Minister Brad Duguid attended the Unpacking Impact Conference on June 21, 2016 and announced the Ontario Government’s commitment to a five year social enterprise strategy. Minister Duguid committed Ontario to supporting a thriving marketplace of sustainable and scalable social enterprises that drive economic development while creating social and environmental impact. In making the announcement, the Government indicated that the strategy incorporates the input of over 400 Ontarians – individuals from the non-profit, for-profit and public sectors, social entrepreneurs, academics and others.

The Ontario government has made significant commitments in three key areas. These areas are:

  1. Equipping social enterprises with solid business fundamentals;
  2. Connecting social enterprises to markets and capital to grow in scale; and
  3. Demonstrating the value of social enterprise and social finance.

The government has indicated that it will invest more than $6 million in the first year of this renewed strategy.

The objectives of the three key strategies are summarized as follows:

  1. Equipping social enterprises with solid business fundamentals:
    • increase access to mainstream entrepreneurship and business support; and
    • integrate specialized social entrepreneurship support, such as impact measurement, into mainstream entrepreneurship programs.
  2. Connecting social enterprises to markets and capital to grow in scale:
    • expand market opportunities for social enterprises through public sector procurement; and
    • increase social enterprises’ access to private investment capital.
  3. Demonstrating the value of social enterprise and social finance:
    • promote the use of impact measurement tools among social enterprises to attract investor, government and community support; and
    • increase the Ontario government’s capacity to develop social enterprise and social finance initiatives.

Minister Duguid clearly feels that Ontario social enterprises are an important part of the economic development of Ontario. The strategy will be supported by social enterprises across the province. Serious legislative changes for adoption of new forms of corporations such as community contribution corporations are, however, not mentioned in these initiatives. While the strategy does mention removing legislative barriers to impact investing, it does not mention the earlier initiative of the Government to consider the introduction of community contribution corporations.

It appears that until the Ontario Non-Profit Corporations Act is enacted (which has been delayed until at least 2018), it is unlikely that we will see the new hybrid legislation move forward. We expect there are those who will question whether these initiatives will be sufficient to support the social enterprises that Minister Duguid anticipates.

The Government’s social enterprise strategy can be accessed here.

Miller Thomson’s Social Impact Group would be pleased to work with organizations regarding their social enterprise and impact investing matters.

Earlier this month, Nova Scotia announced the coming into force of the long awaited Community Interest Companies Act (“CICA”). This new law allows new and existing businesses incorporated under the Companies Act (Nova Scotia) (“CA”) to apply for designation as a Community Interest Company (“CIC”). Following the model used in BC’s Business Corporations Act for Community Contribution Companies (“C3s”) and the UK’s Companies (Audit, Investigations and Community Enterprise) Act for its CICs, the CICA provides a governance framework for social enterprises incorporated in Nova Scotia.

Below is a description of the features of Nova Scotia’s CICs and a summary of the requirements for designation under the new legislation and its Regulations.

Features

As a hybrid corporate vehicle, CICs combine certain characteristics of for-profit businesses with the social purpose nature of non-profit entities.

Business Activities

Under the CICA, CICs, like any other business corporation, are permitted to engage in their activities with a profit motive and are established with share capital. The latter feature specifically distinguishes CICs from registered charities and non-profit organizations.

Community Purpose

CICs must have a community purpose. The CICA defines “community purpose” as a purpose beneficial to:

      1. a segment of society that is broader than the group of persons who are related to the CIC.

Importantly, a CIC may not carry on any of its activities with a political purpose. Unfortunately, “political purpose” has not been defined in either the CICA or its Regulations. We query whether Nova Scotia will turn to the Canada Revenue Agency’s definition of “political activities” in determining whether a CIC is offside this prohibition.

Shares

The most obvious business-like feature of a CIC is its ability to issue shares to shareholders. This makes CICs attractive as a way for people to invest in community projects and receive a return on their investment (“ROI”). Importantly, however, as described below, there is a limit to the ROI that shareholders (and debtholders) may receive.

Cap on ROI

Investors may invest in a CIC by purchasing shares or providing the CIC with a loan. What makes a CIC different from a typical business corporation, however, is that CICs are restricted on the annual amount of dividends that they may declare on their shares or the amount of interest that they may pay under their debentures. This effectively places a cap on their investors’ annual ROI.

Under the Regulations to the CICA, the maximum aggregate dividend that a CIC may declare on its shares (less the amount of any exempt dividends) is an amount equal to 40% of its distributable profits. The Regulations define an exempt dividend as a dividend declared on shares held by, or on behalf of, a qualified entity. A qualified entity is described below.

Where a debenture has been issued by a CIC, the interest payable under the debenture in a given year may not exceed 15% of the average amount of the CIC’s debt or the sum outstanding under a debenture issued by the CIC during the 12-month period immediately before the interest becomes due.

Restriction on Asset Transfer

CICs are also prohibited from transferring their assets for less than fair market value unless the transferee is a qualified entity. Further, CICs may not transfer their assets at all unless such transfer is in furtherance of their community purpose. The Regulations to the CICA specifically list those entities considered to be “qualified entities”. The list includes:

  • a number of Universities located in Nova Scotia
  • Nova Scotia Community College
  • a school board within the meaning of the Education Act (Nova Scotia)
  • a hospital within the meaning of the Hospitals Act (Nova Scotia)
  • a health authority within the meaning of the Health Authorities Act (Nova Scotia)
  • the Nova Scotia Museum
  • the Art Gallery of Nova Scotia
  • a municipality with the meaning of the Municipal Government Act (Nova Scotia)
  • the Nova Scotia Provincial Government
  • the Federal Government

As evidenced by the list above, the definition of “qualified entity” is limited to certain organizations in Nova Scotia. This means, for instance, that charities operating outside of Nova Scotia (or even those operating within Nova Scotia that are not on the list above) that wish to use a hybrid model to structure their social enterprise will not find the Nova Scotia CICs very useful given the inability of the CIC to gift funds to the parent charity (or any other charitable organization not listed above). This restriction would apply to any transfer of property for less than fair market value.

Asset Lock

Further, upon dissolution, the assets of a CIC may only be distributed to one or more qualified entities established for a similar community purpose. When considering whether a qualified entity has been established for a similar community purpose, the qualified entity must meet at least one of the following criteria:

  • the qualified entity benefits the same segment of society that benefits from the CIC;
  • the community purpose of the qualified entity is in the same general category as the community purpose of the CIC; or
  • the qualified entity benefits the same community or geographical area that benefits from the CIC.

This restriction ensures that the assets of the CIC continue to be used for their specified social purpose.

Taxable

As a business corporation, the income of a CIC is taxable at the rate applicable to all other business corporations. This means that CICs will be required to file T2 – Corporation Income Tax Returns with the Canada Revenue Agency.

Annual Community Interest Report

Each year, on or before the date of the company’s annual general meeting (“AGM”), a CIC is required to place before its shareholders a Community Interest Report (approved by its directors) pertaining to its most recent fiscal year. The Community Interest Report must include:

  1. a description of the manner in which the company’s activities benefited society or advanced the community purpose of the company;
  2. the assets that were transferred in furtherance of the company’s community purpose and the purpose for such transfer(s);
  3. the amount of dividends declared in that fiscal year;
  4. the assets that were transferred for redemptions or purchases of shares or other reductions of capital; and
  5. details (including identity of transferee, purpose of transfer, and amount transferred) of any transfers of the company’s assets made:
    1. with a fair market value exceeding the prescribed amounts noted above;
    2. to a qualified entity;
    3. by way of financial assistance; or
    4. to a person related to the company.

The Community Interest Report must be signed by at least two directors and filed with the Registrar of Community Interest Corporations (“Registrar”) within 90 days after the company’s AGM.

Requirement to File Financial Statements

The financial statements of a CIC must be filed with the Registrar at the same time that the company files its Community Interest Report. At this point it is unclear whether the financial statements and/or the Community Interest Reports will subject to public disclosure.

The Application Process

Companies not yet incorporated under the CA that wish to be incorporated and then designated as a CIC may submit one application containing all of the necessary documents for incorporation and designation to the Registrar of Joint Stock Companies. Provided that all of the incorporation documents are in order, the Registrar of Joint Stock Companies will automatically forward the application to the Registrar for designation.

The application must include:

  • the incorporation documents required under the CA;
  • the designation documents; and
  • the prescribed fees.

Companies already incorporated under the CA must similarly submit an application directly to the Registrar of Joint Stock Companies. However the application must include:

  • a copy of a resolution passed by all voting and non-voting members of the company to alter the company’s memorandum of understanding and to change its name as noted below;
  • certificate of an officer of the company attesting to the approval;
  • a copy of the company’s memorandum of understanding as altered;
  • the designation documents; and
  • the prescribed fees.

The “designation documents”, which must be signed by each of the company’s directors, include:

  • a community interest plan, comprised of:
    • a statement that the company will carry on its activities for a community purpose; and
    • a description of the company’s community purpose and how it proposes to carry out activities in support of that community purpose;
  • a declaration that the company does not (or will not) carry on activities with a political purpose; and
  • a declaration that each of the directors will perform his or her function as a director in accordance with the company’s community purpose.

Eligibility

To be eligible for designation as a CIC, a company must meet the following criteria:

  1. its memorandum of association must include a statement confirming its community purpose and the restrictions associated with such purpose;
  2. it must have at least three directors;
  3. its name must end in the words “Community Interest Company” or “société d’intérêt communautaire” or the abbreviation “ C.I.C.”, CIC”, S.I.C.” or “SIC”; and

It will be interesting to see the extent to which Nova Scotia businesses seek designation as a CIC. While there has been limited use of C3s in British Columbia to date, as of May 2016 there are over 12,000 CICs registered in the UK, including, notably Timewise Foundation, Wellbeing Enterprises, and Frame of Mind (Vocational Training).

As previously reported, Ontario has initiated the process of considering whether to introduce hybrid corporate legislation, however this initiative appears to have been placed on hold.

Miller Thomson’s Social Impact Group would be pleased to work with you to assist in determining whether a CIC might be a beneficial corporate vehicle for your organization.

The Competition Bureau (the “Bureau”) has recently been increasing its oversight over false and misleading representations made in connection with charitable claims. The Bureau is the government regulator responsible for investigating and enforcing deceptive marketing and advertising practices in Canada. The Bureau’s mandate is broad, and, notably, the scope of its oversight includes potentially false or misleading claims made in the course of raising funds for charitable or other non-profit purposes.

Most recently, the Bureau announced that it sent warning letters to two clothing donation bin operators in the Montreal area. Unadministered bins are often used by charitable or not-for-profit organizations seeking donations of clothing or other goods. Typically these donations are then re-sold, with the proceeds benefiting a social cause. In this instance, however, the Bureau alleged that the proceeds were in fact being used for commercial purposes, notwithstanding that the claims on the bins gave the impression that all or part of the proceeds would be given to charitable organizations. Further, some of the bins may have even imitated the donation bins of real charities, to further mislead consumers as to the donation recipients.

The warning letters are part of a larger drive by the Bureau to identify and decrease fraud against consumers. Increasingly, the Bureau has been focusing its enforcement on false or misleading representations that have a significant impact on consumers and not just the market generally. Penalties for non-compliance with the Competition Act (Canada) can be up to $10 million for the first order, and $15 million for any subsequent orders.

This is not the first time that the Bureau has targeted fake donation bins. In 2014, the Bureau sent similar letters to for-profit bin donation organizations operating in the Vancouver area, for similarly misleading claims that gave the general impression that the recipients of the donations would be charities. As was apparently the case with some of the targeted Montreal operators, the bins in Vancouver made claims that the operators were “a proud sponsor” or “in support” of certain named charities. While these claims might not have technically been false, the context gave the misleading impression that the donation would directly benefit these named charities.

Donation bins are not the only area of charitable claims recently under the Bureau’s scrutiny. Following the recent devastation in Fort McMurray, Alberta, many Canadians sought to donate funds to assist the wildfire evacuees and their communities. At the time, the Bureau issued an alert warning Canadians of fraudulent solicitations for donations from fake charities and scammers posing as legitimate social impact groups. While the details of their investigation were not made public, it is likely that the Bureau identified the significant occurrence of this type of donation fraud and sought to limit its success. One takeaway is that charitable advertising claims certainly seem to be a current enforcement priority for the Bureau.

Canadians do not need to sit and wait for the Bureau to identify and challenge potentially fraudulent solicitations and claims. Consumers are able to report instances of suspected fraud directly to the Canadian Anti-Fraud Centre, and can also report instances of misleading or deceptive marketing practices to the Bureau using its online complaint form. Charities and not-for-profits are also able to make use of the Bureau’s online complaint form to flag potential violations of advertising laws. Further, where a scammer is using a charity or a not-for-profit’s logo or other intellectual property, there are certain legal measures that the organization can take to force the scammer to stop its behaviour. For example, organizations could send a cease and desist letter to the scammer regarding the use of its trademarks and other intellectual property, or formally file an action for trademark infringement, depreciation of goodwill or passing off.

Beyond legal recourse, there are steps that an organization can take to ensure that its name is not used as part of a scam. Organizations should stay informed of possible charitable donation scams and consider increasing communication with donors about events of fraudulent or other deceptive practices, confirming that the organization is not a part of these scams. Flagging the potential for donation fraud helps to ensure that donations are instead directed to legitimate channels. Unfortunately, with increasing donation fraud and other false and misleading advertising claims, consumers and donors may be becoming increasingly suspicious of certain marketing claims, even those that are legitimate. Charities and not-for-profits should be mindful of this possibility when designing their promotions, materials and solicitations – particularly those leveraging the digital economy – so as to reassure donors that their donations will be making an impact with the correct organization.

On July 12, 2016, Susan Manwaring will be presenting on Social Enterprise and Business Activities to Carleton University’s Summer Institute of the Master of Philanthropy and Non-profit Leadership Program.

In the May, 2016 issue of Canadian Tax Highlights (Volume 24, Number 5), Robert Hayhoe and Nicole D’Aoust prepared and submitted an article entitled: "FCA Decisions on Charities".

This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice.

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