The CRA has updated its Guidance CG-014, Community economic development activities and charitable registration to discuss the topic of whether a charity can help small businesses in a disaster and to what extent. As we have had and will continue to have large scale disasters such as flooding and wildfires this guidance may be helpful to some registered charities. The changes were made on August 9, 2017.
Here are the relevant portions relating to registered charities helping small business in a disaster area.
90. Examples of cases where private benefit may be acceptable:
90(b) In a disaster area, there may be limited ways to promote social and economic development because resources have been destroyed or damaged. In these conditions, a program that gives funds to restore local small businesses so they can provide goods, services and employment to residents of the affected area might be a charitable activity. This activity could further the charitable purpose of improving socio-economic conditions and preventing community deterioration. Footnote31
To show that the private benefit the small businesses receive (such as money or interest-free loans) is incidental, this type of funding program would generally have to meet all the following requirements:
- the funds must be available to all small businesses within the disaster area that were adversely affected by the disaster (subject to justifiable restrictions)
- the small businesses cannot have the skills or resources from their own assets, conventional financing or insurance to recover, or must be unable to pay insurance deductibles
- the funds must be needed to make it possible for the small businesses to resume operating in the affected area
- the funds must be used for expenses directly related to the businesses resuming operations within, and providing goods, services and employment to residents of, the affected area (such as uninsured losses, deductibles, repairs to business locations/worksites/work equipment, and related occupational training expenses). As a general rule, most of the goods and services should be provided to, and used within, the affected area
- there must be a reasonable prospect of the businesses being restored by the funds provided, either alone or when combined with funds from other sources
The organization should have a process in place to get the information it needs to make sure these requirements are met, and to monitor fund use. It should also have criteria and procedures to decide when funds should no longer be provided to businesses because they are operational or the area is no longer in need of disaster relief.
To do this, an organization could use an application process that provides assurance that each of these requirements is met. For example, an organization may decide, among other things, to do all the following:
- get copies of, and assess, relevant documents relating to the location and operation of the business, and all related financial information, including tax returns, for current and previous years
- only cover documented damages and costs
- issue payments only in the name of the eligible business
- set out in a letter what the funds cover if the payment is a reimbursement for costs already incurred, or what the funds are to be used for if they cover costs not yet incurred. In the second case, the letter would set out the reporting required to confirm appropriate use of the funds and be signed by the business acknowledging the terms
- provide funds in stages to make sure the business uses all funds in accordance with the program, and that both the business and the disaster area continue to meet the eligibility requirements
91. Examples of cases where there may be concerns about providing an unacceptable private benefit in a small business funding program could include:
(a) Providing excessive funds to a small business. For instance, if the funds place the business in a better position than it was in before the disaster, instead of helping to restore its prior operating status, the private benefit to the business is likely not incidental and is unacceptable.
(b) Providing funds that duplicate those received by the business from another source. For instance, if a small business is operated out of the owner's home, exceeding the maximum expenses that can be claimed as a deduction for the home office for income tax purposes would likely provide a private benefit that is not incidental and is unacceptable.
An organization is expected to get and document relevant business-related and financial information, including previous years' income tax returns, to assess these types of issues.
92. In deprived areas, preventing further unemployment by providing training to the employees of a specific company may be charitable, when it would otherwise deliver a more than incidental private benefit, if:
- without this training, the company would be forced to close or dismiss workers
- the training can be generally applied in the marketplace (such as literacy or computer skills), as opposed to training that is useful only to the specific employer
93. For more information on the restrictions on private benefit, see CPS-024: Guidelines for registering a charity: Meeting the public benefit test.
94. Examples of types of purposes that could improve socio-economic conditions in a deprived area and potentially deliver a charitable public benefit include:
- improving socio-economic conditions and preventing community deterioration in an area of social and economic deprivation, namely, [identify location], by assisting residents in need of disaster relief
- relieving unemployment of individuals who are unemployed or facing a real prospect of imminent unemployment in an area of social and economic deprivation, namely, [identify location]. [Note: eligible individuals must be shown to need assistance and lack the skills or resources to help themselves.]
- promoting industry, trade and commerce in an area of social and economic deprivation, namely, [identify location], by providing disaster relief to residents in need
F. Appendix A: Terms and definitions
According to Public Safety Canada, a disaster is a hazard that overwhelms a community's ability to cope and may cause serious harm to people's safety, health, welfare, property, or the environment. A disaster can be the result of a naturally occurring phenomenon within the geophysical or biological environment or human action, whether malicious or unintentional, including technological failures, accidents, and terrorist acts.
Includes providing relief during the period immediately following a disaster and recovery assistance thereafter.
Includes, but is not limited to, incorporated companies, partnerships, and sole proprietorships. A small business has 1-99 full-time equivalent paid employees (full-time equivalent employees = number of full-time employees + number of part-time employees × 0.5). (See SME Research and Statistics and Small, Medium-sized and Large Businesses in the Canadian Economy: Measuring Their Contribution to Gross Domestic Product in 2005).
The numbers provided are maximums. All decisions about the actual number of employees an eligible small business should have must be decided by the organization based on the particular circumstances. The decision must take into account the overriding need to provide a public benefit to the affected community while providing only incidental private benefit.
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Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.