Charitable Business Activities: What You Can and Can’t Do

Operating a charity in Canada comes with specific rules about business activities. The Canada Revenue Agency (CRA) regulates what types of businesses registered charities can operate while maintaining their charitable status. Understanding these charitable business activities Canada regulations is essential for compliance and protecting your organization's registration.

This guide covers everything Canadian charities need to know about related business activities, including what's permitted, what's prohibited, and how to stay compliant with CRA charity business rules.

⚠️ Important: Operating an unrelated business can result in loss of charitable registration status, financial penalties, and tax consequences. Always consult with charity law experts before launching business activities.

When most people decide to start a charity, they have a big dream to make a difference in the world. They know they want to help, but they're not always entirely sure how they plan to do that.

That can complicate things for these organizations, because under Canadian law and tax regulations, there are actually quite a few limitations on what you can and can't do. To make matters worse, if you cross the line on these limitations, even unintentionally, you can lose your charitable registration status.

One area that is particularly tricky is the business that your charity can be involved in. So, let's take a closer look at why you might want to be involved in business, and what the rules are.

Why Charities Need to Generate Revenue

The law in Canada says that a registered charity (either a charitable organization or public foundation) may be engaged in business related to its purpose or mission.

Of course, charities' purpose or mission is to effect positive change in the world, and one of the most fundamental ways to do that is to provide financial support to organizations or individuals.

That means that charities need to generate revenue, and one way to do this is to be involved in some kind of business. That's where things get tricky.

One of the complexities of generating revenue for a charity while still staying on the right side of the Canadian charity regulations governing them is how to earn money.

What Qualifies as a Related Business for Charities?

When it comes to the definition of "related businesses" in the charities context, there are two specific situations that apply:

1. If the business is "subordinate" to your primary activities, which means it's not the primary focus of your work and,
2. If it is run 90% or more by volunteers

That's still pretty broad and open to interpretation though. Which means that many people and organizations struggle to determine if the business they are planning to run to support their charitable work will meet the requirements.

Real-World Examples of Charitable Business Activities

To better understand how these rules apply in practice, here are some common examples of permitted charitable business activities:

Hospital Gift Shops: A hospital charity operating a gift shop within the hospital is considered a related business because it serves patients, visitors, and staff while supporting the hospital's charitable mission.

Thrift Stores: A charity running a thrift store that sells donated goods qualifies as a related business when proceeds support the charitable purpose and the operation is substantially run by volunteers.

Church Parking Lots: A religious charity renting out its parking lot to commuters during weekdays is permitted because it generates revenue from an existing asset without detracting from the primary charitable purpose.

Museum Cafeterias: A museum operating a small café for visitors is a related business that enhances the visitor experience while supporting the museum's educational mission.

These examples show that the key factors are whether the business supports your charitable purpose and whether it remains subordinate to your primary charitable activities.

Unsure if your planned business activity qualifies? Contact our charity law experts for a compliance review.

Activities That Are NOT Considered Business Activities

The first type of activity we should look at are things that are not considered a business when done by a charity, and there are actually quite a few things that fall into this category, including:

• Reselling items that have been donated to the charity.
• Fundraising activities that rely on asking for and receiving donations.
• Fundraising events, so long as they are not a frequent or regular activity.
• Investing the charity's funds and receiving income from those investments
• Charging fees for services, provided that the funds raised are used to pay for the operation of the service.

All of the things on this list can be done without being considered business activities and will not cause any risk to your charity registration compliance.

Permitted Business Activities for Canadian Charities

Of course, for the rule about business conducted by charities to exist, there must be circumstances where you might cross this line. These include:

• Operating a gift shop, paid parking service for your operation, or a restaurant or café on the site of your organization
• Selling products with your organization's logo on them
• Renting out space in your building or parking lot

These activities should all be directly related to the activities of your charity, but they can be done and used to generate funds for your organization.

Hiring Employees: What Charities Need to Know

If you need to hire employees for your charity, that's actually great news! It means you've probably come a long way from registering your charity, and you're well on your way to achieving your goals. In fact, you might even change the world.

But, while growth, including needing to hire people to help with the day-to-day of your organization is a good sign, it does also raise a few new questions and problems.

Here's what you need to know about employing people to work in your charity.

Employee Privacy Rights and Background Checks

One of the biggest problems many employers face in Canada is balancing their employees' rights to privacy with the protection they are entitled to under The Privacy Act.

The rules about what employers can and cannot ask their prospective hires also differ from one province to the next, and by employer type. So, in some places, you may be allowed to ask if your potential employee has a criminal record, but elsewhere you might not.

The same goes for credit checks. Unless the job is directly related to working in finance or a related industry, it might not be relevant to the job, and asking for one might contravene the Act.

Generally, when it comes to employees and privacy in Canada, any screening, background checks or surveillance by employers must be relevant to the job, disclosed to the employee, applied consistently, and obtained through legal and credible means.

This includes things like drug and alcohol testing, and even looking up employees on social media.

Of course, even though you can't be excessively invasive with your employees, you should also know that any negative behaviour that they might indulge in (and any press that accompanies it) can and probably will reflect on your organization. That might not affect your organization in any fundamental way, but it can be a public relations nightmare. So, make sure you have clearly defined policies governing employee conduct, and that you apply them consistently.

Compensation Guidelines for Directors and Trustees

Many charities only employ a handful of directors and trustees and rely on the donated time of volunteers to get a lot of their work done. However, if you are paying those directors and trustees, you need to know that the CRA has set strict guidelines for how much they can earn, and what kind of earnings they are entitled to.

You can read more about this on the Government of Canada website which also has information about undue benefits, and how employee remuneration affects your tax returns.

It's also important to note that the CRA does pay close attention to the earnings of charity directors and trustees, and they will take action if they suspect something is amiss.

Managing Volunteers in Your Charity

Many charities rely on volunteers to get their good work done. But it's also interesting to note that just the act of encouraging volunteerism can be considered a charitable purpose, and that organizations that do that can become registered charities.

If volunteers incur expenses while working for a charity, and are not reimbursed for those expenses, they are also seen as a gift to the organization, and the rules about gifts and donations would apply.

Which means that while it's fine for charities to make use of volunteers, they do need to be knowledgeable about the regulations, and how they apply.

Remember that having 90% or more volunteers operate a business activity is one of the key criteria for qualifying as a related business under CRA charity business rules.

Staying Compliant: Best Practices for Charitable Organizations

A charity is like any other business. There are all kinds of legislation that governs what you can and can't do, including when you hire employees. Some of that legislation is specific to charities, but some applies generally. Some is managed at the federal level, but there is also provincial level legislation to consider.

The best advice is the same as it would be with any business. It's always best to know the rules before you need to apply them, and to have policies drawn up before you need to use them.

Spend some time before you need to hire employees or take on volunteers, and make sure that you've dotted all the i's and crossed all the t's. It will undoubtedly save you a lot of time, money, and effort later. Stay abreast of changes in legislation too. This is a good business practice, but it will also ensure that your charity stays in good standing, and on the right side of the law.

Quick Compliance Checklist for Charitable Business Activities

Before launching any business activity, use this checklist to ensure compliance:

☐ Is the business activity related to your charitable purpose?

☐ Is it subordinate to your primary charitable activities?

☐ Is it operated 90% or more by volunteers (if not directly related)?

☐ Have you documented the relationship to your charitable mission?

☐ Are employee compensation levels within CRA guidelines?

☐ Do you have clear written policies for business activities?

☐ Have you consulted the CRA's Policy Statement on Related Businesses?

☐ Does the business activity generate unrelated business income that could be taxable?

Conclusion

Navigating charitable business activities in Canada requires careful attention to CRA regulations and a clear understanding of what qualifies as a related business. Even well-intentioned decisions can put your charitable registration at risk if they don't align with federal guidelines. When you're uncertain whether a planned business activity meets compliance requirements, seeking expert advice can protect your organization's status and save you from costly consequences.

At B.I.G. Charity Law Group, we specialize in helping Canadian charities navigate business activity regulations, maintain CRA compliance, and protect their charitable status. Whether you're planning to launch a new revenue-generating activity or need guidance on existing operations, our team provides the clarity and expertise you need. 

Contact us at dov.goldberg@charitylawgroup.ca or call 416-488-5888 to discuss your charity's business activities. Visit CharityLawGroup.ca for more resources on Canadian charity law.

Ready to ensure your charity's business activities are compliant? Schedule a FREE consultation with our charity law experts today. For additional information on related business guidelines, visit the Canada Revenue Agency's website.

Frequently Asked Questions About Charitable Business Activities

Can a registered charity operate a business in Canada?

Yes, registered charities in Canada can operate businesses, but only if they qualify as "related businesses." The business must either be substantially related to the charity's purpose or be subordinate to charitable activities and operated 90% or more by volunteers.

What percentage of volunteers is required for a related business?

If your business activity is not substantially related to your charitable purpose, it must be operated by 90% or more volunteers to qualify as a related business under Canadian charity regulations.

Can charities sell merchandise?

Yes, charities can sell merchandise with their logo or brand. This is generally considered a permitted business activity, especially when it promotes awareness of the charity's mission and generates revenue for charitable purposes.

What happens if my charity violates business activity rules?

Operating an unrelated business can result in serious consequences including loss of charitable registration status, revocation of tax-exempt status, financial penalties, and potential taxation of business income. The CRA may also impose sanctions or require corrective action.

Do fundraising events count as business activities?

No, fundraising events are generally not considered business activities as long as they are not frequent or regular activities. Occasional fundraising events, soliciting donations, and receiving gifts are all permitted charitable activities.

Can charities hire paid staff?

Yes, charities can hire paid employees. However, compensation must be reasonable and within CRA guidelines, especially for directors and trustees. The charity must also comply with employment standards, privacy laws, and other applicable regulations.

How do I know if my business activity is "subordinate" to charitable work?

A business is subordinate when it's not the primary focus of your organization. If your charitable programs and activities clearly take precedence in terms of time, resources, and organizational focus, the business is likely subordinate. Document this relationship carefully.

Can a charity own shares in a for-profit business?

Charities can hold shares or investments, and receiving income from investments is not considered a business activity. However, operating a for-profit business as a primary activity could jeopardize charitable status.