B.C. paves the way for community contributions companies.
Unlike non-share or cooperative corporations, which have members, a CCC can have shareholders. As well, the structure provides for potential payment of dividends. Any such payments, however, would be at odds with section 149(1)(1) of the federal Income Tax Act as currently worded. Section 149(1)(1) is the federal legislative provision under which a wide range of non-charitable organizations are granted exemption from tax on their income. The section affords status based on an entity being establishing and operated exclusively for a purpose or purposes other than profit, and precludes income being payable to or otherwise made available for the personal benefit of any proprietor, member or shareholder. CCCs are, therefore, at present considered for-profit companies.
The provisions for CCCs are embedded in the province's Business Corporations Act and were enacted under the B.C.'s Finance Statutes Amendment Act, 2012 (Bill 23), so the entities are effectively a type of business corporation. Under the legislation, as well as having an express societal purpose, an asset lock is placed on the entity's property and its distribution of dividends (or other securities payments based on the company's profitability) is restricted by regulation. Additionally, a company in this category must publish an annual report outlining certain of its financial transactions and its community benefit activities. These features distinguish CCCs from standard for-profit companies.
The Regulations related to CCCs, which will flesh out exactly what the parameters for the new entities will be, are still pending at the time of this writing.
The characteristics of B.C.'s CCC parallel those of some of the new types of corporations that have emerged in other jurisdictions. A number of years back, the United Kingdom introduced the concept of the Community Interest Company (CIC). In the United States, Vermont and some other jurisdictions have enacted laws permitting low-profit limited liability companies (L3Cs). Both these legal forms contemplate an asset lock (a provision in the constating documents or elsewhere preventing use of specified assets for unintended purposes) and restrictions on the amount of return investors can get on the capital they put into the corporation.
There is some debate over whether the better approach is for CCCs, CICs, L3Cs or similar legal forms to be subject to mandatory restrictions on how much profit they can distribute to their investors or, alternatively, whether they ought to be required to demonstrate a minimum quantifiable amount of societal benefit to retain their status.
Although limiting and monitoring financial transactions can be easier than assessing social impact, most of the legislation in this area provides for some mechanism to identify and/or gauge the contribution to community of these types of entities.
Britain introduced CICs in part because that jurisdiction does not use the non-share capital corporation structure that is common in Canada and the U.S. Pre-CICs, in the U.K. most community benefit activity had to take place under the auspices of charities to receive preferential tax treatment. That said, it should also be noted, certain categories of mutual benefit organizations have also long been recognized in Britain, and are generally not subject to tax of their income.
CICs were seen as a way to deal with, and in particular a means to capitalize, social enterprise activities that did not fall within the definition of charity. Prior to CIC legislation there was not a suitable legal form in Britain for certain socially beneficial revenue-generating activity that did not qualify as charitable. Given this, it was sometimes difficult to underwrite this type of work because charitable monies were not available for it and because a market return on investment could not be achieved given the costs of fulfilling a social mission. If such activity was structured as a forprofit endeavour it became vulnerable to takeovers owing to its perceived below market performance.
Providing a hybrid legal form was viewed as potentially promoting this type of activity and well as certain other socially beneficial endeavours. Even though, as a unitary state, Britain can more easily control the coordination of corporate status and tax treatment, the form has not been granted tax privileges akin to charities. Rather, there has been some indirect tax relief granted to individual and corporate investors.
Notwithstanding the appeal of its novelty, to date there has been limited take up of the opportunity to use the new legal form. In part, as well as owing to limits of its preferential tax treatment this may be because social capital financing remains an emerging field, and investment and revenue-generation models are still largely untested.
In the U.S., L3Cs were seen as a mechanism to unleash the market to accomplish social good. However, progress in use of the new form has been fitful. Like Canada, the U.S. is a federal state, with tax treatment of organizations and those who contribute to them generally determined by the national, rather than local, governments. Although there has been some coordination of L3C legislation with federal rules in the U.S. establishing parameters with charity program-related investments, broader cooperation between the federal and state governments in this area has not yet occurred. Absent such cooperation the pace of growth in the popularity of L3Cs is likely to be limited.
It is certainly a welcome development that Canadian--or at least British Columbia--legislators are making efforts to facilitate the work of the voluntary sector, rather than devoting their time to curtailing funding or focusing on what new regulations ought to be imposed on groups that are often already overburdened with administrative obligations. But for those efforts to fully realize their potential more work needs to be done in aligning federal and provincial policy and in developing models and tools so the merit of use of this new corporate form becomes more apparent and its use more appealing.
Peter Broder is Policy Analyst and General Counsel at The Muttart Foundation in Edmonton. The views expressed do not necessarily reflect those of the Foundation.