Social purpose real estate projects: The goals
Social purpose real estate development is an endeavor that seeks to address challenging and pressing issues such as affordability of suitable housing and access to rental space in communities across Canada. The goals of such social purpose real estate projects or programs are altruistic in nature and are ultimately geared towards attaining positive societal outcomes for the good of the communities in which they operate. To achieve such goals, the social purpose entity may purchase real estate for lease or re-sale to financially disadvantaged members of the community on certain affordable terms, or may lease or license premises through which community programs and services are delivered either by the social purpose entity itself or by a community partner or third party at affordable rental or licensing rates.
One of the most important preliminary considerations for any social purpose real estate project or program (“Project” for the remainder of this article) is the structure of the corporate or legal entity(ies) involved in the Project.
Issues for consideration: The structure
While not intended to be an exhaustive review, some preliminary issues which should be considered in determining which is the type of entity that is best suited for a Project to be fulfilled are noted in this section:
1. Determining the legal structure of your social purpose entity
Before deciding on what type of legal entity should undertake a Project, the key players involved in the Project should consult legal professionals to determine the options available for the Project and receive advice on which structure would best achieve the goals of the Project and align with the business plan.
There are a number of options available for the legal structure of a social purpose real estate entity in Canada. By way of a few examples, a for-profit entity can be incorporated which will earmark an amount of its profits to charitable purposes, or a non-profit organization or a charity with charitable purposes at law can be established.
There are advantages and disadvantages to each available structure that will need to be weighed with the input of legal professionals. For instance, a for-profit structure may make an entity more conducive to obtaining debt or equity financing. Whereas with a non-profit entity, there may be tax benefits derived, and such an entity may be eligible for certain available grants and governmental support, depending upon the activities which the entity plans to undertake.
2. Determining the sources of funding for the project
A critical issue to consider in the examination of the structure is how the Project or entity will raise funds necessary to achieve its community-focused goals and activities. As noted above, generally speaking financing or funding could be obtained through various means such as grants, donations, loans, or by issuing shares. The type of legal entities involved in the Project will determine which funding sources may be available. Key differences that will determine the structure flow from the type of entity chosen. For example, most non-profit organizations are non-share capital entities so issuing shares or declaring dividends is not available. With certain donations and grants there may be further restrictions that impact certain available funds which may only be available to “qualified donees.”
If donations are intended as a primary source of funding, and potential donors to the Project expect donation tax receipts, then at least one charity needs to be involved. This will also impact the eligibility criteria for certain grants that are available to the social purpose entity and will inform whether the entity should consider applying for charitable registration under the Income Tax Act (Canada) (the “ITA”), if it is eligible to do so.
It is important to note that a non-profit entity (without charitable status) that distributes funds may jeopardize its tax exempt status if it is found to be operating for a “profit purpose.” Accordingly, such entities are generally not appropriate vehicles through which to make grants.
3. Determine if a registered charity will be involved in the project
If the intent of the entity is to become a registered charity, then such an entity will be subject to additional tax compliance obligations pursuant to the ITA. Canada Revenue Agency (“CRA”) has issued a number of rules which dictate this federal regulator’s position on how charities should meet their ITA obligations.
In order to become a registered charity, the social purpose entity will need to have corporate or trust purposes that are considered exclusively charitable at law, and approved by the CRA. For more information on charitable purposes, see the CRA guidance on this topic.
Any funding distributed by a charity must either be distributed to qualified donees (generally, other registered charities) or in fulfillment of the charity’s own purpose(s).
In the affordable or social purpose housing context, CRA will be concerned about the charity conferring a private benefit on beneficiaries that cannot properly be considered charitable (e.g. low income). See CRA’s guidance on housing and charitable registration for more information.
While charities are permitted to hold real estate and lease out such property to tenants, this can generally speaking be only done in the following two contexts:
- if it is done as a passive investment; or
- if the property is used exclusively in furtherance of the charity’s purpose(s).
Generally, holding real estate is considered to be a passive investment if it is leased at or above market rates, and the charity does not provide any services beyond basic services that are standard in the commercial leasing context. If a charity provides additional services to its tenants, the “related business” rules under the ITA may be triggered.
For further information, please see CRA’s guidance on related business.
Concluding thoughts
Miller Thomson LLP’s Social Impact Group is well equipped to advise on social impact real property projects of all kinds and help guide your considerations in setting up or best equipping your entity. Please contact a member of our Social Impact Group team should you have any questions as we would be pleased to assist.
