This series explores the approach taken by several public post-secondary institutions in Canada to deploy innovative, independent, and accountable business structures to make the most of their institutional assets and business opportunities. Most often, though not exclusively, these business structures are used to develop campus lands not required for academic uses, into mixed use or commercial developments aimed at broader goals such as community-building and revenue generation.
In Part 1 of this series we discussed the "wheelhouse" issue, which answered the question: "The institution already conducts various business activities, why doesn't the institution just engage in these business activities itself?"
As described in Part 1, not all business activities are directly related to the institution's mission and mandate, nor are they directly related to the advancement of education and research. In addition, whether for a related or unrelated business, some institutions are prevented from taking on the debt necessary to undertake the business activity (that may be by statute, or by government policy, or other considerations). As a result, the institution needs other options.
Two such options are: outsource the activity to an unrelated, external entity; or establish a related business structure to carry out the activity.
In this article, we'll focus on the second option: establishing a related business structure that can perform the business activity, take business risks, and earn and distribute profits in a tax efficient manner.
Bearing in mind the "a word to the wise" section that follows, the three alternative business structures are:
- A Business
In essence, this involves a two-step process. The institution incorporates a wholly owned subsidiary (which could be a business corporation), and establishes a discretionary trust. The sole trustee is the newly incorporated subsidiary corporation, and the beneficiaries are the institution and another (preferably tax exempt) entity closely aligned with the institution or its purposes. All business is conducted by the subsidiary corporation in its capacity as the trustee of the business trust.
- A Limited Partnership
This is a three-step process. This variation involves establishing a business trust as described above. Then, as a third step, the institution causes the creation of a limited partnership, with a different wholly-owned subsidiary as the general partner, and the business trust as a limited partner. The business activities are undertaken by the general partner on behalf of the limited partnership.
- A Subsidiary
This is a simplified structure that involves only the creation of a wholly-owned subsidiary corporation. For this structure to achieve tax efficiency, the entity that owns the shares of the subsidiary must itself be a tax-exempt entity under specific and highly technical regulations in the Income Tax Act.
Institutions established under the B.C. University Act as well as the College and Institute Act must conduct careful analysis of these provisions of the Income Tax Act to determine whether this option is available to them. For those institutions that have related foundations incorporated under the University Foundation Act, a variation that may prove worthy of further consideration is the creation of a subsidiary of their foundation.
A Word (or two) to the Wise
Summary. First, this article contains only a very high-level summary of the options available. The right option for any one institution depends on various factors that are not addressed here, including governance and autonomy, tax efficiency, capital distribution, Provincial accounting standards and public accountability laws and principles, as well as the ease of implementation and ongoing operation.
Flexibility. Second, these options are flexible and it may be that the right option is a variation or hybrid of one of these options, or an altogether new option. Therefore, seek advice from experienced legal, tax and accounting advisors before starting to seriously consider any particular option.
Oversight. Third, public post-secondary institutions are highly regulated, especially when it comes to financial and accounting matters. As a result, each institution needs to consider its legal and operational relationship with its regulator to determine at which point it should approach the regulator to discuss implementing any related business structure.
Don't venture lightly. Fourth, these structures have a cost, both for initial set-up and ongoing expenses. Enthusiasm, goodwill, and an great idea are necessary, but not sufficient—what's necessary includes a determination that the business activity needs to be conducted through a related business structure (see Part 1 of this series), a well-considered business case, and (in most cases) a means to provide interim financing.
If your institution is considering achieving its mission and mandate by tapping the potential of innovative, unrelated business activities, it is a good idea to reach out to the institutions (both in and outside of your jurisdiction) who have deployed these structures in order to gather important due diligence and lessons learned. As these structures have been around for several decades now and are picking up steam, a community of experienced executives, professionals and advisors is available for you to draw upon.
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.