Community economic development activities and charitable registration

Guidance

Reference number
CG-014

Issued
July 26, 2012 (Revised August 9, 2017)

This guidance replaces Guide RC4143, Registered Charities: Community Economic Development Programs, issued on December 23, 1999.

 

For more information, watch our recorded webinar Community economic development activities and charitable registration.

Summary

Community economic development (CED) activities can be charitable when they further a charitable purpose.

Organizations that carry out CED activities may be eligible for charitable registration under the Income Tax Act if all their activities further charitable purposes.

Generally, CED activities involve improving economic opportunities and social conditions of an identified community.

CED activities may further charitable purposes that:

  • relieve poverty
  • advance education
  • benefit the community in other ways the law regards as charitable

CED activities generally fall into five areas:

  • activities that relieve unemployment
  • grants and loans
  • program-related investments
  • social businesses for individuals with disabilities
  • community land trusts

To be charitable, CED activities must be undertaken in a way that ensures that any resulting private benefit is incidental, meaning that it is necessary, reasonable, and proportionate to the public benefit that is delivered. If a private benefit is more than incidental, an organization can face sanctions or have its charitable registration revoked.

When CED activities are undertaken in areas of social and economic deprivation, including disaster areas, it may be easier to show that a private benefit is incidental. Each situation will be evaluated in its own context.


A. Introduction

1. The Canada Revenue Agency’s Charities Directorate registers charities under the Income Tax Act and ensures that registered charities continue to meet all associated requirements.

2. In this guidance, unless otherwise stated, the terms:

  • “organization” includes applicants for registration as a charitable organization, a public foundation, or a private foundation, as well as already registered charities

3. This guidance explains the Charities Directorate’s interpretation of the relevant common law (case law or court decisions) and legislation (the Income Tax Act). It sets out the criteria the Charities Directorate uses to determine whether an organization that engages in community economic development (CED) activities that further charitable purposes may be eligible for registration as a charity under the Income Tax Act. Charitable registration is one option for organizations. Please go to Is registration right for you? for more information about this topic.

4. An organization must meet a number of general requirements to qualify for registration under the Income Tax Act. Refer to Charities Directorate guidance for detailed information about other registration requirements, including the following:

5. This guidance provides general information only. All decisions about specific organizations are made individually, applying the law to the facts in each case. The facts may come from information the organization provides or from other information available to the Charities Directorate.

B. Community economic development in the charitable context

Key concepts

6. The law in Canada does not recognize community economic development (CED) as a charitable purpose. However, activities related to CED (CED activities) may be charitable when they directly further a charitable purpose.

7. CED refers to a wide variety of activities. Other terms that could describe similar activities include community capacity building, social enterprise, and social finance. In this guidance, CED activities may include activities associated with all such terms. For more information about these terms, see Appendix A.

8. Regardless of how an activity is labeled, it will only be charitable if it directly furthers a charitable purpose. Footnote 1 

9. Many CED activities involve improving economic opportunities and social conditions of an identified community. A community is often defined geographically, but in this guidance it can also mean an identified group of eligible beneficiaries who share a common characteristic that results in an economic disadvantage. Sometimes, both characteristics will be present.

10. Organizations that conduct CED activities must make sure they meet the public benefit requirement, which prohibits the delivery of unacceptable private benefits. As a general rule, a private benefit is a charitable or non-charitable benefit provided to a person, entity or organization that is not a charitable beneficiary, or a benefit provided to a charitable beneficiary that exceeds what is considered to be charitable. Most of the time, an unacceptable private benefit is one that is not incidental to achieving a charitable purpose. A private benefit will usually be incidental if it is necessary, reasonable, and proportionate to the public benefit achieved. For more information, go to Policy statement CPS-024, Guidelines for registering a charity: Meeting the public benefit test.

C. Community economic development activities that further charitable purposes

11. CED activities may potentially further purposes that relieve poverty, advance education, or benefit the community in other ways the law regards as charitable. The following are examples of charitable purposes that can be furthered by CED activities:

  • relieving poverty by relieving unemployment of the poor
  • advancing education by providing employment-related training
  • benefiting the community in a way the law regards as charitable by:
    • relieving unemployment of individuals who are unemployed or facing a real prospect of imminent unemployment and are shown to need assistance Footnote 2  
    • relieving conditions associated with disability
    • improving socio-economic conditions in areas of social and economic deprivation
    • promoting commerce or industry

12. Each charitable purpose has specific requirements relating to eligible beneficiaries.Footnote 3   For example:

  • for a purpose that relieves poverty, eligible beneficiaries must be poor
  • for a purpose that relieves conditions associated with disability, eligible beneficiaries are individuals with conditions associated with the disability
  • when unemployment is relieved to further a purpose beneficial to the community in a way the law regards as charitable, the beneficiaries must be unemployed or facing a real prospect of imminent unemployment and be shown to need assistance

13. The courts have not recognized “providing employment,” or “helping people find employment” as charitable purposes in and of themselves when the beneficiary group is the general public.Footnote 4   However, either providing employment, or helping individuals find employment, could be a charitable activity if it directly furthers one of the charitable purposes listed in paragraph 11.

14. CED activities generally fall into five areas:

  • activities that relieve unemployment
  • grants and loans
  • program-related investments
  • social businesses for people with disabilities
  • community land trusts

15. Depending on the purpose they further, different activities may be subject to different requirements. For example, activities that advance education must be sufficiently structured, meaning they have a teaching or learning component and involve a legitimate, targeted attempt to educateFootnote 5   requirements that do not generally apply to activities that further other charitable purposes.

16. The following sections provide more details about activities within these five areas and the charitable purposes they can further.

Activities that relieve unemployment

17. Activities that relieve unemployment of individuals who are unemployed or facing a real prospect of imminent unemployment and are shown to need assistance may be charitable if they directly further one or more of the charitable purposes listed in paragraph 11.

18. Examples of activities that relieve unemployment include:

  • providing employment-related training (see paragraph 21)
  • providing career counselling
  • providing referral services to appropriate agencies for assistance
  • forming and facilitating mutual support groups for individuals seeking employment
  • providing assistance with résumés or preparing for job interviews
  • establishing lists of available jobs
  • matching individuals who are unemployed or facing a real prospect of imminent unemployment and are shown to need assistance to appropriate employers
  • providing funds to allow individuals who are unemployed or facing a real prospect of imminent unemployment and are shown to need assistance to attend job interviews or to relocate to get employment
  • helping unemployed individuals to get employment insurance or other benefits to which they are legally entitled

19. Helping individuals who are underemployed to get a new job can be a charitable activity when it can be shown to further a charitable purpose, such as relieving poverty or relieving conditions associated with a disability.

20. When the emphasis is on helping employers recruit employees, this does not further a charitable purpose due to the delivery of a more than incidental private benefit to the employers.

Employment-related training

21. Generally, employment-related training must not be limited to a specific employer, because this could result in an unacceptable private benefit to the employer.Footnote 6   Exceptions may be possible in areas of social and economic deprivation (see paragraphs 84-94). For more information, go to Policy statement CPS-024, Guidelines for registering a charity: Meeting the public benefit test.

22. Examples of employment-related training activities for eligible beneficiaries include:

Employability training: developing the skills necessary to prepare for employment such as English or French as a second language, as well as life skills such as time management and interpersonal relations.

Entrepreneurial training: providing instruction on preparing a business plan, obtaining financing, bookkeeping, preparing financial statements, marketing, and government regulations.

On-the-job training: providing on-the-job training in vocational or work skills that enhance an individual’s employability. These activities cannot simply provide individuals with employment or supply an employer with staff. The aim and result of the program must be to provide training, not jobs. To be acceptable, programs should feature the following characteristics:

  • instruction is provided to complement the on-the-job training (before or during the on-the-job component)
  • the participants are employed for a limited period of time
  • the charity offers a job placement service to help graduates of the program find work in the labour force
  • the proportion of workers from the beneficiary group in relation to the total number of employees is 70% or higher, but alternative ratios may be justifiable if considerable supervision is required
  • the focus of the activity must be to further a charitable purpose, not to generate revenue Footnote 7 

23. If these criteria are not met, the charity may be running an unrelated business, which is not permitted. For more information, go to Policy statement CPS-019, What is a related business?

Grants and loans to eligible beneficiaries

Individual development accounts

24. Providing individual development accounts (IDA) may be charitable if they directly further one or more of the charitable purposes listed in paragraph 11.

25. IDAs are savings accounts that are used only for a specific goal. The charity provides matching funds at a predetermined ratio (for example 2:1) to help eligible beneficiaries develop savings over a specific period. For example, a charity contributes two dollars for every dollar the individual saves. The individual then uses the amount saved for the agreed upon goal.

26. While IDAs are most commonly used to further poverty relief by relieving unemployment of the poor, they may also advance education by providing funds for employment-related training, or further a fourth category purpose such as relieving employment-related conditions associated with disability.

27. Examples of IDAs that may further charitable purposes include:

  • funds to help a disabled individual modify his or her home in order to operate a home-based business
  • funds to buy tools that an unemployed tradesperson needs to work
  • funds for employment-related training, including post-secondary education

28. The organization must be able to provide its policy for ensuring that IDAs are used only to further charitable purposes. The policy should include the following information:

  • the criteria for determining who is an eligible beneficiary of an IDA
  • how the amount of the IDA is determined
  • the acceptable uses for its IDAs
  • when eligibility ceases based on predetermined criteria (for example, the recipient has finished school or has purchased equipment and is now employed and therefore no longer meets predetermined poverty criteria)

29. To avoid delivering more-than-incidental private benefit, a charity may grant only the amount needed to achieve the charitable purpose. A charity must be able to show that its grants do not exceed this amount.

Loans and loan guarantees

30. Providing loans, including micro-loans, and loan guarantees to eligible beneficiaries may be charitable if they directly further one or more of the charitable purposes listed in paragraph 11. For example, a loan or loan guarantee can help an eligible beneficiary attend courses to enhance employment-related skills.

31. Start-up loans and loan guarantees to establish businesses, including sole proprietorships or collective enterprises such as worker cooperatives, can be charitable if they directly further a charitable purpose. These loans and loan guarantees are typically accompanied by entrepreneurial training (see paragraph 22) and necessary support services.

32. However, providing loans, including start-up loans, and loan guarantees to promote entrepreneurship by, for example, helping entrepreneurs bring new and innovative ideas to the marketplace, or to promote business development, is generally not a charitable activity. These loans and loan guarantees typically fail to directly further a charitable purpose without delivering a more-than-incidental private benefit.

33. When loans, including start-up loans, and loan guarantees are provided to individuals to relieve poverty, and the recipient no longer meets the eligibility criteria, the loan or loan guarantee no longer furthers the charitable purpose. The balance of the loan should be repaid or the terms of the loan adjusted to market rates to ensure the non-qualifying beneficiary doesn’t receive an unacceptable private benefit.

34. The organization must be able to provide its policy that ensures that all loans and loan guarantees further its charitable purposes. The policy should include the following information:

  • the criteria for determining eligible beneficiaries
  • in the case of start-up loans for businesses, how it determines when a start-up business has become viable and no longer needs support. For example, the organization might consider a business to be viable when it can get financing from conventional sources

35. To avoid delivering a more-than-incidental private benefit, a charity may only loan or guarantee an amount needed to achieve the charitable purpose. Total loans or guarantees of less than $10,000 to eligible beneficiaries will generally be considered to meet this requirement; however, the determination will be fact-based in each case. For example, a smaller loan may achieve the same results in a developing economy that a $10,000 loan would achieve in the Canadian context.

36. A charity must be able to provide a rationale and justification to show that its loans or guarantees do not exceed the amount needed to achieve its charitable purpose. For more information about private benefit, go to Policy statement CPS-024, Guidelines for registering a charity: Meeting the public benefit test.

37. In most cases, interest rates are expected to be at or below fair market value to allow greater charitable benefits to be delivered. Footnote 8  However, there may be circumstances when a higher rate is justified. For example, a loan at above-market rates could be justified based on terms that allow the borrower to delay repayment. Flexibility may be as important a consideration as rate for some borrowers.

38. For information about accounting for loans, see paragraphs 61-68.

Program-related investments

39. Program-related investments (PRIs) may be charitable if they directly further one or more of the charitable purposes listed in paragraph 11. A PRI is an activity that directly furthers the investor charity’s charitable purposes. Common types or forms of PRIs include:

  • loans
  • loan guarantees
  • share purchases
  • leases of land or buildings

40. A PRI is not an investment in the conventional financial sense. While PRIs may generate a financial return, they are not made for that reason. A PRI usually involves the return, or potential return, of capital (funds or property) within a set period of time, but this is not a requirement. A PRI may also yield additional revenue for the investor charity (such as interest), but the yield of additional revenue can be below market rates.

41. A charity could often simply fund a PRI-related activity outright because it furthers one of its charitable purposes. However, a charity may decide to invest capital with the expectation of it being returned with or without yielding additional revenue for various reasons. For example, a PRI can increase the benefits a charity can provide when the invested capital or property is returned (such as repaying the principal or ending a lease), or yields additional revenue (such as interest on a loan) as these funds or facilities can be used or re-used to support other charitable activities.

Examples of program-related investments

42. Examples of PRIs include:

Example A
A charity that has a purpose to relieve poverty by providing essential amenities of life makes a PRI in the form of a fair market value purchase of shares of an arm's length corporation (a non-qualified donee Footnote 9  ) that operates a commercial apartment complex. This PRI is based on a written agreement that a proportionate number of units in the apartment complex are rented at reduced rates to poor individuals who satisfy the investor charity’s appropriate poverty eligibility criteria. The terms of the agreement include ongoing monitoring and reporting provisions to ensure the charity maintains the necessary direction and control over its activity, which is to provide affordable rental housing to the poor.

Example B
A charity that has a purpose to relieve unemployment of individuals who are unemployed or facing a real prospect of imminent unemployment and are shown to need assistance by providing job skills training makes a PRI in the form of a low-interest loan to a not-for-profit entity (unconnected to the investor charity and a non-qualified donee). The not-for-profit entity provides job training programs on the charity’s behalf. This PRI is based on a written agreement that the funds are used only to provide training to participants who meet the investor charity’s appropriate eligibility criteria. The terms of the agreement include ongoing monitoring and reporting provisions to ensure the charity maintains the necessary direction and control over its activity.

Example C
A charity that has a purpose to advance education leases a building to an arm’s length organization (a non-qualified donee) at less than fair market value. The arm’s length organization teaches English or French as a second language to help students develop the skills necessary to prepare for employment. The lease agreement between the charity and the arm’s length organization states that all students have to meet the investor charity’s appropriate eligibility criteria. The terms of the agreement include ongoing monitoring and reporting provisions to ensure the charity maintains the necessary direction and control over its activity, which is to teach eligible beneficiaries the language skills necessary to prepare them for employment.

Requirements for program-related investments

43. A PRI must directly further a charity’s stated charitable purposes.

44. According to the Income Tax Act, a registered charity can only use its resources (such as funds, personnel, and property) in two ways:

  • for gifting funds to qualified donees
  • for its own activities (those over which the charity maintains ongoing direction and control, and for which it can account for any resources invested)

45. For this reason, a PRI must:

  • be made to a qualified donee
  • if the recipient is a non-qualified donee, the PRI must be used for a program over which the investor charity maintains ongoing direction and control, so that the program is the investor charity’s own activity

46. When a PRI is made for the program of a qualified donee, the investor charity does not need to retain direction and control over the resources invested. These PRIs are considered to generate gifts to the recipient qualified donees to the extent of the investment income foregone by the investor charity.

47. If a PRI is made for a program being carried out by a non-qualified donee, the investor charity must be able to prove that the arrangement meets the "own activities" requirements of the Income Tax Act. This means that the program the PRI relates to must be conducted under the charity’s ongoing direction and control. In many cases, the recipient non-qualified donee will act as the intermediary of the investor charity.

48. For information about the types of arrangements an investor charity can use to establish the necessary direction and control, see the sections relating to working with intermediaries in Guidance CG-002, Canadian registered charities carrying out activities outside Canada, and Guidance CG-004, Using an intermediary to carry out a charity’s activities within Canada Footnote 10 

49. A charity that makes a PRI to a non-qualified donee must show that any private benefit resulting from the PRI is incidental (necessary, reasonable, and proportionate to the resulting public benefit). For more information about private benefit, go to Policy statement CPS-024, Guidelines for registering a charity: Meeting the public benefit test.

50. If a charity cannot maintain direction and control over the activity carried out by a non-qualified donee, it cannot use a PRI. However, a charity could potentially invest in, or provide resources to, the non-qualified donee at market rates (as a form of conventional financial investment) provided the investment meets the investor charity’s conventional investment requirements.

51. The charity must ensure it has appropriate exit mechanisms in place to allow it to: a) withdraw from a PRI; or b) convert the PRI to a regular investment, if the PRI no longer furthers its charitable purposes. Failing to do so may result in sanctions. Examples of exit mechanisms include:

  • for PRIs in the form of loans or leases, the exit mechanism is most often a condition that requires the immediate repayment of the loan or termination of the lease, or the conversion of the loan or lease to commercial terms. In the latter case, the loan or lease must subsequently be treated as an investment, not an activity that furthers a charitable purpose. The charity would be expected to get appropriate market rates of return on such an investment. Property not used in charitable programs or administration may be subject to the disbursement quota

  • for PRIs in the form of shares, subject to the laws governing the reduction of capital, the exit mechanism would likely be an arrangement by which the company initially issues shares that are redeemable in certain circumstances or by which it agrees to repurchase its own shares conditionally. Alternatively, a charity could declare that the investment is no longer a PRI, but has become a regular investment. In that case, the charity would be expected to get appropriate market rates of return on such an investment. Property not used in charitable programs or administration may be subject to the disbursement quota

52. Other forms of exit mechanisms may be used provided they satisfy the requirement that the charity is able to withdraw its investment when it can no longer ensure that its charitable purposes are being furthered.

53. The charity should have a written policy or other documentation explaining the relationship of each PRI to its purposes, and setting out the criteria or parameters it applies when making PRI decisions. If the PRI involves funding a non-qualified donee, supporting documentation to establish the necessary direction and control as outlined in paragraphs 47-48 should form part of the charity’s books and records because the Charities Directorate may ask to see it during the application or audit processes.

54. The charity must also ensure that its PRIs meet all applicable trust, corporate, or other legal or regulatory requirements.

Program-related investments in the form of loans and loan guarantees

55. A charityFootnote 11   may make a PRI in the form of a loan. In most cases, interest rates are expected to be at or below fair market value so that greater charitable benefits can be delivered. Footnote 12   However, there may be circumstances when a higher interest rate is justified. For example, a loan at above-market rates could be justified based on other terms that allow the borrower to delay repayment. For some borrowers, flexibility may be as important a consideration as rate.

56. A charity may also make a PRI in the form of a loan guarantee to help another organization to obtain a loan. The guarantee must be for a loan that will further the investor charity’s charitable purposes.

Program-related investments in the form of share purchases

57. A charitable organization may make a PRI in the form of share purchases. A public or private charitable foundation can also make a PRI in this form, but neither can acquire a controlling interest in a company. Footnote 13   Also, if a private foundation acquires more than 20% of any class of shares in a company, it might trigger divestment obligations and sanctions, including revocation of its charitable status. Footnote 14 

58. Other legal limitations may apply to all charities because of the provisions in provincial and territorial legislation.

Specialized intermediaries for program-related investments

59. An investor charity may use an intermediary to carry out the program financed by the PRI on its behalf. The same requirements for maintaining direction and control over resources, avoiding non-incidental private benefit, and including exit mechanisms all apply. For more information about working through an intermediary, go to Guidance CG-002, Canadian registered charities carrying out activities outside Canada, and Guidance CG-004, Using an intermediary to carry out a charity’s activities within CanadaFootnote 15  

60. A specialized PRI intermediary that helps charities to make or manage PRIs could itself potentially qualify as a registered charity on the basis that it is promoting the efficiency and effectiveness of charities. For example, a property management organization that leases and manages only low-income housing properties owned by registered charities might qualify for charitable status. For more information, go to Policy statement CPS-026, Guidelines for the registration of umbrella organizations and title holding organizations.

Accounting for loans and program-related investments

61. When completing its annual information return (Form T3010, Registered Charity Information Return), a charity should include the outstanding amount of all loans and the value of all PRIs (loans, share purchases, and leases) in its total assets (section D, line 4200 Footnote 16  ) or accounts receivable from all others (Schedule 6, line 4120). Footnote 17 

62. Charities should not include loaned funds and PRIs used for charitable activities in assets “not used in charitable programs or administration” when completing the T3010.

63. Charities that have to complete Schedule 6 of the T3010 must report all interest or other income that is earned from loans or PRIs at line 4580 – Total interest and investment income received or earned. Charities that have to complete section D must report all interest or other income that is earned from start-up loans or PRIs at line 4650 – Other amounts not already included in the amounts above.

64. If the charity has to complete Schedule 6, all amounts received (principal repaid, interest earned, disposition from shares, dividend income, etc.) have to be added to the total “property not used in charitable activities” (Schedule 6, lines 5900 and 5910) until such time as it is directly used again for charitable activities or administration.

65. If a portion of any loan is held by the loan recipient for future use, that portion has to be reported as “property not used in charitable activities.”

66. A PRI in the form of a loan guarantee is cost-neutral. It is not a debt at the time the loan is guaranteed. If the borrower defaults on the loan, and the charity has to honour the guarantee, the charity will be considered to have incurred a debt. Once the debt has been incurred, the charity has to report the debt as a liability. Any principal and interest paid can be reported as a charitable or other type of expenditure, as applicable.

67. If the investor charity is unable to recover part or all of the principal of a loan, the unrecovered amount is a charitable or other expenditure of the investor charity, depending on the purpose of the loan.

68. When a charity fails to meet its disbursement quota requirement and the charity has made a loan or a PRI (in the form of a loan, a share purchase, or a lease), the Charities Directorate may consider any opportunity cost resulting from these activities as equivalent to an expenditure. In this situation, the opportunity costs of PRIs are calculated as follows:

  • loans: the outstanding loan multiplied by the difference between the interest rate the investor charity could have earned if it invested the amount in T bills or GICs, and the interest rate the charity received
  • share purchase: the difference between the return the investor charity could have realized had it invested in T bills or GICs and the actual return or loss from purchasing shares
  • lease: the difference between the fair market value of the lease and the actual amount the investor charity received from the lease

Social businesses for individuals with disabilities

69. Operating social businessesFootnote 18   for individuals with disabilities Footnote 19  may be charitable when the businesses directly further one or more of the charitable purposes listed in paragraph 11. Social businesses differ from on-the-job training opportunities because they seek to provide permanent employment, not employment for a limited time.

70. A social business may provide services, sell goods, manufacture articles, or undertake other kinds of work. A social business may operate a retail outlet or send products manufactured in a workshop to a store.

71. Social businesses may directly employ eligible beneficiaries. They may also provide technical assistance, tools, materials, and marketing to eligible beneficiaries who use the workshop, but are self-employed.

72. To further a charitable purpose, a social business must have the following characteristics:

  • the workforce is composed entirely of individuals with disabilities, with the exception of employees who provide necessary training and supervision
  • the work is specifically chosen and structured to take into account the special needs of individuals with disabilities and to relieve conditions associated with those disabilities

73. The following characteristics, although not required, are generally expected:

  • associated job-related training that enhances the general skills of the eligible beneficiaries
  • significant involvement of eligible beneficiaries in managing and making decisions for the social business

74. A social business must focus on helping eligible beneficiaries and not on making a profit. For more information, go to Policy statement CPS-019, What is a related business?

Community land trusts

75. Operating a community land trust may be a charitable activity if it directly furthers one or more of the charitable purposes listed in paragraph 11.

76. A community land trust is set up to ensure that land will continue to be available for the benefit of a community. Generally, community land trusts operate by developing properties and leasing them to eligible beneficiaries. For example, an organization that creates a community land trust to provide housing for individuals who are poor or who have a disability may be eligible for registration as relieving poverty or conditions associated with disability.

D. Community economic development activities that promote commerce or industry

77. CED activities may be charitable when they promote commerce or industry for the public benefit. Footnote 20  Charities may conduct CED activities to promote a particular industry or trade such as agriculture, horticulture, or craftsmanship. However, the organization’s purposes and activities must focus on enhancing an industry or trade as a whole for the benefit of the public, and not on advancing the interests of members of that industry.

78. Promoting a particular industry or trade will only be charitable if doing so results in a charitable benefit being provided to the public or a sufficient section of the public. Footnote 21   At common law, a charitable benefit must be recognizable and capable of being proved, and socially useful. To be recognizable and capable of being proved, a benefit must generally be tangible or objectively measurable. Benefits that are not tangible or objectively measurable must be shown to be valuable or approved by “the common understanding of enlightened opinion for the time being." Footnote 22   “The common understanding of enlightened opinion for the time being” may be proved through objective evidence of common or widespread acceptance by persons who are knowledgeable and informed about the particular subject or issue. To be socially useful, a benefit must have public value and a demonstrable impact on the public. Footnote 23   This means that the nature of the particular industry or trade must be such that its promotion results in a charitable benefit, and that charitable benefit must be delivered to the public.

79. Examples of the types of purposes that could enhance an industry as a whole and potentially deliver a charitable public benefit include those that:

  • promote greater efficiencies within an industry, if those efficiencies benefit the general public
  • promote and facilitate the achievement, preservation and maintenance of high standards of practice within an industry, if doing so benefits the general public Footnote 24 

80. Examples of activities that further the purposes in paragraph 79 include:

  • conducting research that will be publically disseminated to establish the socio-economic profile of a community, assess its socio-economic strengths and weaknesses, and identify potential economic opportunities. For more information, go to Policy statement CPS-029, Research as a charitable activity
  • holding public exhibitions of a community’s agricultural products and services that include prizes being awarded to promote excellence and demonstrations being conducted to showcase new advances in technology and enable spectators to learn about the industry
  • encouraging excellence in the products and services of an industry by holding industry-wide competitions, creating industry-wide standards, or developing and disseminating new scientific and technological knowledge related to that industry

81. Organizations often have difficulty promoting commerce or industry without delivering more-than-incidental private benefit to those engaged in the particular industries or trades. The public benefit cannot be too indirect, remote, or speculative as compared to a more direct or immediate private benefit, particularly where the direct benefit is to private persons, entities or businesses. Footnote 25 

82. Objective evidence is used to determine whether a benefit to the public will result from promoting an industry. The non-expert opinions of the founders, directors, trustees, members or supporters of the organization are not relevant, and an expression of non-expert opinion or belief, or merely stating that a public benefit will result from a purpose, is not enough. Footnote 26 

83. Subject to possible exceptions for activities conducted in areas of social and economic deprivation (see section E), examples of types of purposes that are not charitable as promoting commerce or industry because they do not deliver the required charitable benefit to the public include:

  • promoting entrepreneurship by helping entrepreneurs bring new and innovative ideas to the marketplace
  • promoting business development by providing funding (including start-up loans), and mentorship programs

E. Community economic development activities in areas of social and economic deprivation, including areas affected by a disaster

84. CED activities may be charitable if they improve socio-economic conditions for the public benefit in an area of social and economic deprivation. Footnote 27 

85. In this guidance, areas of social and economic deprivation (also known as deprived areas) are either of the following:

(a) geographic communities that generally display high rates (at least 1.5 times the national average) of one or more of the following characteristics:

  • unemployment for two or more consecutive years Footnote 28    
  • crime, including family violence
  • health problems, including mental health issues, drug and alcohol addiction, and suicide
  • children and youth at risk (taken into care or dropping out of school)

(b) geographic communities affected by a disaster and in need of disaster relief ("disaster areas"). Footnote 29  

86. To deliver the required public benefit, the deprived area must be large enough for the beneficiaries to form a sufficient segment of the public.

87. The need for social and economic development to improve socio-economic conditions and prevent community deterioration can usually be presumed in a disaster area for two years after the date of the disaster, unless there is evidence to show otherwise. After that date, the area will have to show continuing need. This may be done, for example, by showing that the area displays one or more of the characteristics listed in paragraph 85(a).

88. An area that is not a disaster area, or does not display the characteristics listed in paragraph 85(a) for four years in a row, is no longer considered socially or economically deprived. When this happens, a charity whose activities were charitable solely because they were conducted in the deprived area has a further two years to wind up those activities.

89. Special considerations relating to the assessment of private benefit are generally allowed in deprived areas. This is because what is considered to be an acceptable incidental private benefit can vary depending on the context it occurs in. Footnote 30  The private benefit assessment involves considering the usual factors: whether a private benefit is necessary, reasonable, and proportionate to the public benefit achieved. However, what is necessary, reasonable, and proportionate is fact-based, and is determined taking into account the circumstances of the deprived area in question.

90. Examples of cases where private benefit may be acceptable:

(a) It may be possible to establish a connection between a shortage of health care professionals and the social and economic deprivation in an area. If so, attracting health professionals to the deprived area by offering inducements (private benefits) might be a charitable activity that directly furthers the charitable purpose of improving the socio-economic conditions in an area of social and economic deprivation. An organization may be able to show that the private benefit delivered to the health care professionals (such as providing low-rent clinic facilities or housing) is incidental in the particular case.

(b) In a disaster area, there may be limited ways to promote social and economic development because resources have been destroyed or damaged. In these conditions, a program that gives funds to restore local small businesses so they can provide goods, services and employment to residents of the affected area might be a charitable activity. This activity could further the charitable purpose of improving socio-economic conditions and preventing community deterioration. Footnote 31 

To show that the private benefit the small businesses receive (such as money or interest-free loans) is incidental, this type of funding program would generally have to meet all the following requirements:

  • the funds must be available to all small businesses within the disaster area that were adversely affected by the disaster (subject to justifiable restrictions)
  • the small businesses cannot have the skills or resources from their own assets, conventional financing or insurance to recover, or must be unable to pay insurance deductibles
  • the funds must be needed to make it possible for the small businesses to resume operating in the affected area
  • the funds must be used for expenses directly related to the businesses resuming operations within, and providing goods, services and employment to residents of, the affected area (such as uninsured losses, deductibles, repairs to business locations/worksites/work equipment, and related occupational training expenses). As a general rule, most of the goods and services should be provided to, and used within, the affected  area
  • there must be a reasonable prospect of the businesses being restored by the funds provided, either alone or when combined with funds from other sources

The organization should have a process in place to get the information it needs to make sure these requirements are met, and to monitor fund use. It should also have criteria and procedures to decide when funds should no longer be provided to businesses because they are operational or the area is no longer in need of disaster relief.

To do this, an organization could use an application process that provides assurance that each of these requirements is met. For example, an organization may decide, among other things, to do all the following:

  • get copies of, and assess, relevant documents relating to the location and operation of the business, and all related financial information, including tax returns, for current and previous years
  • only cover documented damages and costs
  • issue payments only in the name of the eligible business
  • set out in a letter what the funds cover if the payment is a reimbursement for costs already incurred, or what the funds are to be used for if they cover costs not yet incurred. In the second case, the letter would set out the reporting required to confirm appropriate use of the funds and be signed by the business acknowledging the terms
  • provide funds in stages to make sure the business uses all funds in accordance with the program, and that both the business and the disaster area continue to meet the eligibility requirements Footnote 32 

91. Examples of cases where there may be concerns about providing an unacceptable private benefit in a small business funding program could include:

(a) Providing excessive funds to a small business. For instance, if the funds place the business in a better position than it was in before the disaster, instead of helping to restore its prior operating status, the private benefit to the business is likely not incidental and is unacceptable.

(b) Providing funds that duplicate those received by the business from another source. For instance, if a small business is operated out of the owner's home, exceeding the maximum expenses that can be claimed as a deduction for the home office for income tax purposes would likely provide a private benefit that is not incidental and is unacceptable.

An organization is expected to get and document relevant business-related and financial information, including previous years' income tax returns, to assess these types of issues.

92. In deprived areas, preventing further unemployment by providing training to the employees of a specific company may be charitable, when it would otherwise deliver a more than incidental private benefit, if:

  • without this training, the company would be forced to close or dismiss workers
  • the training can be generally applied in the marketplace (such as literacy or computer skills), as opposed to training that is useful only to the specific employer Footnote 33 

93. For more information on the restrictions on private benefit, see CPS-024: Guidelines for registering a charity: Meeting the public benefit test.

94. Examples of types of purposes that could improve socio-economic conditions in a deprived area and potentially deliver a charitable public benefit include:

  • improving socio-economic conditions and preventing community deterioration in an area of social and economic deprivation, namely, [identify location], by assisting residents in need of disaster relief
  • relieving unemployment of individuals who are unemployed or facing a real prospect of imminent unemployment in an area of social and economic deprivation, namely, [identify location]. [Note: eligible individuals must be shown to need assistance and lack the skills or resources to help themselves.]
  • promoting industry, trade and commerce in an area of social and economic deprivation, namely, [identify location], by providing disaster relief to residents in need

F. Appendix A: Terms and definitions


Disaster 

According to Public Safety Canada, a disaster is a hazard that overwhelms a community's ability to cope and may cause serious harm to people's safety, health, welfare, property, or the environment. A disaster can be the result of a naturally occurring phenomenon within the geophysical or biological environment or human action, whether malicious or unintentional, including technological failures, accidents, and terrorist acts.

Disaster Relief

Includes providing relief during the period immediately following a disaster and recovery assistance thereafter.

Small Business

Includes, but is not limited to, incorporated companies, partnerships, and sole proprietorships. A small business has 1-99 full-time equivalent paid employees (full-time equivalent employees = number of full-time employees + number of part-time employees × 0.5). (See SME Research and Statistics and Small, Medium-sized and Large Businesses in the Canadian Economy: Measuring Their Contribution to Gross Domestic Product in 2005).

The numbers provided are maximums. All decisions about the actual number of employees an eligible small business should have must be decided by the organization based on the particular circumstances. The decision must take into account the overriding need to provide a public benefit to the affected community while providing only incidental private benefit. 

Note 

Community economic development has not been recognized as a charitable purpose in Canada. The Charities Directorate does not have official definitions for community economic development or other associated terms, and recognizes that there are no universally accepted definitions. The following definitions may be helpful to readers interested in considering the concepts further. They are provided for reference only and will not be used as determining factors in any registration or auditing processes.

Community economic development

“...is action by people locally to create economic opportunities and better social conditions, particularly for those who are most disadvantaged. CED promotes holistic approaches, addressing individual, community and regional levels, recognizing that these levels are interconnected.”

Source: What is CED?, The Canadian CED Network

Social enterprise

“A social enterprise is generally understood to mean any organization or business that uses the market-oriented production and sale of goods and/or services to pursue a public benefit mission. This covers a broad spectrum of entities – from enterprising charities, non-profits, and co-operatives to social purpose businesses.”

Source: Mobilizing Private Capital for Public Good (p.32), Canadian Task Force on Social Finance

Social finance

“Social finance uses standard financial tools and instruments to leverage the economic, social and environmental value created by organizations in the non-profit and for-profit sectors or in the hybrid space between them. These organizations are usually mission-driven and seek to maximize all three forms of value.”

Source: Impact Investing / Social Finance, Carleton Centre for Community Innovation

Community capacity building

“…refers to the identification, strengthening and linking of your community’s tangible resources, such as local service groups, and intangible resources like community spirit.”

Source: Community Capacity Building: Ontario Healthy Communities Coalition

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