February 1, 2015
by Amir Fathollahzadeh
A pavilion in Botwood, Newfoundland is a tangible outcome from last year’s Culture of Outports projects. ERA Architects and the Centre for Urban Growth + Renewal – a non-profit organization that the architect co-founded – spearheaded the community build initiative.
TEXT Amir Fathollahzadeh
In today’s marketplace, doing business with a cause is good for business. Progressive architecture and design firms are looking to engage in charitable projects that complement their core business activities. A well-implemented plan that is aligned with a firm’s goals and initiatives can have a significant impact on how it is perceived in the crowded marketplace.
When we think about a cause-driven business, certain terminology comes to mind. From a marketing standpoint, cause marketing, conscious capitalism and social business venture are terms to describe a business or plan specifically conceived to drive social change. All may be considered profit-oriented businesses, with part of the profits invested in a cause. We may also think of charitable organizations, not-for-profit organizations (NPO) and private or public foundations. We may assume that registered charities and NPOs should not generate a surplus. On the contrary, many registered charities and NPOs are focused on generating surplus funds to gain financial stability, in order to meet their missions and to provide for their programs.
Consumers are demanding more from companies: purchasing, recommending or promoting those that commit to social change. The retail sector has effectively used social initiatives to drive business and bring awareness to many different causes.
One retail company that exemplifies the successful utilization of the NPO structure is TOMS, a shoe manufacturer that has expanded into eyewear. It also operates a non-profit subsidiary called Friends of TOMS. For every shoe or piece of eyewear sold, they donate the same to a needy child. This is a great example of how a for-profit business can co-exist with a not-for-profit and at the same time drive sales.
Another example is the eyeglass company Warby Parker, which has the same type of model as TOMS, but with a twist. Instead of giving away a pair of glasses for every one sold, they fund the production of a pair of eyeglasses by an unaffiliated non-profit organization called VisionSpring.
How can these ideas apply to the architecture and design fields, as firms seek to support and enhance their communities? There are several examples of not-for-profits that already exist in Canadian design, including the organizations Architecture for Humanity, Habitat for Humanity, and in Toronto, developer Artscape.
Less frequent, but equally viable, is an organization such as the Centre for Urban Growth and Renewal, which is directly supported by ERA Architects and planningAlliance (see case study below). In this model, to facilitate “doing business with a cause,” a for-profit architecture or design firm co-exists with a not-for-profit organization, each one complementing the other. Profits and contributions from the for-profit firm fund the NPO’s cause, while in return, the NPO brings awareness to social issues that could provide projects and revenue for the firm.
Doing business with a cause isn’t just about making more profits or driving business. First and foremost, it’s about supporting a cause that your firm and your team believe in—any increased profits are an added bonus. Other advantages may include increased client awareness, lower marketing costs, opportunities for innovation, improved productivity, employee morale and retention, and talent recruitment.
Incorporating a Not-for-Profit or Registered Charity into Your Firm
In order to implement an NPO into a firm’s overall business structure, it’s essential to understand the building blocks and technical aspects of the various NPOs available. The optimum structure depends on the firm’s mission. For example, if social housing is a subject the firm wants to tackle, it may make sense to set up an NPO to research and create awareness around the subject, whereas a registered charity framework could be used to raise funds to build social-housing projects. The chart above provides a summary of the differences between a registered charity and an NPO.
Within the registered charity framework, there are three types of entities that can be registered with the Canada Revenue Agency: charitable organizations, public foundations and private foundations. Private foundations are a popular choice for many organizations, as they provide a high degree of flexibility over how funds may be used. A private foundation may be governed by a small group of people who already do business together, and may carry on its own charitable activities as well as funding other registered charities.
There are unique compliance and administrative requirements to consider when setting up a registered charity:
• The organization’s purpose and objectives must be documented in an application for charitable status made with the Canada Revenue Agency. It’s recommended that the application be prepared by a lawyer specialized in this area.
• There are ongoing administrative costs, such as accounting and legal fees, similar to running a corporation.
• There are governance requirements, including the need for the directors to hold regular meetings and maintain minutes.
• Donors may be entitled to receive a tax receipt for their contribution if the funds qualify as a gift. This may enable the for-profit business to make a donation to the registered charity and receive a charitable tax receipt to reduce its income taxes—there is an immediate financial benefit.
For those companies who may prefer to explore less intensive opportunities for corporate social responsibility, there are options for charitable and not-for-profit support that are beneficial both in terms of creating social change and from a tax standpoint. Following are some examples:
A donor-advised fund (DAF) is an alternative to setting up a private foundation. It provides simplicity and flexibility, since it removes the administrative duties and costs associated with running a foundation. To set up a DAF, an up-front donation is made and is invested by the DAF management entity, similar to an investment fund. Many financial institutions, community foundations and charitable organizations offer this service. Each year, the donor recommends grants to their designated registered charities. A contribution to the DAF is tax-deductible, and a charitable tax receipt is issued at the time the contribution is made.
Donations by Corporations
Firms making a donation to a registered charity such as the Royal Architectural Institute of Canada (RAIC) Foundation will receive a charitable tax receipt. The amount of the donation is deductible for tax purposes but the firm must meet an income test in order for the donation to be fully deductible within the year. The deduction is limited to 75% of the firm’s net income before the donation expense is claimed. Therefore, in a year that the company has a loss, the donation would carry forward to be claimed in the next five years.
Donations by Partnerships
If a partnership (which is not a taxable entity) makes a donation to a registered charity, the donation amount will be allocated to the partners in the same proportion as the partnership’s income is allocated. If the partner is an individual, the personal tax rules will apply, and she will receive a tax credit. If the partner is a corporation, the corporate tax rules will apply, and the corporate partner will treat the donation as an expense.
Gift of Property
A gift of property to a registered charity, such as the donation of your archive to the Canadian Centre for Architecture, is considered a disposition by the donor and may result in a capital gain on disposition. In return, the donor will receive a charitable tax receipt for the fair market value of the donated property. If the donated property has qualified as &l
dquo;Canadian Cultural Property,” the gain on the disposition of the property is deemed to be nil, and the donor can still claim the donation credit.
This tax treatment also applies to donation of publicly traded securities. Under normal circumstances, when you sell a publicly traded security, you are subject to capital gains tax. However, when you donate an appreciated investment to a registered charity, you don’t have to pay tax on any capital gain and you still receive a charity receipt for the fair market value of the security donated.
Sponsorships to registered charities and NPOs are not eligible for a tax receipt as there are commercial benefits received, such as advertising and promotion of the firm. This is the case if the firm was to sponsor Canada’s entry to the Venice Architecture Biennale, for example. Therefore, the business making the sponsorship will claim the contribution as a business expense rather than a charitable donation.
Performing Services for a Registered Charity
When a business performs services (such as working pro bono) for a registered charity or NPO, it must issue an invoice and charge HST as for its other customers. We’ve seen many arrangements whereby registered charities will engage a firm for services with the expectation that the firm will donate back the value of the contract/invoice. In this case, the company’s revenue and expense for the donation is offset, and the company will ultimately realize a net expense equivalent to the cost of its employees’ time. There is no other deduction available to the company under this scenario.
The use of these different forms of giving will continue to grow as government funding for programs decreases and social responsibility becomes a more important factor for many businesses. Whether implementing a not-for-profit structure as part of a for-profit business, setting up a donor-advised fund, or donating services to registered charities, many opportunities exist for practicing corporate social responsibility. The result: helping specific causes championed by business owners, while at the same time creating win-win propositions for both for-profit and not-for-profit organizations.
Amir Fathollahzadeh is Partner, Assurance and Business Advisory, at Toronto-based Shimmerman Penn LLP. Amir is also part of the firm’s industry specialist group for architecture, engineering and design firms.
CASE STUDY: CENTRE FOR URBAN GROWTH AND RENEWAL
The Centre for Urban Growth and Renewal (CUG+R) is a non-profit organization based in Toronto, founded by members of ERA Architects and planningAlliance. CUG+R conducts focused research to enhance public policy and enables private initiatives that together foster healthy urban, suburban and rural environments. The founding partners started the organization in order to collaborate with academic, government and NPO partners on an equal and shared footing—without the perception that as private-sector businesses, they were solely motivated by for-profit interests. Since its establishment in 2009, CUG+R has produced landmark reports for the United Way, the City of Toronto’s Health Department and the Province of Ontario’s Growth Secretariat, as well as assisting with an educational and research project in Newfoundland. The organization is currently exploring other opportunities across Canada. According to ERA partner Michael McClelland, CUG+R’s focus on research has encouraged staff to appreciate the value the firm places on public-interest design. More information on CUG+R can be found at www.cugr.ca.
A pavilion in Botwood, Newfoundland is a tangible outcome from last year's Culture of Outports projects. ERA Architects and the Centre for Urban Growth + Renewal - a non-profit organization that the architect co-founded - spearheaded the community build initiative.