Related business - Segment 3


Welcome to segment 3 called "Related business", part of the "What is a related business? (Policy Statement CPS-019)" recorded webinar.

Related business

Now that we have identified carrying on a business, let's proceed to the term "related business".

Section 149.1 (1) of the Income Tax Act, includes the term "Related business".

Related business, in the context of a charity, includes a business that is unrelated to the purposes of the charity if substantially all persons employed by the charity (as a general rule 90%) in the carrying on of that business are not remunerated for that employment.

Additionally, based on our "What is a related business" policy, related businesses also include if the business accomplishes or promotes the charity's purposes.

Therefore, there are two kinds of related businesses, those that are substantially run by volunteers and those that are linked to a charity's purposes.

We will now discuss the first kind of related business which is a volunteer-run business.

As previously mentioned, the Income Tax Act defines related business as businesses that are not related to the charity's purposes but that have substantially all those employed in the business serving as unpaid volunteers. So the general rule, "substantially all", means 90%.

The people "employed" in the business means the people the charity uses to operate the business. It includes those working for the charity under contract as well as the charity's direct employees.

We will now present the second kind of related business, which is separated into two parts. The first is " Linked to a charity's purpose" and the second is "and /or subordinate to a charity's purpose." 

So the fact that the profits from a business are applied to a charitable purpose is not sufficient to constitute the necessary linkage. Instead, it is the nature of the business, and whether it has some direct connection to a charity's purpose, that determines whether it is a related business.

Four forms of connection or linkage have been identified.

A) A business is considered linked to a charity's purpose if it fits within one of the following categories:

  1. A usual and necessary concomitant (meaning naturally accompanying or associated) of charitable programs
    So these activities supplement charitable programs and are necessary for the effective operation of the programs, or they improve the quality of the service delivered in these programs. So for example: a hospital parking lot, cafeterias, and gift shops and for the use of patients and a university book store.
  2. Another example is an offshoot of a charitable purpose
    In the ordinary conduct of its charitable programs, a charity may create an asset (by-product) that it can exploit in a business. The charity carries out its charitable programs not to create the asset, but to achieve its charitable purpose. Examples: church recording services and then selling the recordings to those who may have missed the service or want to hear it again, or providing Christmas services.
  3. The third is a use of excess capacity
    This type of business activity involves using a charity's assets and staff, which are currently needed to conduct a charitable program, to gain income during periods when they are not being used to their full capacity within the charitable program. An example is a university renting out its facilities (classrooms, residences, etc.) during non-operational months (summers).
  4. And the fourth one, the sale of items that promote the charity or its purposes
    This type of business activity is linked to a charity's purpose because it involves sales that are intended to advertise, promote, or symbolize the charity or its purposes. A product may serve this promotional purpose by virtue of its design, packaging, or included materials. Examples include pens, credit cards, and cookies that clearly display the charity's name or logo, and T-shirts or posters that depict the work of the charity.

B) Subordinate to a charity's purpose: 

A business is subordinate to a charity's purpose if it remains subservient to a dominant charitable purpose, as opposed to becoming a purpose in its own right.

In considering whether a business remains subordinate to a charity's purpose, we need to consider four factors. The various factors and the strength of the evidence supporting each of them need to be weighed together.

So the first is…

Relative to the charity's operations as a whole, the business activity receives a minor portion of the charity's attention and resources

Some questions to ask: What subjects dominate board meetings? How do managers allocate their time? In terms of expenditures, staffing, and assets such as buildings and vehicles, what proportion is applied to the business activity?


The business is integrated into the charity's operations, rather than acting as a self-contained unit

Some questions to ask: To what extent is the commercial activity a stand-alone operation? Could the business operate as easily outside the charity as within it? In terms of its staffing, equipment, and physical location, how much is shared with the rest of the charity's operations?


The organization's charitable goals continue to dominate its decision-making

Some questions to ask: Has the charity risked the assets intended for charitable programs to support the commercial activity? For example, has it borrowed against resources used in its programs to finance the commercial activity? Are decisions being made on a bottom-line basis without regard to the organization's charitable purpose? For example, is an art gallery stocking items in its souvenir shop on the grounds of what sells best and ignoring the charity's mission to promote artistic excellence?

And lastly…

The charity continues to operate for exclusively charitable purposes and delivers no more than an incidental private benefit (a benefit that is necessary, reasonable, or proportionate in relation to the resulting public benefit)

Some questions to ask: How many salaried employees does the commercial operation have? Are the salaries much higher than those for equivalent positions elsewhere? Did the initiative to set up the business activity come from inside or outside the charity? Are the for-profit firms at arm's length with the charity?

Private foundations are not permitted to conduct any business activity, whether or not it's related to their purposes, as it can lead to the revocation of their charitable registration. 

Charitable organizations and public foundations can carry on related businesses, as long as it accomplishes or promotes their charitable purposes.

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