As enterprising activity by charities and nonprofits grows, an early question asked by budding social entrepreneurs is “Where should the social enterprise be housed?”

Unfortunately Canada’s regulatory regimes for both charities and nonprofits were not developed acknowledging or anticipating the emergent enterprising character of the charity and non-profit community.  While there are appropriate and compliant ways to organize enterprise or business activities within a charity or a non-profit (or in provinces where rules allow, to place it in a for-profit subsidiary), too often a complicated “work-around” or “retrofit” is required.  As well, social entrepreneurs face a regulatory maze of competing rules, which need to be reviewed, monitored and reconciled to ensure both federal and provincial compliance.

Similar dilemmas exist outside Canada.  Significantly both the UK and the USA are experimenting with novel “hybrid” entities that try to empower social entrepreneurs seeking to advance social, public benefit goals while engaging market tools and market forces.  The USA is developing the Low Profit, Limited Liability Corporation (“L3C”) and the UK now has several years experience with a Community Interest Company or “CIC” (pronounced “kick”).

Given the relatively close historic charity common law tradition of Canada and the UK, I think it behoves us to recognize that an adapted CIC model could be very helpful for a wide range of Canadian social entrepreneurs and social innovators.

The UK CIC regulator describes CICs as follows:

“A CIC is a type of company, designed in particular for social enterprises that want to use their profits and assets for the public good.  CICs are easy to set up, with all the flexibility and certainty of the company form, but with some special features to ensure they are working for the benefit of the community.”

Some key aspects of CICs are that they can

• Operate as company (and pay taxes on profits though taxes can be reduced by donating profits to a charity)
• Pay reasonable compensation to directors
• Allow the CEO to sit on the board and have more direct control than an ED of a charity might
• Receive assets from foundations and charities if the CICs’s purposes are charitable (i.e. more restrictive than simply “for the benefit of the community”)
• Raise equity by selling shares, though the value of shares cannot appreciate
• Attract share purchasers by offering dividends
• Boast a CIC “brand” of serving public benefit which can help in marketing and partnership building.

CICs have their own regulator (not the charity regulator), who ensures that the companies are operating for public benefit (e.g. CIC applications are reviewed to ensure the objectives are compliant, the dividends are controlled, there is an “asset lock” to ensure accumulated assets are not improperly stripped out, etc.)

As you can see, CICs really do occupy a neatly designed mid-space between the charity world and the for-profit universe, especially by being eligible to receive charitable capital as well as investor capital. They cleverly accommodate the growing specialized constituency of social purpose businesses that seek to serve public benefit.

When the CIC was originally innovated, the expectation was that they would have a tax credit associated with the sale of their shares.  Someone like Sir Ronald Cohen observes that in order to attract investors to a new asset class, it is important to have a tax incentive.  Others argue that since a) CIC dividends are capped by the regulator and b) shares do not offer the upside of capital appreciation, CICs should have a compensatory benefit of tax relief on the purchase of shares.  I think for CICs to be truly effective in Canada that they should be accompanied by a tax credit.

Currently there is a review of CICs underway in the UK.  Notwithstanding the lack of tax credits, there has been a strong uptake of CICs.  Since their 2005 introduction, nearly 3,200 CICs have been registered. In fact, there is a spurt of CIC growth in the wake of the economic crisis.

Canada is currently experiencing a rising tide of social enterprise activity but the regulatory environment supporting it is badly structured to enable it. 

CRA Charities Division, the Canadian government’s charity regulator, does recognize that charities can undertake business activities directly. But their 1990s “guidance paper” is badly written and contains errors of fact. CRA’s primary mandate is tax collection and thus is ill equipped to be an insightful regulator for charities’ social enterprise activity.   CRA also governs non-charity, nonprofits.  Some of their tests (see guidance IT-496R, August 2, 2001) for being a non-profit are whether it is “operated in competition with taxable entities” or whether it generates a surplus.  While a recent court test seems to protect non-profit social enterprise activity, do you really think this is a clear sailing space for innovative social enterprises?

Currently nearly half of Canadian charities are incorporated in Ontario; they are denied the option of operating their enterprise in a for-profit subsidiary.  The Ontario government has had a rule on the books for half a century prohibiting charities from owning more than 10% of a for-profit business. (There is a complicated work-around possible using an intermediary non-profit; also thanks to work by the Ontario Bar Association and ONN, it is expected that Ontario will drop the prohibition to for-profit ownership.)

Having a Canadian CIC would release social entrepreneurs from this Kafkaesque regulatory maze. 

In addition, creating CICs would signal to Canadians that it is possible to think outside the box: we can stop seeing community benefit activities as operating in either non-profit or for-profit silos.  It would provide a dramatic statement about the emerging hybrid universe.  Canada needs one in order to pursue social innovations serving public benefit with financially self-sustaining models.  Introducing CICs would spark a new and needed discourse on creative non-profit problem solving. 

Let’s remove stupid barriers to enterprising innovation serving public needs. 
Let’s unleash the talents of Canada’s social entrepreneurs.
Let’s kick-start the CICs.

An excellent explanation of the value of the CIC model for Canada is from the BC Centre for Social Enterprise: Legislative Innovations and Social Enterprise:
Structural Lessons for Canada, Richard Bridge and Stacey Corriveau (February 2009) http://www.centreforsocialenterprise.com/index.html

The UK CIC regulator has a very accessible website with new informative guidance documents (October 2009), see: http://www.cicregulator.gov.uk/
A complete list of CICs is found at: http://www.cicregulator.gov.uk/coSearch/companyList.shtml

MaRS Discovery District is producing a series of White Papers on social entrepreneurship.  Look for a forthcoming one on legislative innovation and capital access for social entrepreneurs: http://www.marsdd.com/Recommended-Resources/Social-Innovation.html

This post originally appeared Tonya Surman's blog on November 3, 2009

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