CORPORATE SOCIAL ENTERPRISE IN CANADA

by Brian E. Roach

The common theme behind ‘social enterprise’ is to use revenue generating, business-like activities, for the purpose or intention of accomplishing a social goal. There are numerous for-profit corporate structures that exist globally today, though only two of the most popular structures that are discussed below exist in Canada.

To illustrate that the concept of social enterprise is a relatively new concept in Canada, a 2010 study on a survey of people engaging in social entrepreneurship found that “social entrepreneurs are not generally well-informed about the dynamics of social enterprise legal structure. This includes knowledge of their own structure (and the rationale for having chosen it) as well as knowledge of other structures and possibilities/ limitations associated with potential reforms.” The development of social enterprise in Canada has tended to outpace reforms of legal framework in the Canadian corporate and tax sectors. For some, this outpacing has been regarded as the greatest challenge for the advancement of social enterprise corporate structures in Canada. Social enterprise is still not yet defined in any legal context.

The relevance of social enterprise in this discussion is what type of returns it can provide to the community. Around 2005 there were around 55,000 social enterprises in the United Kingdom (UK) that contributed approximately £8.4 billion to the national Gross Domestic Product. This was before the UK introduced a for-profit social enterprise structure that has been a huge success and will be part of the main focus of this article.

For-Profit Corporate Structures for Social Enterprise in Canada

Today there are a number of popular corporate structures that are used in the world for social enterprise, with only a limited number of them currently in use in Canada. One of two such corporate structures is referred to as the “B Corp”, while the other is commonly referred to as Community Interest Company or “CIC”. Other for-profit corporate structures for social enterprise exist in the United States such as the Low-profit Limited Liability Company (L3C), and the Benefit Corporation. However, for the sake of conducting a more practical analysis, the remainder of the discussion on corporate structures will focus on the B Corp and the CIC for the reason that they are the only two for-profit social enterprise vehicles that are currently available in Canada.

The B Corp Structure

Developed in the US, the B Corp is less of a corporate structure than it is a designation granted by the US not-for profit company B-Lab. A corporation that wishes to obtain the B Corp designation “must amend its articles of incorporation (or other set-up documents) to expressly consider the interests of other stakeholders, in addition to shareholders…” In addition, B-Lab requires that the interested corporation conduct an assessment which requires disclosure on behalf of the corporation to asses the overall impact of the corporation on its stakeholders. If the corporation meets a minimum social and environmental performance standard, the corporation will be certified with the B Corp designation. Compliance with the minimum B Corp standards is monitored by a random audit process by B-Lab. These characteristics of the B Corp designation begin to highlight what could be a good choice for corporations that prefer to put social or stakeholder interests over the interests of shareholders alone.

The Community Interest Company Structure

Originally developed in the United Kingdom (UK), the CIC may be a viable method of corporate structure to enable the success of a for-profit social enterprise in Canada. In 2012, the governments of Nova Scotia (NS) and British Columbia (BC) passed and amended legislation respectively, to allow the creation of CIC’s. The BC Business Corporations Act was amended to create a new category of share corporation called the Community Contribution Company (C3). The Community Interest Companies Act was also passed in NS to allow corporations to be designated as a CIC. BC and NS have largely adopted the UK structure of the CIC with slight modifications.

Both the BC-C3 and the NS-CIC are required by their respective governing legislation to declare in their corporate governance documents that that they have a ‘community purpose’. This is similar to the UK-CIC model in that the purpose and activities of the CIC are mostly directed at providing benefits for the community.

Another similarity between the UK-CIC, NS-CIC, and BC-C3 is a feature unique to this type of for-profit social enterprise. These corporate structures include an asset lock that restricts the transfer of assets, as well as the sale of assets. A cap on dividends payable from annual profits is also unique to these three variations of the CIC. These unique features that are

common between these three CIC variants are generally intended to ensure that profits and assets are used in furtherance of a community purpose or to be retained by the corporation. One very significant distinction between the BC-C3 and the NS-CIC is that the NS-CIC is regulated by a registrar, with very broad powers to ensure that the CIC complies with the legislated restrictions as mentioned above. The BC-C3 on the other hand, does not have this strict form of government oversight.

The characteristics of the CIC or C3, just as the B Corp designation, establish a good choice for corporations that wish to prioritize social or stakeholder interests over the interests of shareholders alone.

Conclusions on Social Enterprise Structure in Canada

The author of this article suggests that creating more options to be available to investors regarding social enterprise for-profit structures would be the most practical way to broaden the opportunity for philanthropic activity in Canada. The current state of the Canada Business Corporations Act (CBCA) does not limit the designation of a B Corp and therefore does not require amendment to the extent of facilitating that corporate structure. The advantages and disadvantages that have been discussed specific to the B Corp designation signify that it would likely attract entrepreneurs and investors who are not as concerned about keeping the corporation committed to a social purpose.

However, the fact that the CBCA facilitates the B Corp designation and allows for at least some potential for philanthropic contribution to Canada is a positive step towards enabling more investing and corporate structures that are geared towards a social purpose.

The broad conclusion with respect to the CIC model(s) is that statutory amendment would be a good thing for providing an additional option to expand the avenues for philanthropic activity in a for-profit business context. The CIC, or a variant, could also potentially allow for more sources of private capital to be integrated into financial support for social purposes. This would be a good thing for the reasons that financing for social purpose could ideally become more self-sustaining and rely less on donations or grants from private sources or government.

The CIC structure could also attract parties that may not wish to choose the B Corp as a for profit social enterprise structure. The CIC or C3 option could attract entrepreneurs and investors who are more concerned with ensuring that the corporation is committed and locked into doing business for a social purpose, especially for the more restrictive corporate form of the UK or NS-CIC as compared to the unregulated BC-C3.

Whether investors would assuredly jump at the chance to take advantage of the CIC structure is still a question that can only be confidently addressed by further study. This would be especially relevant to highlight any differences that may arise between those who choose to support a CIC over a C3 structure based on the existence of a government regulator in the former structure compared to the latter. In this respect, the true viability and sustainability of a variant of the CIC in Canada will only be confirmed if these structures can be tested beyond the provinces of BC and NS.

The author of this article opines that it would be preferable to have amendments to the CBCA on a federal level to facilitate the creation of a CIC or a variant such as the C3 to enable a more timely and efficient opportunity for these structures to develop Canada-wide. This would be important to determine whether there are particular provincial economies that will be more or less facilitative for the viability of these structures, and to avoid delay from provincial legislatures acting at their own pace.

At a minimum however, it would still be advisable for individual provinces to consider creating specific CIC legislation as NS has done, or amending existing corporation legislation as BC has done to allow for the creation of CICs or C3s. The ability to test the viability of these for- profit social enterprise structures on a federal or provincial level will be a significant way to further research the sustainability of these structures in the Canadian context.