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Social Enterprise - Nova Scotia Style

A social enterprise (or community) company is a hybrid corporation that has become well-established in the UK and several US states. The corporation is intended to achieve some public (but non-charitable) benefit (for example, environmental sustainability) and, at the same time, be profit-making and generate a return for investors, thereby encouraging the formation of capital by the corporation.

Canada is a late adopter of social enterprise companies. In Canada, social enterprise companies can only be formed in two jurisdictions: Nova Scotia (which calls them community interest companies or CICs); and British Columbia (which calls them community contribution companies of CCCs). This article focuses on Nova Scotia CICs.

Nova Scotia has allowed the formation of CICs since June 2016. In Nova Scotia, a company is incorporated under the Companies Act and either designated as a CIC concurrently on incorporation or after it has been incorporated.

So, what is the advantage of a CIC? It turns out that there are none, apart from the possibility that individual investors may feel they are investing virtuously. A CIC is subject to several regulatory requirements, but it receives nothing from the corporate law regime in exchange.

To start with, a CIC is taxed the same as any other taxable Canadian corporation under the Income Tax Act.

Nevertheless, a CIC is subject to various types of regulation, including the following:

Restrictions on Transferring Assets Outside the Ordinary Course of Business: A CIC may only transfer its money or assets outside the ordinary course of business if the transfer (broadly defined to include a sale, assignment, gift, charge or agreement to make any transfer) is for a value that is equal to fair market value ("FMV") or is:

● to further the company's purposes;

● to a qualified entity, which includes a registered charity under the Income Tax Act, certain non-profit cooperative associations incorporated under the Nova Scotia Co-operative Associations Act or societies incorporated under the Nova Scotia Societies Act;

● to certain entities prescribed in the regulations to the Community Interest Companies Act (which include, for example, school boards, hospitals, health authorities and municipalities, the Province of Nova Scotia, the federal government and various Nova Scotia universities, colleges and other charitable institutions); or

● permitted by way of dividend, redemption, purchase of shares, other reductions of capital or dissolution.

Restrictions on Payment of Dividends: A CIC is restricted in the payment of dividends. In any financial year, the amount of all dividends declared on its shares may not exceed 40% of the company's profit for that year and any unused cumulative dividend amount carried over from previous financial years. This restriction on dividends does not apply to shares held by qualified entities specified in the company's memorandum of association.

Dissolution Distributions: Before a CIC is dissolved, it must distribute at least 60% of its residual assets to one or more qualified entities named in the company's memorandum of association or specified by special resolution of the members.

Restrictions on the Redemption, Repurchase or Reduction of Share Capital: A CIC may redeem or purchase its own shares only if the amount to be paid by the company does not exceed the paid-up capital of the share. Therefore, there can be no premium over the issue price of the shares.

Restrictions on Financial Assistance: A CIC cannot transfer (which again is broadly defined) assets by way of financial assistance unless those assisted are qualified entities.

No Joint Tenancy Property: A CIC cannot acquire any property, real or personal, in joint tenancy with another person. Any property that is purported to be held in joint tenancy is instead deemed to be held as tenants in common.

Interest Rate Cap: A CIC cannot pay a rate of interest that is related to the company's profits on a debenture or other debt unless, among other things, the rate does not exceed 15% of the average amount of the company's debt, or the sum outstanding under a debenture issued by it, during the 12-month period immediately preceding the date on which the interest on that debt or debenture became due.

Minimum Number of Directors: A CIC must have at least three directors.

Publication of Mandatory Annual Report: A CIC must publish a community interest report each year. The report must be published on or before the day that the company holds its annual general meeting. The report must include various information for its most recently completed financial year, including:

● a fair and accurate description of how the company's activities during that financial year benefitted society or advanced the company's community purpose;

● the assets (including monies) that were transferred during that financial year in furtherance of the company's community purpose; and

● the amount of any dividends declared during the year.

Mandatory Name Element: The corporate name of a CIC must end with "Community Interest Company", "CIC", "C.I.C." or their French language equivalents.

In general, the Nova Scotia CIC regime runs counter to the enabling function of corporate law, which seeks to facilitate private ordering and avoid pointless regulatory requirements.

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