Registered charities (other than private foundations) are allowed to carry on business activities, which can be an important source of revenue. These activities are subject to certain limitations, however, and must adhere to Canada Revenue Agency (CRA) requirements.
Rules for business activities
A registered charity (except for private foundations) may carry on a business if it is a related business. A related business is:
- a business in which substantially all of the people involved are volunteers or
- a business that is linked and subordinate to the charity's charitable purpose.
Any business in which "substantially all" of the people who are involved are volunteers is a related business. Example: Charity X operates a large retail store. The charity employs a vice-president, a store manager, three shift supervisors and 60 volunteers who work in the store at various times. Following this method, there are 60 volunteers, and 5 employees, for a total headcount of 65. Since approximately 92% (60/65) of the people involved in the store are volunteers, the store meets the "substantially all" test. Since the business has met the "substantially all" test, the business is considered to be a related business.
For more information, read Policy Statement CPS-019, What is a Related Business? from the CRA.
Linked to charitable purpose?
To be linked to a charity’s purpose, the nature of the business has to have some direct connection to that purpose. There are four types of connection or linkage to charitable purposes:
- Business activities that supplement charitable activities. These activities are necessary for the effective operation of the charitable activity or improve the quality of the service delivered by the charitable activity. For example, a hospital operates parking lots, cafeterias, and a gift shop for the use of patients, visitors, and staff.
- Business activities that are by-products of charitable activities. The charitable activity creates, as a by-product, goods or services that can then be sold. For example, a heritage village plants crops to show visitors how 19th century farm implements were used. Visitors can watch the grain being milled into flour. The flour is sold in the village and in a for-profit grocery store nearby. .
- Business activities that use excess capacity of a charity. For example, a university operates classrooms and student residences, which it rents out when its academic year is not in session.
- The sale of items that promote the charity or its purpose. For example, a charity sells flowers the public associates with the charity's cause.
Tip: Organizations that are considering developing a "Social Enterprise" must apply the rules relating to business activities to these initiatives.
Comparison to charitable activities
Many activities generate revenue for a charity, but this fact alone does not cause an activity to be considered a business activity. The table below shows some differences between charitable activities and business activities.
| Charitable activity | Business activity |
| Charities design fee structures to cover all or part of a program's costs. | Businesses design structures to generate a profit. |
| Charities set fees primarily with a charitable objective, for example, based on a user's means. | Businesses set fees primarily with a market objective, such as competing with other businesses. |
| Charities’ goods or services may not otherwise be available to their target audiences in the marketplace. | Businesses offer goods or services that are similar to others generally available in the marketplace. |
Comparison to fundraising activities
The fundamental fundraising act of soliciting donations is not a business activity, since donors give because they wish to contribute to a charitable purpose and do not expect goods or services in return.
The CRA considers that most fundraising events are business activities, in that they often have commercial attributes. For example, events such as concerts, dinners, or golf or other sporting tournaments have many features in common with for-profit entertainment offerings.
However, some events have more attributes of a fundraising activity than a business activity. As well, even where fundraising events are business activities, they may not be affected by the related business rules because they do not amount to “carrying on a business.” CRA evaluates each fundraising event on its own merits; in cases where a charity holds several similar events in the course of a year, CRA may evaluate the events as a group and decide that their recurring nature amounts to carrying on a business.
| Fundraising activity/event | Business activity |
| Volunteers provide a significant portion of the labour, and many supplies are donated. | Labour is provided by paid employees, and supplies are purchased. |
| The activity typically attracts, or provides its services to, supporters of the charitable purpose, who know of the charity and its work. | The activity typically attracts purchasers who consider the services in a commercial context, as providing the best value at the lowest price. |
| Fundraising events have a clear “start” and “end.” | Businesses usually have continuous operations. |
| A charity may hold several different types of fundraising event that typically do not recur throughout the year. | Businesses usually hold the same or very similar events with great frequency and regularity throughout the year. |
Comparison to investment activities
Charities will often earn investment income, either from temporary surplus funds, or from endowments or other assets held for the purpose of generating income in support of charitable activities. While investment and business activities both derive income from assets, investment activities tend to involve the mere ownership of assets and be fundamentally passive activities.
The table below shows some differences between investment activities and business activities.
Earning income requires an active role in operating the business.
|
Investment activity |
Business activity |
|
Common assets include savings accounts, GICs, stocks, bonds, and other securities |
Common assets are machinery and equipment, buildings, etc., that are productively operated by the organization to create goods or services that are sold. |
|
Income is derived as a result of ownership, such as interest or dividends. |
Income is derived from trading (the active purchase and resale of assets) or from creatively operating or exploiting the assets, often in unique combinations, to create good or services that are sold. |
|
Earning income is passive, such as receiving interest or dividends. |
Earning income requires an active role in operating the business. |