Social Finance, Enterprise and Innovation

What are we talking about?

Social Finance, Enterprise and Innovation

A young woman is talking about her new innovative idea and setting up a social enterprise. She goes on to say she has a charitable foundation that wants to invest! This has led to questions about “social impact” law – what is it? What is involved?

Today’s world is complex and fast-moving – the notions of how entrepreneurs do business and how to help others are also changing. A social visionary needs counsel to assist in their efforts to achieve their missions while complying with the law.

This involves working with charities to assist them with compliance with the Income Tax Act (Canada) (“ITA”), in particular as this relates to their revenue generating activity. More and more charities are pursuing social enterprise to enhance their ability to achieve their mission. The ITA requires a charity to ensure it is running a related business. The ITA regulates how charities are permitted to generate revenue through business activities. The activities must be related to the mission of the charity and the activity must be subordinate to the charitable activities. Entrepreneurs need guidance with these issues.

Social finance is the term used when talking about investing in social enterprises or in activities that pursue social good. Public and private foundations are increasingly interested in devoting resources to such investments. A number of years ago, Canada’s National Advisory Board to the Social Impact Investment Task Force challenged Foundations to have 10% of their endowments invested in mission investments before the year 2020. 

What does this involve? Mission investing again requires a consideration of various laws that govern the registered charities. Under the ITA, a charity is not permitted to make a grant to a non-qualified donee so it is critical for the Foundation making an “investment” in a non-profit to establish the money advanced is a true “investment” and not a grant to ensure it is not offside the ITA. The “prudent investor” rules also need to be considered. Provincial legislation requires a registered charity to invest its assets prudently. How does this fit with the ITA rules on how a charity can invest its assets? A careful application of the rules together makes mission investing possible.

Social innovation is a term being used to identify research activity and efforts to find new ways of solving societal issues. Registered charities, non-profits and for-profits working in this area require assistance to navigate the various regulatory rules that may apply.

Providing legal advice to clients that are running social enterprises; engaging in investments that generate social returns; or conducting innovation requires not only an understanding of long-standing legal rules but also an understanding of the new way entrepreneurs, governments and the social sector are doing things.