Tax Implications of Crowdfunding

Today we are talking about crowdfunding and it’s tax implications. So if you’ve ever thought about using this new method of raising capital to startup your new business, or to develop a market for a new product – be sure to watch this video!

What is Crowdfunding?
Crowdfunding is when an individual raises capital for a project, business or charitable organization by seeking donations of any size from a large volume of donors. These contributions are typically made online through such crowdfunding websites such as Kickstarter, Indiegogo, and Fundageek.

How Will Your Crowdfunding Contributions be Taxed?
Crowdfunding in Canada is such a new concept that the CRA has yet to establish a set of tax laws for funding raised through such means. Due to this, the CRA will be assessing the taxation of crowdfunding capital on a case-by-case basis. That said, there are 4 different models of crowdfunding, each defined by what the contributor expects to receive in exchange for their donation.

The 4 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. Funds received should not be taxable income because they are loans that will be repaid, additionally, the interest paid on the loans will be tax deductible.

2. The Equity-Based Model: Supporters make their contributions based on the expectation that they will receive partial ownership in the organization they chose to fund. Funds received should not be taxable income since they are paid as capital in the company.

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 or any other form of a promotional reward. The bad news is, amounts that are received will be included on the income tax return of the recipient as income from carrying on a business. The good news is, the recipient will be able to deduct expenses that were incurred with their crowdfunding campaign. How the donor would be taxed is dependent on the value of the reward. For example, a $10 advanced copy of a DVD versus a $50,000 new car.

4. The Donation Model: Supporters make their contributions altruistically, with no expectation of receiving anything in exchange for their donation. No specific tax laws about this model have been released yet, although it is safe to assume that the donor will not be able to claim donation credit, as crowdfunding campaigns are not registered charitable organizations.

So here’s the tip: Be sure to consider the tax implications of each of the 4 models of crowdfunding before starting your campaign!

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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