Deciphering the Liberal’s social finance plan
Various estimates suggest so-called impact investors in Canada are sitting on between $2 billion and $5 billion, and the Liberals are looking for ways to activate that money on projects that have a broad social impact
OTTAWA—A group of experts is considering whether a niche should be carved out of the tax system to unlock billions in private cash for a range of programs that could help the homeless get off the street or boost the incomes of Indigenous Peoples.
The heads of the advisory group say the issue is one of many being studied as part of work on a federal strategy on social finance, an area that looks to link the charitable and private sectors to deliver services that have a social or environmental benefit.
What makes the approach attractive to governments is that it shifts the financial risk from taxpayers to investors in the delivery of social programs.
The federal government currently identifies 69 companies as social enterprises, such as a 35-year-old Halifax bakery that employs marginalized people, and an online sock store that donates a pair for each one ordered.
But there are many more that meet the criteria and multitudes of others that want to get involved.
Rejigging the tax system was the most ambitious of five ideas presented in a briefing note late last year to the top civil servant at Employment and Social Development Canada. The ideas ranged from creating tax credits for charities running for-profit businesses with a social mandate to letting them earn as much as they want tax-free so long as the profits are reinvested in the operation.
The Canadian Press obtained a copy of the briefing note under the Access to Information Act, among dozens of pages that outline the hurdles the social finance strategy is trying to overcome.
Non-profits and charities have increasingly turned to the world of social finance as a way to tap new sources of funding as traditional sources like donations dry up.
Various estimates suggest so-called impact investors in Canada are sitting on between $2 billion and $5 billion with the potential to grow to $30 billion within a decade.
In some instances, governments pay private backers a premium for their investment if certain benchmarks are met, such as a marked improvement in essential job skills for participants. In other cases, the profits from a social enterprise go to investors, are reinvested in the business, or a combination of both.
The Liberals made their first move on the social finance strategy in 2016 through tax changes to allow charities and amateur athletic associations to be involved in a limited way in a for-profit business without losing their charitable status.
Since then, they have opened consultations on the upcoming strategy, launched a $4-million social impact bond to prod private investment into a program aimed at helping Canadians manage high blood pressure, and sent the lead minister on the file to the U.K. on a fact-finding mission.
However, through it all, the sector has told the Liberals that Canada’s tax code and the rules around how charities can raise money remain a key hurdle.
An inter-departmental task force report, also released under access-to-information law, noted community foundations and charities have abandoned ideas to start a social enterprise because it could put their tax-exempt status in jeopardy. The 2015 report suggested that allowing profits from a social enterprise to be tax exempt could put other small businesses at a competitive disadvantage, which federal officials fretted about allowing.
The Liberals’ advisory committee is studying regulatory and legal issues to see what can be done, said Catherine Scott, the committee’s co-chair.
“We hear from stakeholders that sometimes the rules are difficult to understand, or that the rules around the business activities of charities and non-profits can be problematic,” said Scott, director general of ESDC’s directorate on community development and homelessness partnerships.
There are five other areas the advisory board is eyeing, including building capacity for charities to tap into non-traditional financing and create a viable social business, as well as expanding their market access.
Committee co-chair Ajmal Sataar said the strategy is also likely to look at a two-fold awareness campaign: one, to help Canadians learn about social enterprises to help consumers when making purchasing decisions, and, two, for procurement officers in the public and private sector to open up more opportunities for the small businesses.
“The purpose of social finance, social innovation, (and) social enterprise is to improve the lives of the most vulnerable Canadians and all Canadians,” said Sataar, founder of Inspire Nunavut, which runs training programs for youth in remote northern communities.
He said if the strategy works, people will be able to “push the needle” on some of the most pressing social issues like affordable housing and food insecurity.
Online consultations on the strategy close on the ESDC website Dec. 31. Scott said the advisory committee’s final report will be delivered in June.