Canada's social economy about to get a boost, but problems remain

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Canada's social economy -- those social enterprises (nonprofits, charities and cooperatives) that generate income in pursuit of social goals instead of profit -- is about to get quite a boost.

Quietly, but thoughtfully and effectively, the federal government has initiated and funded, with serious money, a brand-new program creating the Social Finance Fund, to drastically expand the social economy.

This year, $50 million is flowing, and is set to quickly increase to $75 million per year for the next 10 years.

The fund is intended to address a major impediment to growth of the social economy -- the shortage of investment capital.

While the private sector readily raises millions through Bay Street's financial institutions, social enterprises don't attract their interest. Instead, to be successful, social enterprises rely heavily on the communities they serve for financial support. And that often isn't enough.

Hence the fund.

the creation of the fund was one of 12 recommendations in support of social innovation and social finance made to the federal government made in August 2018 by a steering group broadly representative of social economy organizations.

Designing the fund

The fund's design drew on similar and quite successful initiatives elsewhere in the world -- see the Global Steering Group for Impact Investment's 2018 report on building impact investment wholesalers for an outline of those initiatives.

Importantly, the steering group insisted that the fund's governance model should include a significant role for social economy stakeholders in its design and delivery, so as to ensure that it responds to the needs of their communities.

And remarkably, the federal government agreed. It relinquished direct control over the disbursement of funds for the initial program of the fund -- an investment readiness stream which offers grants to social enterprises to prepare themselves to access social finance.

This initiative is a remarkable achievement, and worthy of celebration.

At the same time, however, there will be forces that distort and diminish the impact that this new funding could have. There's a clear need to push and prod to keep those forces at bay.

Odd choices

Some of those forces seem to have resulted in several odd choices for what are called "investment readiness partners" -- entities that are to select which social enterprises are to receive money from the $5 million investment readiness stream.

There were five organizations chosen to administer the stream:

All three of these are worthy organizations well-rooted through their members in their respective communities.

But why the Canadian Women's Foundation and Community Foundations of Canada?

While they both do valuable work, neither has a particularly strong history of engagement in the social economy.

And both are registered charities, which means they are severely restricted: they can't grant money to other organizations unless the grant money is used for exclusively-charitable activities.

Charitable activities don't include conferring private benefit on individuals, or non-charities. Most social enterprises are not registered charities.

In the context of the social economy, that fundamental rule is a significant barrier. That impediment was recognized by the steering group.

Here's what it said on page 31 of its report:

"We have heard through our consultations that the current rules and a lack of clarity arising from them, notably the rules under the Income Tax Act governing registered charities and incorporated non-profit organizations, 28 are constraining the ability of organizations to innovate, generate earned income through social enterprise, work collaboratively with other sectors, and ultimately, deliver better outcomes in their communities. Instead, organizations are expending significant resources -- time, money, and energy -- to ensure that they are in compliance."

And, at page 34:

"In some cases a charity may convey private benefits in the course of creating a public benefit. This scenario is more likely to occur for charities that are engaging in social innovation, social finance and social enterprise, where the lines between private and public benefit are blurred. … There are some situations, such as entrepreneurship and employment programs, where the public and private benefits are so closely intertwined that it is difficult to ascertain whether private benefit is indeed incidental."

So, if charities can't really deliver money to non-charities, and as they have no strong history of engaging in the social economy, why were these two charities chosen to deliver the investment readiness program to most Canadian social enterprises?

One can only guess.

Potential for private-sector abuse

There is a significant risk that private-sector businesses will be allowed to access fund monies.

We saw significant abuses in Ontario's renewable energy feed-in tariff program, which promised a premium price for electricity generated by community-based cooperatives. A significant number of "cooperatives of convenience" set up by private renewable energy developers took advantage of lax rules and regulations to access that premium price.

For the fund, getting the definition of what is meant by the social economy right has been an ongoing issue.

There's consensus that charities, nonprofits and cooperatives are included.

But what about private enterprises that are driven in part by social goals?

Both Nova Scotia and British Columbia have created hybrid social-purpose/for-profit corporate forms: the community interest company (Nova Scotia) and the community contribution company (British Columbia).

They must have a stated social purpose, limit owners' return on capital invested to 40 per cent of distributable profits, may not sell assets for a price less than fair market-value, and may only distribute 40 per cent of its assets to its owners on dissolution, save for its stated social purpose.

Not surprisingly, there's not been much take-up of these hybrid models.

B-corps are another example -- they are certified if they satisfy a mix of social criteria, but don't have to have any of the strictures of the hybrid model.

The social goals of both hybrids and b-corps can readily be dropped or gamed, as Ontario's cooperatives of convenience have shown.

Nevertheless, the fund's definition of "social enterprise" includes "for-profit social enterprise," with nothing to clarify what that might mean.

In Québec, it is somewhat different, as the Chantier specifies that an applicant that is a "private, for-profit social enterprise" means:

"A company whose entire mission is based on meeting one or more needs of a population or community and which generates profits. Through the sale of goods and services, the private for-profit social enterprise generates profits, but at least sixty per cent of the net profits must be directed towards the social objective. Therefore, the social mission of such a company cannot be limited to its social responsibility or to donating to a charity."

The potential for abuse of the fund's goals by private business applicants is significant.

To date, it seems little attention has been given to how to prevent that abuse.

Social economy still can't readily access RRSPs

Finally, the steering group, and the government, have to date failed to address a significant barrier social enterprises face in raising capital from their members and supporters -- the virtual monopoly Bay Street institutions have on the sale of RRSPs.

As our firm noted in our submission to the steering group, many Canadians who wish to invest in social enterprises, but only have funds available in their RRSPs, are effectively prohibited from doing so by the narrow criteria established under the Income Tax Act for eligible investments in RRSPs.

Ontario's Solar-Share Coop and Toronto's Centre for Social Innovation have attempted to comply with those criteria, and have achieved only limited success.

But far too much energy and resources have been consumed trying to persuade RRSP trustees of their eligibility and meeting those narrow eligibility criteria.

Two publications illustrate the problem: MaRS Centre for Impact Investing's discouraging publication "Barriers to Putting Community Bonds into RRSP Accounts," and Solar-Share's plucky response: "Breaking the Barriers: Holding Community & Green Bonds in Registered Accounts." They're worth a read.

Brian Iler is a Toronto-based lawyer, with Iler Campbell LLP. He advises many social enterprises, and has served as a director with many of them, over the years. He most recently co-founded Circle Land Trust, which seeks to acquire 623 homes in Toronto from the city to preserve them as affordable social housing, and Hugh's Room Live, a legendary music venue reopened three years ago as a charity.

Pro Bono provides legal information designed to educate and entertain readers. But legal information is not the same as legal advice -- the application of law to an individual's specific circumstances. While efforts are made to ensure the legal information provided through these columns is useful, we strongly recommend you consult a lawyer for assistance with your particular situation to obtain accurate advice. Submit requests for future Pro Bono topics to [email protected]. Read past Pro Bono columns here.

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