How to operate a business while remaining on-side CRA requirements and tax law

Article by Jonathan Wright. Click here for homepage.

Phone:   604.678.4459


Your charity’s story likely sounds a little like this. You’ve begun with energy and enthusiasm. Goals are set and milestones reached one by one, and you realize it might be time to grow.

And then a problem. More often than not, while the dreams expand, the budget more or less remains the same. How then might a charity fund the next part of its journey?

One increasingly common answer is to use business to bridge this gap. A common belief among charities is that income earned and used for charitable ends makes the business activity permissible, but unfortunately, this is not the case. Done right, operating a business is fully permissible under tax law and Canada Revenue Agency (“CRA”) requirements. Done wrong and the risks, including penalties and even revocation, will outweigh the benefits.

This note discusses some of the more important aspects of how a charity might avoid common missteps in conducting its business and stay on-side CRA requirements and tax law.


First, we ask whether the activity is a business at all. Not all income-generating activities are businesses at law. Some are even charitable. The key characteristic of a charitable income-earning activity is that it retains the elements of altruism and public benefit. The charity might offer a service that is otherwise unavailable to the public, or set fees for the services according to charitable rather than market objectives.

In-depth discussion of these is outside the scope of this note. For now, let us assume the activity is a business.

Related business

Under the Income Tax Act (the “ITA”) and CRA policy, a charity can only operate a business if it is a “related business”. There are two types of related businesses. The first is a business that is 90% or more run by volunteers (which is straightforward and not considered in detail here). The second is one “linked” and “subordinate” to a charity’s purposes, discussed below.

Linked to a charity’s purposes

The key question here is whether the business activity is integrated in action and philosophy with the purposes and operations of the charity. The CRA gives four types of business which would be considered linked to a charity’s purpose. In paraphrase, these are:

(a)        A usual and necessary concomitant of charitable programs, this being business activity that supplements charitable programs.

(b)        An off-shoot of the charity’s charitable programs, occurring when a charity creates an asset in the course of its charitable programs that it then may bring to market.

(c)        A use of the charity’s excess capacity, arising when a charity uses its assets to gain income in periods when they are not being used to their full capacity.

(d)        Sale of items that promote the charity or its objects, including the sale of charity-branded goods, like mugs or t-shirts.

Subordinate to a charity’s purposes

A business will be considered subordinate to a charity’s purposes if it is not a non-charitable purpose of the organization in its own right.

The CRA sets out four categories of factors it considers in the question of whether a business is subordinate and subservient to a charity’s purposes.

(a)        The activity receives a minor portion of the charity’s resources.

(b)        The activity is integrated into the charity’s operations.

(c)        The charity’s charitable goals continue to dominate its decision-making.

(d)        The charity continues to operate for exclusively charitable purposes.

The focus of these questions is whether the charity has strayed from its charitable roots. Important follow-up questions include whether the charity’s physical and human resources are taken up by the business, whether the business is stand-alone or integrated into the charity’s operations, whether the activity could operate outside the charity and whether decisions for the charity have strayed from its charitable purposes toward a profit motive.

Staying on-side

The question of whether an activity is linked to a charity’s purposes can be complex. Businesses run by a charities are rarely so straightforward as a hospital parking lot or the sale of crops grown on a heritage farm—two examples used by the CRA as related businesses.

For whether the activity is subordinate to a charity’s purposes, no single category or factor will be decisive. A charity can miss requirements set out above and the activity may still remain subordinate. However, the analysis has moving parts which will depend on the circumstances of the particular charity.

Finally, even where a business is off-side, a charity may still operate it indirectly through a wholly-owned for-profit company. The company may then donate the proceeds from the business and receive tax credits for up to 75% of its income.

If your charity is considering starting a business or has already begun such an activity and is concerned as to whether it is on-side tax law and CRA policy, please do not hesitate to contact the author at or 604.678.4459, or visit our website at