Crowdfunding is a relatively new phenomenon where individuals or groups raise money to fund projects or ventures, typically through the Internet, of a for-profit or not-for-profit nature.
Individual contributions are usually small and come from a large number of people. Crowdfunding web sites such as Indiegogo, FundRazr, and Kickstarter began appearing in the late 2000s and have grown in popularity since that time. The Canada Revenue Agency characterizes its understanding of the phenomenon of crowdfunding as “a way of raising funds for a broad range of purposes, using the Internet, where conventional forms of raising funds might not be possible.”
Uses of crowdfunding have ranged from helping individuals with education or funeral arrangements to holding a potato salad-themed festival. While crowdfunding offers developers or charitable causes a means of directly accessing funding from supporters, which may have advantages over traditional approaches and offer a more direct relationship with them, the tax implications of such arrangements are a growing area of focus. Recently, the CRA explained its current approach to and the potential income tax implications of crowdfunding in its response to a taxpayer request.
Given the variety of uses of crowdfunding, it’s not surprising that the CRA’s response indicated that it must assess the tax consequences of money raised through a particular crowdfunding campaign on a case-by-case basis. Depending on the specific facts and circumstances of each arrangement, it may classify the funds involved as loans, capital contributions, gifts or income. For example, a business may use crowdfunding as a method of raising funds for the development of a new product or an individual or charity may use it to raise funds for a particular cause.
Although the CRA provided a broad position in relation to crowdfunding, it did specifically note that “where funds are received by a taxpayer as a result of a crowdfunding arrangement for the development of a new product and that taxpayer carries on a business or profession, CRA generally considers such funds to be taxable income . . . unless it can be shown that the crowdfunding arrangement otherwise clearly represents a loan, capital contribution or other form of equity.”
Further, if the CRA does consider the funds to be taxable income, its response suggests taxpayers could deduct “any reasonable costs incurred” with regard to the crowdfunding arrangement. Such a clarification is important since the growing popularity of different crowdfunding web sites means that the ease of entry to such arrangements may be changing given the importance of making potential supporters aware of a product or project early in a campaign through social media or other means.
The CRA also noted that crowdfunding may have issues related to securities where it includes raising equity. In such circumstances, the CRA has indicated it will evaluate the tax consequences of such arrangements once securities regulators make changes to existing securities regulations to address this new approach. As such, crowdfunding campaigns may often have issues beyond those related to taxation.
The CRA’s response also refers to several paragraphs of its income tax folio first published on Dec. 9, 2014, that deals with lottery winnings, miscellaneous receipts, and income and losses from crime and addresses the tax treatment of gifts and voluntary payments. These paragraphs clarify the CRA’s position that gifts are not taxable to the recipient so long as there is a voluntary transfer of property “without consideration and which cannot be attributed to an income-earning source.”
Although both the income tax folio and the CRA’s response are silent on the issue of crowdfunding by charities, presumably funds raised this way could be treated as gifts and therefore be non-taxable as long as they are made in accordance with its gifting, fundraising, related business, and receipting policies. As such, a number of issues may arise in crowdfunding situations such as whether the funds go to an individual or another third party rather than directly to the charity or whether the money raised may be directed for the benefit of a particular person. These issues may affect whether donors can receive a tax credit and there may be an impact on the determination of such a credit if the supporters receive any type or reward or other advantage in making a gift. In this regard, while a case-by-case approach may be sufficient for the time being, these areas will be expanded upon as the CRA continues to review the tax consequences of crowdfunding.
Ryan Prendergast and Linsey Rains are associates at Carters PC practising charities and not-for-profit law.
