Canada: Canada Weighs In On Social Impact Investing: Highlights From The Report Of The National Advisory Committee

Last Updated: October 1 2014
Article by Susan M. Manwaring and Natasha Smith

A major outcome of the 2013 G8 summit was the launch of the Social Impact Investment Taskforce (the "Taskforce").  Comprised of over 200 people from the G8's member countries, the Taskforce was charged with the daunting task of taking a significant step toward "improving society". National advisory boards were established to furnish reports on how social impact investing strategies and supportive public policy and legislation could be used to catalyze social development within their respective countries.  Canada's National Advisory Board recently published its report titled Mobilizing Private Capital for Public Good: Priorities for Canada (the "Report").

What is Social Impact Investing?

Social impact investing is the investment of private capital with the aim of generating financial returns along with positive social, environmental, cultural, or economic impacts.  Investors seek to allocate capital with the expectation of financial return and specified social impact, and investees implement business models catering to these expectations.  Depending on the desired social impact (e.g., prisoner rehabilitation, reduced homelessness, increased Aboriginal entrepreneurship, etc.), business models may utilize benchmarks or thresholds to measure the return on investment (both fiscal and social) of their respective social initiatives.

The Current Canadian Landscape

As we previously reported, the Canadian Task Force on Social Finance (an earlier group) was created in 2010 to consider opportunities to mobilize private capital for public good within either non-profit or for-profit enterprises.  Although there is much left to do, over the past four years the recommendations of the Canadian Task Force on Social Finance have helped shape the current state of Canada's impact investment market today.  Current governmental initiatives include:

  • Government of Canada's release of its Venture Capital Action Plan
  • launch of the Social Impact Bond (SIB) in Saskatchewan
  • rollout of green bonds and launch of a social venture exchange in Ontario
  • recognition of Community Economic Development Investment Funds in Nova Scotia

Current private advancements include:

  • launch of various  private equity impact funds
  • certification of over 100 benefit corporations

Summary of Recommendations

Building upon the recommendations set out in 2010 by the Canadian Task Force on Social Finance, the 2014 Report makes recommendations directed at four major objectives:

1. Enable charity and Non-Profit Organization (NPO) social enterprise activity

2.  Unlock foundation capital for impact investing

3.  Establish an impact investing matching program, paired with appropriate incentives

4.  Establish an outcomes payment fund

Enable charity and NPO social enterprise activity

The Report takes the position that the Income Tax Act (Canada) and related guidance often inhibit the ability of charities and NPOs to participate in revenue generating and capital activity.  Although charities are permitted under the ITA to generate income through a "related business", such business must either be run substantially by volunteers or otherwise be linked and subordinate to the charity's purpose.  The report notes that these restrictions, as well as similar restrictions applicable to NPOs, inhibit the participation of social organizations in social entrepreneurship, resulting in a limit of the growth, impact and overall success of these organizations. 

The Report recommends changes to be made to allow charities and certain NPOs to:

(a) pursue certain related business activities on an income tax exempt basis, and to pursue other business activities subject to income tax; and

(b)  provide a private benefit where it is necessary to achieve a broader public benefit, by clarifying guidance on the public benefit test.

These measures, the Report suggests, would afford these organizations with the "flexibility to develop and test innovative ideas, grow successful services to scale, and ensure financial stability." 

Unlock foundation capital for impact investing

The Report notes that charitable foundations have the potential to "act as significant leaders in Canada's impact investing market".  Under the current rules, foundations are required to make grants in an amount representing 3.5% of their assets in order to meet their disbursement quota while the rest of their assets may be invested in a manner which maximizes financial return.  Charities (including foundations), however, are prohibited from making grants to organizations which are not "qualified donees" under the ITA or which are not under their direction and control.  Furthermore, private foundations are prohibited from investing in limited partnerships as such investment, by virtue of the definition of "partnership", is considered to be carrying on a business. The Report comments that private foundations' inability to invest in limited partnerships limits their overall ability to make impact investments as such investments are often structured in this manner.

In this area the Report recommends the following:

(a) clarify that impact investments can be part of a balanced portfolio under current prudent investor rules;

(b)  alter trust law to state that, in the case of a charity, a prudent investor should consider social impact;

(c)  amend the ITA to permit charities to invest in limited partnerships; and

(d)  amend the ITA to permit charities to make below market investments in recipient organizations that are not necessarily qualified donees provided that the operations of the recipient result in a direct, tangible public benefit that advances the charity's charitable purposes. 

Establish an impact investing matching program, paired with appropriate incentives

Categorized as a way in which the federal government "can help catalyze an increased flow of private capital directed toward impact investing", the Report recommends establishing an impact investing matching program designed to supplement, not replace, government and philanthropic funding.  The Report outlines various possible structures, but maintains that regardless of the program(s) implemented, there should be a corresponding "criteria to guide eligibility for funding, including measures to help ensure that funding is allocated in support of regional initiatives." 

Establish an outcomes payment fund

Citing the SIB as a prototype for an outcomes payment fund, the Report states that outcomes-based approaches identify "the interventions that are having the greatest positive impact".  Successful models around the world are based upon government commitments to pay for stated outcomes (i.e. measurable fulfilment of an organization's purpose), providing charities and NPOs with the primary benefit of increased access to capital markets.

It will be interesting to see how stakeholders in the social impact investment market respond to the recommendations of the Report.  We will continue to keep you apprised as new developments in the area of social enterprise arise.

The Taskforce's report as well as the reports from the National Advisory Boards of other countries may be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Susan M. Manwaring
Natasha Smith
 
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