In these difficult times and as the Canada Revenue Agency (CRA) has increased its policing of charities, it is important for charities and non-profits to protect their tax exempt status. These entities must be careful to carry on business activities and invest in for profit corporations within the rules in the Income Tax Act in order to maintain their preferential tax treatment.

Miller Thomson Analysis

Private Foundations

A private foundation can lose its charitable status for carrying on any business activity.

A private foundation must also limit its business holdings. If a private foundation and its related persons (such as directors, trustees and relatives of such persons) own more than 20 per cent of the issued and outstanding shares of a corporation, then the Foundation must either reduce the foundation’s holdings to less than 2 per cent or together with related persons reduce their collective holdings to 20 per cent. Failure to divest the shares can result in financial penalties and revocation of charitable status.

As well, in Ontario, charities are required to dispose of any interest in a business carried on for gain that exceeds 10 per cent, pursuant to the Charitable Gifts Act. Some religious organizations are exempt from this requirement.

Charitable Organizations and Public Foundations

Charitable organizations and public foundations can carry on a related business, but will lose charitable status if they carry on an unrelated business. There are two kinds of related businesses. A business can be related because it is run substantially by volunteers. Alternatively, the business must be linked and subordinate to the organization’s charitable purpose. Recently, the CRA has been reluctant to register charitable organizations and public foundations that carry on a related business as its main activity. While the CRA has accepted that charities can raise funds through lotteries and resale of used goods, it appears reluctant to register new charities where such fundraising is their main activity. These activities appear to be more acceptable to the CRA when they are carried out in a charity along with other fundraising and charitable activities.

As discussed above, in Ontario, a charity is subject to the requirement in the Charitable Gifts Act that it dispose of more than a 10 per cent interest in a business carried on for gain. There is an exemption from this requirement for some religious charities.


To maintain tax exempt status, a non-profit must have a purpose other than profit. Therefore, a non-profit cannot carry on a business in order to make a profit. In other words, a non-profit can carry on business activities and make a substantial amount of income, but it must have another reason for undertaking these business activities. To demonstrate that the non-profit does not plan to profit from its business, a non-profit may run its business on a cost recovery basis and ensure that its reserve is reasonable.