The CRA sees only two types of organizations: those that seek to make a profit, and those that do not and prefer to pursue a social good. This binary thinking hinders the ability of creative entrepreneurs to seek social goals by harnessing the power of markets. Some jurisdictions have recognized this and created a third category of organization: one that seeks to do good by doing well.
Women Like Us is an employment agency with a difference. Cofounders Karen Mattison and Emma Stewart kept hearing from businesses that they couldn’t find part-time workers, while other mothers they met complained they couldn’t find part-time work that fitted around their family obligations. Mattison and Stewart set up Women Like Us to match women who have family obligations with companies that need workers. The agency also offers career guidance and training for those who have been out of formal employment for some time.
Women Like Us aims to make a profit, helps the labour market work better and is designed to fulfill a social purpose. Welcome to the world of Britain’s community interest companies (CICs), a new type of social enterprise that combines profitability with social goals.
Setting up such a company in Canada would be difficult, however. Is yours a for-profit or a nonprofit organization? That is the first question that Canada Revenue Agency (CRA) asks you when you set up a new organization. Depending on your answer, you will pay corporate income tax or get charitable status. But what if your new organization wants to pursue blended value: that is, to make a profit and to promote an explicit social good? That binary thinking gets in the way. Fortunately, policy-makers in Britain, the United States and three Canadian provinces are finding innovative regulatory and tax treatments for such blended-value enterprises.
Current Canadian law obliges the directors of for-profit companies to pursue their shareholders’ best interests, usually interpreted as maximizing profit. Pursuing social objectives beyond compliance with applicable laws can leave directors open to sanction. For-profit firms are discouraged from pursuing blended value.
On the other hand, Canadian nonprofit organizations are not allowed to make a profit. Registered charities in Canada are legally barred from pursuing any “unrelated business activity”: that is, any commercial activity with the intention of generating a profit.
What if your new organization wants to pursue blended value, that is, to make a profit and to promote an explicit social good?
But several factors are now helping to break down the for-profit/nonprofit binary. The fiscal difficulties they faced in recent years have led several governments to seek new ways to meet social objectives while controlling public expenditure and spreading the risk to other players. Changing political attitudes on the left and the right have also opened space for such initiatives. The left’s historical hostility to markets and commercial enterprise has softened somewhat, especially as enterprises incorporate green tech, organics and fair trade in their business models. On the right, pursuing social objectives through the market mechanism has blunted accusations of socialism.
The United Kingdom was the first to exploit this new space. In 2005, the Labour government allowed the creation of CICs. By 2006-07, over 500 CICs were registered; now there are over 10,000. The primary focus of the CIC must be the achievement of benefits for the community. CICs are regulated by the Department for Business, Innovation and Skills.
In 2014, recognizing that some social enterprises were having difficulty raising capital, the UK government implemented income and capital gains tax relief for those investing in social enterprise. The Social Investment Tax Relief provides an official endorsement of enterprises dedicated to creating blended value and raises public awareness of CICs. It appeals not only to those who want to pay less tax but also to socially conscious investors. It is also compliant with the European Union’s restrictions on state aid (subsidies) to enterprises.
In the US, the federal Internal Revenue Service, like the CRA, treats organizations as either for-profit or nonprofit. But now 26 US states have passed legislation to allow Certified Benefit Corporations (B Corps) to pursue blended value. The B Corp states include not only giants like New York and California but also Delaware, the legal home of many American companies.
In New York, B Corps must create a “public benefit.” This can include promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of their business, preserving the environment, improving health or promoting the arts and sciences. Directors of B Corps are accountable to shareholders, who are entitled to vote on corporate actions, including how to define public benefit.
In Delaware, B Corps are defined as for-profit entities managed in the interest of stockholders but also for the benefit of other persons, entities, communities or interests. Directors must manage their B Corp in a manner that balances the stockholders’ pecuniary interests, the interests of those materially affected by the corporation’s conduct and a public benefit identified in the B Corp’s certificate of incorporation.
B Corps in the US are certified by B Lab, a nonprofit organization. B Corp certification is a coveted status. Such certification depends on meeting the environmental and social performance standards set by B Lab, which are measured on how an organization performs against dozens of “best practices” for employee, community and environmental impact. B Lab calls this measuring system a “race to the top,” as B Corps compete to develop and implement best practices. Certification by B Lab also helps the public distinguish between real B Corps and pretenders.
Currently, there are over 1,000 B Corps in the US, over eight times more than in 2008, and they generate approximately US$2.4 billion in revenues. In the 26 B Corp states, B Corps are exempt from paying state-level corporate income tax; however, they may have to pay federal corporate income tax if the IRS views them as commercial entities.
In Canada, CRA is sticking to the forprofit/nonprofit binary, just like the IRS. At stake in Canada is not only the payment of corporate income tax but how the GST, HST and QST are treated. But three provinces are creating a new category of blended-value organizations. British Columbia allows the creation of community contribution companies (CCCs), while Ontario and Nova Scotia have passed but not yet implemented similar legislation. Instead of relying on an independent third party like B Lab to certify its CCCs, BC uses a provincial registrar. Ontario and Nova Scotia have not announced which route they will take.
The lack of a consistent regulatory framework explains why Canada has created so few blended-value organizations compared with the US and the UK. As of 2013, there were fewer than 100 B Corps in Canada, and many were having trouble attracting capital. The 2013 federal budget promised new policies, but no announcements have been made since then.
To foster CCCs, Canadian policy-makers at the federal and provincial-territorial levels need to answer several questions:
- How can we stimulate investor interest in blended-value organizations without offering illegal subsidies? The UK’s experience in navigating the EU’s restrictions on state aid to enterprises may provide a good guide.
- Should certification be outsourced to a nonprofit organization, as in the US, or to government regulators, as in the UK and BC?
- Should CCCs report on the creation of blended value to shareholders, regulators or both?
- Should any new legislation include a definition of “public benefit,” as in New York, or should the CCC have more freedom to define it, as in Delaware?
- Most importantly, how can federal and provincial laws be better harmonized?
In this endeavour, it will be important to learn from the US and the UK, from both their successes and their failures.
Blended-value companies are not a panacea. But they have the potential to garner support across the political spectrum while producing important social benefits. We owe it to ourselves to make this sector work, for all our benefit.