Toronto’s Cabbagetown is a diverse collection of tony brick homes and gritty walkups, home to millionaires and students alike.

It’s a fitting home for blockbuster charity Kids Can Free the Children, which straddles those worlds and more.

With a two-storey glass front rising between small shops, the charity’s head office is imposing. Inside the front door, photos and newspaper clippings of the charity’s charismatic leading brothers, Craig and Marc Kielburger, dot the walls, and the staff – almost all female and recent university graduates – work diligently into the night.

Marc enters the room assuredly just after 2 p.m. in jeans and a blazer, taking a corner seat. “Very happy to have this conversation,” he says with a smile.

Beside him is Free the Children’s executive director, Dalal Al-Waheidi, 30, a bubbly international-development graduate who confides nervously that she doesn’t like public speaking.

It’s a problem the Kielburger boys have never had. You could just about feel Jean Chrétien’s pain back in 1995, having come all the way to India only to have to listen while 13-year-old Craig, a kid from middle-class Toronto, lambasted him in a private meeting for not doing enough to stop child labour internationally. At home in Toronto, the boy had read a newspaper story – while searching for the comics page – about the death of a Pakistani child labourer. He convinced his parents to let him go to South Asia, where his tour rivalled the Prime Minister’s own for attention. Mr. Chrétien had little choice but to invite young Craig for a 15-minute meeting.

Afterward, complaining that the PM had been “quite vague,” Craig came home and commandeered his parents’ basement – “a place to take over the world over pop and pizza,” as Ms. Al-Waheidi put it.

Older brother Marc, already on scholarship at Harvard when the story began, got involved but left front-man duties to his younger sibling, playing The Edge to Craig’s Bono (to draw a comparison to Craig’s favourite activist rock band).

Before long, the pair got their own newspaper column and were guests on Oprah. Today, Free the Children is a global brand – one that from its headquarters in Cabbagetown is challenging the very foundations of Canada’s charity system.

Marc, speaking like the lawyer he is, acknowledges they’ve “scaled” quickly. In other words, they’ve exploded. They have programs in 4,000 schools across North America, a network of a million kids.

They’ve built 500 schools in 16 countries, including Kenya, Sierra Leone and Haiti. They have 120 employees in their Toronto headquarters alone, and more in regional offices across Canada and abroad. They also run awareness and empowerment programs locally, all part of what they call “the world’s largest network of children helping children through education.” The charity took in $15,683,212 in donations in Canada in the last fiscal year, and nearly $8-million more in the United States.

Together the brothers have written half a dozen books. Craig, now 27, was the youngest ever Executive Master’s graduate of York University’s Schulich School of Business, and Marc, now 33, won a Rhodes scholarship and got a law degree at Oxford. They are members of the Order of Canada, were torch bearers in the Vancouver 2010 relay, met the Dalai Lama and have the ear of former president Bill Clinton.

They fill arenas with screaming teenagers almost at whim, a scene at odds with their relatively bookish vibe. They’re passionate, well-versed and hard workers – one former Free the Children staffer said she quit because she couldn’t keep up with the 18-hour days.

“They were very high-energy,” she says. “A lot was expected of you.”

This year, Free the Children turns 15, but it’s not the Kielburgers’ sole focus any more. In 2008, they launched another project – a for-profit company called Me to We, which sells socially responsible products and offers young people trips abroad, channelling most of the proceeds back to Free the Children.

With that, the wunderkinds find themselves on the cutting edge of social enterprise – a term describing for-profit companies that pair with charities to create innovative ways of changing the world without relying solely on the kindness of politicians and other strangers.

“They’re ahead of the curve,” says Allyson Hewitt, director of social entrepreneurship at MaRS, a Toronto-based research think tank. “I think that the newer generation is really challenging us to think differently.”

But as the Kielburger empire has grown, it’s run into the limits of what the Canadian system imagines a charity able to do.

Advocates say their example should inspire a new model, one that could be the salvation of the charity sector in a time when governments and other donors are cutting back. Critics say that in less-trustworthy hands, it could lead to the exploitation of charitable causes for profit. Without it, though, future potential do-gooders could be kept from following in their path.

Canadian law bars charities from taking on projects intended to turn a profit, even if the profit is meant to be funnelled back to the charity. They must stick to donation- and grant-based funding, and spend only within their declared mandates. The only things they can sell are promotional items – such as World Vision pens bearing their logo – and they may not compete with products made by for-profit companies, a huge drawback to social enterprise.

This month’s throne speech from Ottawa strongly hinted that Stephen Harper’s government sees social enterprise as the future of the charity sector. But the current situation forces the likes of the Kielburgers to look for loopholes by setting up baroque structures to separate the charity from anything that makes money.

It’s a dilemma no country has successfully cracked. The delicate balance is to encourage entrepreneurs to turn a big enough profit to support a charity, but not so much that they become too rich themselves.

Among those pushing for change is Mr. Harper’s most recent predecessor as prime minister. “Government policy hasn’t caught up to where they are,” Paul Martin says by telephone. “I think Canada is ready for it. I think Canada is looking for it.”

Marc Kielburger agrees. “The philosophy was, and is, very straightforward,” he says. “If we can give people the opportunity to make choices that support a more sustainable lifestyle, it is possible to do good and generate profits. In fact, that classic win-win is the very cornerstone of the entire social economy.”

Me to We was born of the Kielburgers’ belief in the transformative power of travel. Before Craig even set foot in India, Marc had volunteered at an AIDS clinic in Asia. “We wanted young people to have life-changing experiences like we did and have the chance to go volunteer,” Marc says. So in 1999, teen Craig and 20-something Marc approached the Free the Children board of directors (which at the time included their mom) and pitched the idea. The board balked at the liability concerns of sending teenagers abroad, so they decided to strike out on their own.

“We went to Revenue Canada and said, ‘Hey, is this a charitable thing?’ And they said, ‘Not really, since it’s a service. But maybe it can be. But it’s all complicated,'” Marc says. “So we said, ‘You know what, we’re just going to set up a corporation that’s going to do this.’ And we did.”

So began the Kielburgers’ drift from the strict world of registered charities and into founding private companies. In 2000, they founded Leaders Today to offer volunteer trips. It eventually would be replaced by the more ambitious Me to We, which, along with facilitating over 1,300 overseas trips last year, provides speakers, runs leadership camps and sells ethically made T-shirts, hoodies, scarves and the like (they’re the official supplier of apparel to this year’s Juno Awards), often printed with social messages, as well as Kielburger-related books, indie-artist DVDs and more.

“We wanted to come up with this mechanism so we could help people realize they could make a positive social contribution without simply having to write a cheque once a year at tax time,” Marc says.

Three years later, they founded Kiel Projects Inc. (KPI), a holding company that manages the money from the brothers’ work on the side – mainly speaking engagements and book royalties. “We have long since made an explicit decision to plow our personal earnings from appearances, book fees and the like into a corporate structure that will serve the public good,” Marc says. “We could have used the funds for a direct personal benefit. Instead, we chose to establish an early social enterprise.” It also safeguards them from what Marc calls the “unpleasant” potential for lawsuits in case anything goes wrong on Me to We voyages.

The complexity of this tripartite structure is compounded by the three groups’ overlapping real-estate holdings, involving a dozen properties.

In 2004, the brothers’ parents were convinced to sell the family home and buy the building that now houses Free the Children headquarters. (“My brother convinced my parents to let him travel to Asia when he was 12,” says Marc. “So we’re pretty good at this.”) As a donation to the charity, Me to We pays the parents $97,200 rent a year, which covers just the mortgage interest and property tax.

The next year, Free the Children used donations to buy its own first house, a short walk away, to offer rooms to its youthful staff. As two-thirds of its employees are young women, and the office lies near the troubled Regent Park housing project, having buildings close by each other is a safety measure. (All requests for interviews with staff were refused.) The next year, they bought three more – all also within walking distance.

All told, Free the Children, KPI, and Me to We dropped $11,288,500 on four offices and eight homes in 53 months, property records show. They’ve since sold one, to raise buffer funds during the recession. Marc and Ms. Al-Waheidi characterize these deals as investments.

“Why rent if you can own?” she says. “providing security to the staff, safety, it’s a cost-effective model and it’s financial security for the organization.”

And so Free the Children carries on its mission of educating and empowering while KPI pays the brothers ($60,000 each, along with access to two Toyota hybrids) and Me to We pays the group’s lawyer, Marc’s wife, Roxanne Joyal ($90,000, part-time). Me to We – owned by the Kielburgers and an unidentified American benefactor – turns half its profits over to the charity ($380,000 last year in cash and $600,000 in kind, mainly the use of its buildings and donated labour), in keeping with a promise made in a memo of understanding when it was created, with the eventual aim of reducing the charity’s administrative overhead to zero. The rest of the profits are reinvested in the company.

The brothers are hunting for more “angel investors” to raise capital to expand Me to We – not to line their own pockets, as they legally could do. True to its mandate, Me to We doesn’t pay dividends to its shareholders (the brothers and their mysterious benefactor), which is one of the reasons social enterprises struggle for capital funding.

“The big challenge for this whole area is really the issue of access to capital. For me, this is how all this stuff is framed,” says Ms. Hewitt, the social-enterprise expert from MaRS.

Tim Draimin, a veteran advocate of social enterprise who is now executive director of the Social Innovation Generation, a MaRS-affiliated agency, says Canada lacks “up-to-date” rules. The result is “a growing blurring of the lines between the operations of what I call public-benefit organizations… and the world of for-profits.”

To sort this mess out on paper, the Kielburgers rely on Torys LLP, a top North American business-law firm, which donates its services pro bono to Free the Children (it’s paid for work for Me to We or KPI). Just another in the line of heavyweights eager to take a call from the brothers Kielburger.

DOUBLE HEADER

By the rules of the game, the brothers’ organizations must run completely independently of one another. Different offices, different boards, different executive directors. All these requirements are strictly followed. But on a practical level, this still allows the two to operate effectively as a single partnership, with buildings doors away from one another, shared staff training and housing, and of course the dual role of the brothers (who, according to a copy of the memo provided to The Globe and Mail, “will not be a part of decision-making processes which involve financial implications, transactions or activities between both organizations”).

“It is a hybrid, and we should recognize it,” says Mr. Martin, the former prime minister and finance minister. “Look, governments are in strained circumstances, and there is a group out there prepared to meet social needs if only the government will give them the same context to operate as it did business entrepreneurs. … If you can’t fund this, you have a responsibility to help meet these needs.”

Mr. Martin’s government pledged $170-million to support Canada’s social economy, funding described as insufficient by charity leaders but later cancelled altogether by the Conservatives.

Because there’s no formal model of a social enterprise, it’s impossible to know how many are operating in Canada. They include things as small as a hospital bookstore or as large as a regional credit union or Mr. Martin’s own CAPE fund, which directs investor capital to aboriginal businesses that are judged able to provide both a financial return and a “social return.”

Mr. Martin suggests treating social enterprises such as Me to We as one would treat a small business, with lower tax rates, and encouraging investment with other incentives. The most important step, he says, though, is simply to recognize their existence.

Many charities are already running social enterprises that break Canadian law – they just don’t know it, according to Stacey Corriveau of the B.C. Centre for Social Enterprise. In a widely cited paper on the subject, “The Fine Print,” she writes, “I am now convinced that the reason that few in the sector are reporting structural social-enterprise barriers is that they are not conscious of the limits that exist. They are unaware that they may be in the position of having their charitable status suspended or revoked, should ever find out.”

Free the Children’s complicated arrangement does not appear to violate any laws (Canada Revenue doesn’t object) and lawyers interviewed say they don’t believe it should. It’s not “any different than any other charity board member having a business, so long as all the other legal rules governing the two entities are observed,” says one top charity lawyer, who would give an opinion only anonymously.

However, the situation does leave the brothers in control of a large part of a marketplace entity that’s closely tied to their charity. Charity founders in such situations could legally sell the social enterprise and pocket the money, although the Kielburgers have no such intentions.

“I think there’s lots of concerns” with the currently unregulated Canadian social enterprise model, says Gary McPherson of the Canadian Centre for Social Entrepreneurship at the University of Alberta. “ is great. But the next one might not be. If you have people lacking integrity who get involved in something like that, they’re going to find ways to shave the corners.”

“To my knowledge, that circumstance has not been legally tested,” says the charity-law specialist. “Those are the kind of public-policy areas that make the area of social enterprise so difficult.”

NEXT YEAR’S MODEL?

There are two schools of thought emerging in other countries that observers say Canada should look to. Last year, the United States introduced Low Profit Limited Liability Companies, or L3Cs, in some states. The L3C model is little more than branding. It offers no tax breaks and doesn’t allow for charitable receipts -just hopes that consumers would buy into something that sounds more charitable. They failed, however, to trademark the name, so anyone can call themselves an L3C without actually proving a charitable purpose.

The United Kingdom introduced Community Interest Companies in 2005, a flexible vehicle designed specifically for social enterprise.

In exchange for tax considerations, CICs (pronounced “kicks”) must prove a “community interest” to their work and place some of their funds under an “asset lock,” ensuring that they’re used only for that purpose. They also allow share-selling to raise capital. A MaRS report last month, co-authored by prominent national law firm Ogilvy Renault, recommended Ontario (Free the Children’s home base) adopt the British model, whereby profits are allowed but capped.

Overall, though, no country has quite cracked the case. “To date, no government has been able to tackle this one. You would not believe the pirouettes that innovative entrepreneurs with a social mission have to perform to undertake the legal mess,” says Pamela Hartigan, director of Oxford University’s Skoll Centre for Social Entrepreneurship, in an e-mail.

“Entrepreneurship focused on social and environmental value creation, in addition to looking at how do they sustain themselves financially, is just way ahead of the legal framework,” she adds in an interview. “You find organizations that have nine different legal frameworks in order to allow them to do what to do … they’re trying every single which way to find ways.”

Ms. Hartigan warns, however, that Canada be careful in adopting its new model. “I think Canada needs to take a very close look. The CICs have not been evaluated,” she says. “Nobody knows if it’s a good system, or a bad system. Nobody knows.”

Ottawa has signalled that change is on the horizon. The recently tabled federal budget recommended dropping a regulation that charities must spend 80 per cent of their annual take immediately – a requirement considered by many to be a weight around the industry’s neck.

And this month’s federal speech from the throne also suggested Canada would be open to more social enterprise: “Too often, however, grassroots efforts are hobbled by red tape,” the speech said. “will look to innovative charities and forward-thinking private sector companies to partner on new approaches to many social challenges.”

Canada Revenue Agency spokeswoman Caitlin Workman said the agency has “policy people working on it right now.” Asked for further detail, she’d only say that “both the charitable sector and the Canada Revenue Agency are actively interested in the concept of social enterprise.”

The attention of advocates of social enterprise was nonetheless piqued. “If that’s the indication of the direction, then I’ll take it,” Ms. Hewitt says.

If Canada were to adopt a system similar to Britain, it might allow charities such as Free the Children to roll their for-profit arm under a more long-term structure. The Kielburger brothers have sunk their own money and efforts into Me to We and its predecessor for years, and perhaps appropriately still retain ownership of the assets. But they say they’ve done it all, toiling with CRA regulations and setting up their separate company, to support Free the Children.

“We try to be as transparent and as clear as possible,” Marc says. “We recognize the need for clarity.”

The stakes are high. When donations dropped last year and most charities scaled back their programs, Free the Children didn’t have to – because it got $380,000 from Me to We, Ms. Al-Waheidi says. “I have a whole office … for free, so that’s where the benefit comes in,” she says. “It really has provided me … with some financial flexibility.”

A new system would safeguard charitable assets – placing Me to We’s real-estate profits, for example, under an “asset lock” system guaranteeing their use in funding Free the Children – and smooth the way for social enterprise in the charitable sector, as a way to cover administrative overhead and increase the percentage of donations that can be earmarked for actual charitable work.

“If we’re asking these kind of charitable groups to be more sustainable, and not rely on government funding forever and ever and ever, we’ve got to create structures that allow them to be more entrepreneurial,” Ms. Hewitt says. “You can do it if you’re motivated and really keen. But why should you have to?”