So whose business is it, anyway?

• Author: Hunter, Laird
• Position: Considers extent of business activity of charities

Everywhere charities are facing financial pressure. As a result, a common question raised by charities is the extent of business activity permitted to them. Here, as in so much else affecting charities, the answer is far from clear. While the Income Tax Act has rules about what is permissible business for charities, the language was all but ignored in the only case which deals directly with the subject. The bedeviling words are related business being allowed and unrelated business being prohibited. Related business is not defined in the Act. But the Act does say that a related business includes a business unrelated to the objects of the charity if "substantially all" the employees in the business are unpaid. The common sense meaning would therefore seem to be that a business is related if it directly furthers the charity's goals. An unrelated business is one that does not.

The Income Tax Act doesn't prohibit a public foundation from carrying on a related business. In a roundabout fashion related business activity is permitted for charitable organizations because the charitable organization is deemed to be devoting its resources to its charitable activities. Private foundations, however, are explicitly prohibited from carrying on any business.

In 1987 the Federal Court of Appeal in Alberta Institute on Mental Retardation v. Canada found that the charity, the Alberta Institute on Mental Retardation, collected and sold used household goods to a retailer, under a contract which provided for monthly advances of $2,000 and a fifty percent share of profits from retail sales. The Alberta Institute, in turn, transferred all its profits to its associated charity, the Alberta Association for the Mentally Handicapped. The Court identified four factors to bear in mind in determining whether the activity in question was permissible:

* The degree of relationship of the activity to the charity;

* Profit motive;

* The extent to which the business operation competes with other businessmen;

* The length of time the operation has been carried on by the charity.

But then, without a detailed analysis, the majority of the Court found that applying these criteria, a business like the one operated by the Alberta Institute is a related business because all the profits from that business are used to advance the charitable purpose. This has since come to be called the destination test. All transactions can have profit. It is just a question of definition. But...