Tax Implications of Crowdfunding in Canada

Is crowdfunding for you? Read below to find out!

The pursuit of creating your own business, nurturing it, and watching as it grows into a successful organization, is perhaps one of the most commonly held career goals amongst many Canadians, and is by in large, the most difficult to accomplish. While there are a multitude of reasons as to why a business may or may not succeed, the simple truth is that many entrepreneurs do not even get the chance to try! Why, exactly? One reason: start-up capital, or to be specific, a lack thereof. No matter how revolutionary the new product you are trying to market, and no matter how brilliant your business plan for your new corporation, at the end of the day if you do not have the funds available to effectively start a business or market a product, you are simply left with – an idea. So, where does that leave all of you entrepreneurs who are anxiously waiting to unleash your creative genius on the consumer market? Enter crowdfunding, a relatively new method of raising the sought after start-up capital that today’s entrepreneurs so desperately need; a method so new, that the CRA itself has yet to establish a finite set of guidelines in the current Income Tax Act, and are instead determining how crowdfunding is taxed in Canada on a case-by-case basis.

What is Crowdfunding?

Simply put, crowdfunding is the act of raising funds for a project, business, or charitable organization, by seeking contributions (usually small amounts, although there are no restrictions on the amount one can contribute) from a large volume of individuals; these contributions are typically made online, through any of the numerous crowdfunding platforms that are currently in operation. That being said, there are four models of crowdfunding:

1) The lending model:

Supporters make their contributions based on the expectation that their contribution is treated not as a donation, but rather as an interest-bearing loan.

2) The equity-based model:

Supporters make their contributions based on the expectation that they will receive partial ownership in the organization they choose to fund.

3) The reward-based model:

Supporters make their contributions based on the expectation that they will receive a reward in the end, such as a discount, the right to advance order the product, or any other form of promotional reward.

4) The donation model:

Supporters make their contributions altruistically, with no expectation of receiving anything in exchange for their donation.

An industry that, globally, grew to be worth in excess of $5.1 billion in 2013 alone, crowdfunding has since enjoyed a solid rate of growth due to its rapidly mounting popularity, the momentum of which seemingly shows no signs of slowing down. So what is it exactly that makes crowdfunding so attractive to the entrepreneurial market? That would be the model by which crowdfunding is based on, as well as the platform that it operates on. What is this platform, you ask? None other than social media! Yes, that’s right, million dollar start-up campaigns are being brokered not in a boardroom, in a bank, or behind closed doors at venture capitalist firms, but rather, online through such crowdfunding platforms such as KickStarter, IndieGoGo and Fundageek. With the project initiators also tapping into their other social media accounts to further endorse and draw public attention to their campaigns, such as Facebook, Twitter, and YouTube, one thing has become apparent: social media is quickly becoming a heavy hitter in the venture capitalism industry. So that leaves the all important question: how exactly, will the proceeds of my crowdfunding campaign be taxed in Canada?

How Will Crowdfunding be Taxed in Canada?

Now here is where crowdfunding gets tricky. Not because the tax laws are inherently intricate, but rather because crowdfunding is such a new concept, that the CRA has yet to identify a definitive set of tax laws surrounding the treatment of funding received through such means.

In April, the CRA stated that it “understands that crowdfunding is a way of raising funds for a broad range of purposes, using the Internet, where conventional forms of raising funds might not be possible;” as such, the agency’s position will be to “evaluate each situation on a case-by-case basis.” Aurele Courcelles, the director of tax and estate planning at Investors Group in Winnipeg, believes that crowdfunding is still a relatively new method of raising capital, and as a result of this, “the tax treatment of crowdfunding is evolving.”

While it is the position of the CRA that funding generated by crowdfunding is in fact a taxable source of business income, as per subsection 9(1) of the Canadian Income Tax Act, the Canadian Tax Foundation is confident that, “the CRA’s opinion is unlikely to have negative effects on crowdfunding campaigns.”

So in the absence of CRA guidelines, how exactly does one make the educated decision as to whether this methodology is in line with their business goals? Your best option would be to talk to your accountant about an Advanced Income Tax Ruling. Read more about CRA Technical Interpretations and Advanced Income Tax Rulings. Tax Interpretations, an organization that specializes in judicial and CRA interpretations of Canadian tax law and transactional interpretations, recommends that entrepreneurs proceed with requesting an advanced income tax ruling before starting their crowdfunding campaign. By doing so, the individual will receive an advanced income tax ruling based strictly on the nature of their specific proposed transactions from the Directorate; this will outline to the individual how their crowdfunding income will be taxed in Canada, and as such, enables the entrepreneur to decide whether this is their best option for raising capital, or whether they should consider pursuing other means.

That said, crowdfunding is not as simple as opening up a campaign website, sitting back and watching the donations roll in. Rather, this specific form of raising capital leaves a lot to be considered, the tax implications of which being just the start. Overwhelming, right? Thankfully, the accountants at MadanCA can help you understand crowdfunding, its Canadian tax implications, and assist you in mapping a strategy that is best inline with your business goals!

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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