spent on their non-profit objectives.
These rules should be updated to recognize the value of revenue generating activity in the non-profit and charitable sector.
The report Mobilizing Private Capital for Public Good: Priorities for Canada made the case for amendments to the Income Tax Act to enable charitable and non-profit social enterprise activity, while addressing concerns about unfair competitive advantage and mission drift.
It made two key recommendations:
- Allow charities and a sub-set of non-profit organizations with clear public benefit objectives to pursue certain related business activities on an income tax-exempt basis, and to pursue other business activities subject to income tax.
- Permit charities to provide a private benefit when it is necessary to achieve a broader public benefit – such as by allowing them to support employer recruitment efforts when this would achieve better employment outcomes for disadvantaged populations.
The Centre for Impact Investing is working with partners from the non-profit, charitable and public sectors to refine and advance these recommendations, in the context of the federal government’s commitment to modernize the rules governing the non-profit and charitable sector.
Over the last decade, the charitable and nonprofit sector has been one of the most rapidly growing parts of the Canadian economy. Yet, there remains a pressing need to ensure the sustainability of the sector’s revenue base, which consists of earned income, government support, and philanthropy.
Together, charities, nonprofits, governments, and the private sector need to explore innovation within each of these revenue streams in order to build on the sector’s achievement and sustain the benefits it provides to Canadian communities.