The 50% Rule
Ontario’s Co-operative Corporations Act, as with other legislation that defines co-ops, attempts to balance the business and social objectives of co-ops by providing certain definitions and limitations on how co-ops are structured and operate. One requirement in the Act is for a co-operative to do the majority of its business (at least 50%) with its members. This requirement, often called the “50% Rule,” does not exist in co-op law for other Canadian provinces and territories, with the exception of a more limited restriction in the Quebec co-op legislation.
The definition of “business” depends on the type of co-operative. If the co-op is created to sell goods or services to its members, as in a housing co-op, a child care co-op or grocery store, for example, the “business” is the sale of those goods or services and so the co-op would have to provide a minimum of 50% of those goods or services to the co-op members. On the other hand, if the function of the co-op is to buy goods or services from its members and process, market and sell them to the general public (which is what happens in producer co-operatives, then the “business” is the purchase of goods or services from its members and the co-op must make sure to buy a minimum of 50% of the goods or services from its members rather than outside sources.
This requirement was created to recognize that, because co-operatives are formed to meet the needs of members, the majority of co-op business must also be done with their members – otherwise they are effectively no different from a business corporation. If a co-op fails to meet the 50% threshold over a three-year period, the co-op sector regulator, FSCO, can penalize the co-op by removing their co-operative status and turning them into a business corporation.
There have been sectors of the co-op movement that believe this restriction hampers the financial viability and success of the co-op. They have also indicated that some co-ops cannot effectively meet the needs of its members if their business functions are limited this way, and that the rule should be changed or removed.
There are other parts of the co-op movement that believe that the restriction for co-ops to do business with members is an essential part of the co-operative identity, and that without this requirement, co-ops will not be different enough from other forms of enterprise.
Although both opinions are present in the co-op movement in Ontario, it is not clear if there is a majority opinion for either side of this argument. It is also not clear what the impacts of changing the rule might be on different co-op sectors or for the movement as a whole.
March 3, 2010 Update
As part of its government relations activities, On Co-op seeks input from the co-op sector, and researches issues that may require changes to co-op legislation in Ontario. On March 3, On Co-op issued a Special Edition of its e-newsletter devoted to the 50% Rule.
Two members of the On Co-op Regulations Working Group, Larry Sadler and Ian Shewan, contributed articles that outline positions on either side of the issue as a way to start a discussion about the 50% Rule and its future in Ontario. Download a PDF copy of the March 3, 2010 e-newsletter at the top right of this page.
