In response to the rising number of “hybrid” businesses pursuing public benefit and financial returns, Canadian province British Columbia approves of the country’s first corporate structure that bridges the gap between the world of nonprofit and for-profit.
On one end of the spectrum, Canada and its provinces have legislation that allows nonprofits to be incorporated and charitable status to be granted. On the other end of the spectrum, businesses can register as a profit-seeking corporation under the Business Corporations Act.
The new corporate structure, known as “community contribution companies” or CCCs, will serve as the middle ground for hybrid businesses, similar to the benefit corporation legislation and low-profit limited liability company (L3C) in the U.S. or the community interest company (CIC) in the UK.
Beginning July 29, 2013, CCCs can be incorporated in British Columbia under changes to the Business Corporations Act.
CCCs are modeled after CICs in the UK and therefore largely resemble one another. The basic premise is that CCCs must have a purpose that is beneficial to the society at large or a segment of society. At the same time, they have characteristics that distinguish them from current forms of incorporation.
“Asset lock” and dissolution
Should a CCC dissolve, it will be subject to an “asset lock” that limits the distribution of assets to shareholders to a maximum of 40 percent. This means at least 60 percent of its assets must go to an entity subject to a similar “asset lock”, such as another CCC, or to a registered charity or nonprofit. CICs in the UK also use “asset locks” to ensure that assets remain dedicated to social purposes.
Private investment and dividends
Unlike nonprofits, CCCs can accept equity investment, issue shares, and pay shareholder dividends. However, unlike typical for-profits, CCCs are limited by the amount of dividends they can issue, which can be no greater than 40 percent of annual profit, unless shareholders are registered charities and other “qualified donees” under the Income Tax Act. The idea is to ensure a portion of profits remain in the company and are used towards social purposes.
Community contribution report
CCCs are required to produce and publish an annual “community contribution report”. This report will provide details of the CCC’s activities, transfer of assets, amount of dividends that were declared, the identities of shareholders receiving dividends, and a list of persons who are remunerated more than $75,000.
Taxation
To date, CCCs receive no preferential tax treatment. Under the Income Tax Act, to qualify as a tax-exempt NPO, the organization must not be a charity, must be organized and operated exclusively for social welfare, civic improvement, pleasure, recreation, or any other purpose except profit, and must not distribute any of its income. Since CCCs do not qualify for an NPO, it will be subject to tax as a regular corporation under the Act. However, if an NPO incorporates a CCC and holds shares in that taxable CCC, this does not, in itself, cause the NPO to lose its tax-exempt status. Canada Revenue Agency has indicated it would need to assess the NPO’s situation on a case-by-case basis.
Final remarks
The new regulations were approved by Order in Council on February 27, 2013.
“We are the first jurisdiction in Canada to create a Community Contribution Company. There are a number of wonderful social ventures and social entrepreneurs in our province and these amendments will support the great work they’re doing and will help them to continue to find new ways of addressing some of our social challenges,” said Gordon Hogg, Parliamentary Secretary for Non-Profit Partnerships to the Minister of Social Development.
According to the province, a 2011 survey revealed that social enterprises in British Columbia provided services to nearly 700,000 people and generated no less than $60 million in revenues.
“The growth in social enterprises over the past decade has been phenomenal – evolving from a radically new idea to mainstream thinking for today’s graduating MBAs,” said Jim Fletcher, BC Partners for Social Impact co-chair. ”The range of activities and markets is expanding rapidly, yet the surface of their potential has barely been scratched.”
Elsewhere in Canada, Nova Scotia received a similar approval on the Community Interest Companies Act on December 6, 2012. CICs incorporated in Nova Scotia will also be subject to an “asset lock”, be able to accept private investment and issue share capital, and produce an annual community interest report. There is no word yet on when the regulations will take effect.
