What is a complementary business activity?

Object

This policy statement sets out the Branch’s policy with respect to the method used to determine whether an applicant organization or registered charity is carrying out an eligible (“complementary”) or ineligible (“non-complementary”) business activity.

States

There are two kinds of complementary business activities, namely:

business activities carried out largely by volunteers
related and subordinate business activities for the purposes of the charity

Application

1. This policy applies to applicant organizations and registered charities that carry on commercial activity.

2. Under the Income Tax Act, a registered charity may lose its registration if it carries on non-complementary business activity. The law (implicitly) allows charities to carry out complementary business activities. However, private foundations are an exception: their registration can be revoked if they carry out a commercial activity, regardless of whether it is complimentary or not. The Income Tax Act does not define the terms “complementary business activity” and “non-complementary business activity”; it simply specifies that a commercial activity carried out by volunteers is a complementary commercial activity, even if it is foreign for the purposes of the charity.

3. Under charitable law, reinforced by the provisions of the Income Tax Act, the purposes of a charity must be exclusively charitable. Carrying out a commercial activity cannot become an end in itself; it must remain subordinate to the charitable purposes of the organization.

A. What is a “commercial activity”?

4. Generally speaking, a commercial activity (ie, earning income from the provision of products and services) is an activity carried out with the intention of making a profit. In determining whether an activity carried on by a charity is commercial in nature, one must consider the specific facts and circumstances of each case in light of criteria established by the courts, namely:

The planned course of action: If an activity is conducted for profit, it is probably a commercial activity
The possibility of making a profit: Even if an activity does not generate a profit, that does not mean that it cannot do it. The relevant factors in determining whether a given activity constitutes a commercial activity are the intention of the organization and the possibility that the activity will generate profit at any given time. If an activity is structured in such a way that it cannot generate profit, it is not a commercial activity.
Profit in the past: If an activity that has been carried on for some time has already generated a profit, it usually means that it constitutes a commercial activity
The expertise and experience of the person or organization carrying out the activity: If the person or organization carrying out the activity was chosen because of their knowledge, skills, or experience in business, it is possible that the activity is commercial in nature

5. Some activities are designed to obtain a profit, but not are considered commercial activities:

Requesting donations: This activity is not considered a commercial activity, as donors do not expect to receive any products or services in exchange for their donation. As the organization does not carry on commercial activity, it is not considered to be carrying on a business
The sale of goods received as a donation: This activity is not considered a commercial activity, because a company does not rely on donations to build up its stock. When a charity sells goods received as a donation, it does not assume the costs or risks associated with doing business. It only converts a given property into cash.

6. Fees are charged for many charitable programs. Just because a charity charges a fee does not mean that it carries out non-charitable programs. or that he carries out commercial activity. A program is charitable as long as it reflects the two essential characteristics of charity: altruism and the pursuit of the public interest. As soon as a charitable program ceases to exhibit these characteristics, it becomes a commercial activity.

Examples of fees charged by charitable programs include rent charged by a low-rental housing program, tuition fees charged by a university, and entrance fees charged by a museum. The guide entitled Registered Charities and Community Economic Development Programs provides other examples of quite acceptable charitable programs, such as microenterprise programs, training companies (which provide on-the-job training to enable the acquisition of professional skills and practical knowledge), and social enterprises (which see to the needs of people with disabilities)

7. The following are some of the indicators for determining that a charitable program in which fees are charged is not a commercial activity:

Fees are imposed to cover the cost of the program rather than to make a profit:
- However, when a government pays a charity to carry out a public program on its behalf, this income and any fees paid by the public, if any, must be taken into account in determining whether the purpose of the program is to generate a profit
The services provided under the program are not comparable to the services offered in the market
Fees are set based on a charitable purpose rather than a business purpose. For example, the fees aim to help the organization alleviate poverty and they are set according to the means of the users, or the organization tries to attract participants to its educational program by not charging fees. entry to an art exhibition

8. Expenses related to a charitable program can be used to reduce the disbursement quota, but expenses related to a commercial activity cannot.

B. What is “carrying on” a commercial activity?

9. “Carrying out” a commercial activity is carrying out a commercial activity on a continuous or regular basis.

10. A charity can conduct business operations as long as it does not do so on a regular or ongoing basis. The case law does not provide clear guidelines in this regard, although the distinction is easy to make in extreme cases. On the one hand, a single sponsorship deal is generally not considered a commercial activity. On the other hand, if the organization sells products or services on a daily or weekly basis and this activity requires continued attention, it is considered to be engaged in commercial activity.

11. Most fundraising activities are commercial activities. They generally consist of the sale of products and services for the purpose of generating income. For example, a contribution to a charity may qualify for an entrance ticket to a concert. The main purpose of a fundraising event is to raise money, and holding the event is not an end in itself. Thus, a high percentage of the gross amount raised is used for charitable purposes. The cost of the activity is often low because the volunteers do a large part of the work and the organization receives many of the necessary supplies free of charge. If such activity were carried out by a business, it would not have such an important “charitable” component. What’s more, a fundraising event usually attracts a clientele who knows the funds raised will be used for charitable purposes and who generally want to support those purposes.

12. Even though fundraising activities are commercial activities, in practice they are generally not subject to the complementary commercial activities legislation, as they do not give rise to the “carrying on” of commercial activity. In order to distinguish between a fundraising activity and a commercial activity, the following factors must be taken into account:

a fundraising activity begins and ends at a specific time, whereas a commercial activity is a continuous operation
unlike a commercial activity, fundraising activity is not an activity carried out on a regular and frequent basis

13. Some charities have more than one fundraising activity in a year. These activities can be very different from each other (eg auction, golf tournament, ball and telethon). In this case, each activity must be assessed individually to determine whether it constitutes a commercial activity. It may also happen that an organization performs the same activity (or very similar activities) more than once (for example a weekly or monthly draw). The more similar the activities, the more likely they will be evaluated together to determine if they constitute the exercise of commercial activity.

14. Income from investments may be different from income from commercial activity. You have to rely on the facts to distinguish between the two types of income. In a way, both business activity and investment rely on the use of goods. The kind of good used is not a very reliable factor. Indeed, while many types of property are usually associated with investments, such as common or preferred stocks and bonds, others can be associated with both investments and commercial activities, such as real estate and rights. royalty free. However, investment income has the following characteristics:

To earn income from an investment, all you need to do is own property. It is not necessary to engage in active trading, as do the brokers who buy a good to resell it for a profit as quickly as possible, nor to operate the good, as do manufacturing companies or companies in the industry. resource industry
The risk to a charity that earns investment income is generally limited to the purchase price of the property.
Raising investment income is essentially a passive activity: the charity does not have to play an active role in carrying out the underlying activity

15. A charity must invest its capital and funds that it does not need to carry out its day-to-day operations. Under the law governing charities, the charity must manage its assets in such a way as to obtain the best possible return while respecting the principles of prudent investment. If investments are managed prudently, it is generally considered that the organization is performing a core administrative function, not a commercial activity.

16. The description of investment income obtained passively does not apply to partnerships. An organization that becomes a limited partner of a partnership carries on commercial activity and does not make a simple investment, even if it does not play an active role within the company. This position is based on the legislative provisions governing partnerships.BAS Agent Services in Australia also Provide this facility . You can Get Information from that Platform

C. What is a complementary business activity?

17. There are two types of complementary business activities:

activities carried out largely by volunteers
related and subordinate activities for the purposes of the charity

To. Commercial activities carried out by volunteers

18. Under the Income Tax Act, a foreign activity for the purposes of the charity constitutes a complementary business activity if all or substantially all of the persons employed in the activity are unpaid volunteers. As a general rule, “all or substantially all” is understood to mean 90%.

19. Persons “employed” to carry out the commercial activity are the persons the charity uses to carry out the activity. These include people who work under contract for the organization and people who are under its direct responsibility.

b. “Related” and “subordinate” business activities for the purposes of the charity

Business activities related to the purposes of the charity

20. The appropriation for charitable purposes of the profits generated by the commercial activity does not constitute a sufficiently strong link(Charities must devote their resources to their charitable purposes, regardless of whether they are carrying on a commercial activity). It is the nature of the activity and its connection to the purposes of the charity that is used to determine whether the organization has a complementary business activity.

21. Four types of links have been identified. Business activity is considered to be related to the charitable purposes of the organization if it falls into one of the categories below.

(i) A usual and essential component of charitable programs

22. These are business activities that complement an organization’s charitable programs. Either they are essential for the effective delivery of programs, or they contribute to improving the quality of the services provided under these programs.

23. For example:

a hospital parking lot, cafeteria, and gift shop, which are accessible to patients, visitors, and staff
gift shops and restaurants in art galleries or museums, which are accessible to visitors
bookstores, student residences, and dining halls in universities, which are accessible to students and faculty

(ii) A derivative of a charitable program

24. In the normal course of carrying out its charitable programs, an organization may create a property that it will carry on in the course of commercial activity. The organization conducts its charitable programs not to create good, but rather to achieve its charitable goals. The good is only a by-product of the organization’s programs.

25. For example:

A historic village grows cereals in the fields that surround it. He does it to show visitors the agricultural equipment of 19 ^thcentury and how this material was used. The grain is transported by cart to the village mill, where visitors can see it being turned into flour. The flour is sold in the village store and in a for-profit grocery store in a nearby community. The charity carries out a complementary business activity by selling the flour to visitors and to the grocery store. This business activity is a complementary activity, as the merchandise sold is produced as part of the charity’s educational programs.
A church records its Sunday mass for parishioners who were unable to attend or who want to hear it again. The church sells the recordings at a price just high enough to cover its costs. This activity is an integral part of the congregation’s evangelistic program and is not a commercial activity. The church in question also has a famous choir and each year its Christmas mass attracts a large audience, and many people want a recording of it. The church sells the recordings of its Christmas mass for as high a price as it can get. This is a commercial activity. However, the business activity is part of the charitable activities of the charity since the church must first carry out part of their charitable program, i.e. celebrate their Christmas mass, before having anything to sell

(iii) Use of excess capacity

26. This type of business activity consists of the use of goods and employees essential to the execution of the charitable programs of the organization, with a view to generating income during periods when they are not used for their own purposes. full capacity in charitable programs.

27. For example:

A charity’s program is a two-week arts festival, held outdoors during the month of July. The charity must obtain tents to accommodate artists and to present exhibitions sheltered from the elements. Since there are no suitable tents for rent in the community, the charity decides to purchase its own tents. During the rest of the year, the organization can rent its tents as a complementary business activity
During the school year, a university needs classrooms and student residences. However, during the summer these facilities are empty. The university can therefore rent them to conference organizers or visitors, as a complementary commercial activity.
A church has a parking lot, the size of which has been determined based on municipal regulations or the needs of the faithful attending Sunday morning mass. It can rent its parking spaces during the week, as an additional commercial activity

28. In the examples above, the charity acquired the property in question because it needed it to carry out its charitable programs and because the purchase made more sense than leasing the item. from an economic point of view. These conditions must be met for the use of the good for commercial purposes to be considered as a complementary commercial activity.

29. If an organization owns property that is used to use for a charitable program but no longer uses them and is unlikely to ever use them again, using those assets for business purposes does constitute not, in principle, a complementary commercial activity. However, the facts may vary from case to case, and various factors must be taken into account in reaching such a conclusion. For example :

There may be times when the market for the asset in question is temporarily unfavorable, so it would be prudent for administrators to hold onto the asset until the market recovers.
The charity cannot easily dispose of the asset in question (for example, floor closed by a hospital due to budget cuts)

(iv) Selling items promoting the charity or its purposes

30. This kind of business activity is related to the purposes of the charity, as the sales made are intended to advertise, showcase or symbolize the charity or its purposes. A product can fulfill its promotional function through its design, packaging or content. Items are typically purchased by people who want to make a contribution to the work of the charity, and they do not compete with products made and sold by for-profit companies. For example, these could be pens, credit cards, and boxes of cookies that clearly display the charity’s name or logo, or even t-shirts or posters depicting the work of the charity. the charity.

Business activities subordinate to the charity’s purposes

31. A business activity is subordinate if it remains secondary to the main purposes of the charity rather than becoming in itself a non-charitable purpose. You have to look at business activities in the context of all the activities of the organization.

32. In determining whether a business activity remains subordinate to the purposes of a charity, four factors must be considered. Taken in isolation, these factors or the supporting evidence for each are unlikely to be determinative. They must be assessed together. The four factors (and the types of evidence that may be relevant) that determine whether an activity is contingent for the purposes of the charity are listed below.

(i) Compared to other activities of the charity, the business activity receives only a small fraction of the attention and resources of the charity

33. What topics dominate at board meetings? How do managers organize their time? What percentage of expenses, personnel, and assets (such as buildings and vehicles) does the organization allocate to business activity? If the organization shares materials or other resources between its charitable programs and its business activities, how often does it use them for its business activities?

34. If, in a year, the organization has devoted a lot of time to commercial activity, is it because of exceptional circumstances (for example the year in which is the planning phase preceding the launch of the project took place? ‘commercial activity)?

(ii) The commercial activity is part of the activities of the organization rather than being an independent activity

35. To what extent is the business activity independent? What percentage of its staff, equipment, and physical location is devoted to other activities of the organization? In advertising of the business activity, is there any mention of the charity and its purposes and programs?

36. Would the business work just as well outside the charity? Is it comparable in size to for-profit companies providing similar products and services? Are the products and services provided by the business the same as those provided by for-profit businesses?

(iii) The charitable objectives of the organization continue to dominate the decision-making process

37. Has the organization risked property intended for its charitable programs to support business activity? For example, has it funded business activity using resources from its programs as collateral?

38. Are decisions focused on results, regardless of the charitable purpose of the organization? For example, does an art gallery that stocks items in its souvenir shop according to their popularity ignore its charitable purpose, which is to promote artistic excellence? Has the organization ever thought about the negative effects its business operations could have on its reputation? Conversely, is there any evidence that the organization has already decided not to carry out certain business activities because they did not fit with its charitable purposes?

39. Who receives the profits from business operations first: the agency’s programs or the business? What percentage of gross business revenue is actually spent on charitable purposes of the organization? Does the organization take a long time to allocate the company’s revenue to its charitable purposes?

40. Over time, have the charity’s charitable programs changed focus because of decisions made in the best interests of the business? Has there been a decrease in the number or quality of services provided by the organization as the business activity has grown?

41. Do the directors of the company play an important role in the management of the charity as a whole?

(iv) The organization continues to operate only for charitable purposes, in particular by not allowing the allocation of any private profit to its activities.

42. How many paid employees are assigned to the business operation? Is the compensation paid to these employees much higher than that offered elsewhere for similar positions? How much is left in gross revenue after the compensation has been paid to the directors of the company?

43. Do for-profit enterprises contribute to the carrying out of the commercial activity? Does the idea to carry out a commercial activity come from the organization itself or from outside? Do for-profit businesses deal at arm’s length from the charity? Did the charity get independent expert advice before making the connection? Do the parties maintain an equitable relationship?

D. Treatment of charities with non-complementary business activities

44. Figure 1 below provides a decision tree for determining whether a charity has a non-complementary business activity. This decision tree highlights the links between the above paragraphs.

45. If a body applying for registration carries out a non-complementary business activity, its application is rejected. If a registered charity conducts a non-complementary business activity, it is breaking the law and risks having its registration revoked.

46. Before revoking the registration of the charity, it should be requested to terminate the non-complementary business activity or to transfer it to a separate taxable company. The organization must then rectify the situation within a reasonable period of time. If he does not do so and he does not take advantage of extenuating circumstances, his registration is revoked.

47. If the charity establishes a separate taxable corporation, it can invest in that corporation just like any other for-profit corporation. The directors or trustees of the organization should ensure that the investment constitutes a prudent use of the charity’s property. They must also ensure that no private profit is allocated to the company.

48. If the constituting documents governing the charity and the provincial legislation allow it, the organization (if it is a charity) can exercise control over the taxable corporation by owning shares or having the power to appoint board members. However, one of the provisions of the Income Tax Act prevents a charity that is a foundation from acquiring more than half of the voting shares issued by a taxable corporation, unless the shares were given to him.