Crowdfunding is defined by Wikipedia as “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.” It is an increasingly popular vehicle for raising funds for specific projects, such as the creation of a music album or artistic work, the purchase of a capital asset, or the financing of a start-up. That trend has led a number of taxpayers to seek guidance from the Canada Revenue Agency (CRA) about the tax implications of raising money via crowdfunding. The following comments summarize the CRA’s views on the topic.
Depending on the facts and circumstances, money raised through crowdfunding could represent:
- a loan;
- a capital contribution (a form of equity);
- a gift or a windfall;
- business income; or
- a combination of some or all of these.
Loan or equity
It is unlikely that crowdfunding will be treated as a loan or as equity since crowdfunding initiatives rarely result in the creation of a debt or equity interest in the entity raising the money.
In the event that this does occur, the money raised would not be subject to tax as it would not represent income but rather amounts that would ultimately be returned to the lenders or
the shareholders.
Gift or windfall
A crowdfunding initiative might also be treated as a gift or a windfall. The courts have defined a bona fide gift as:
- a voluntary transfer of property
- from a donor who freely disposes of his or her property
- to a donee who receives the property given
- with no right, privilege, material benefit, or advantage conferred on the donor or any person designated by the donor in exchange for the donor making the gift
A windfall is similar to a gift in that it does not create a right, privilege, material benefit or advantage for the donor, but it adds the further requirement that the recipient has neither sought, solicited nor made an organized effort to receive the payment. Consequently, crowdfunding will tend to fit more naturally into the category of gift than of windfall.
To the extent that money raised through crowdfunding constitutes a gift or a windfall, the amount received will not be taxable.
Business income
When crowdfunding occurs in the context of a business
(whether in the start-up phase as funding for the creation of a new product, service or enterprise, or in the course of operations of an established business), the CRA considers that crowdfunding proceeds constitute business income “unless it can be shown that the crowdfunding arrangement otherwise clearly represents a loan, capital contribution or other form of equity.” Such proceeds would be taxable. In addition, to the extent that the recipient is not a small supplier, the CRA would consider GST/HST to have been collected on the proceeds. It should thus be reported on the appropriate GST/HST return and remitted to the CRA.
Deduction of expenses
To the extent that crowdfunding proceeds are used to pay the expenses of a business, their inclusion as taxable revenues may not be a concern given the deductible nature of the expenses. The CRA anticipates that many outlays and expenses funded by crowdfunding money will be deductible in the course of carrying on business. Should 100% of the crowdfunding proceeds be spent on deductible expenses subject to GST/HST, there would be neither income nor sales taxes owing as a result of deductible expenses and input tax credits. However, if crowdfunding proceeds are spent on capital assets, there may be a mismatch in timing between the income inclusion (at the time of receipt) and the deduction (as the deduction of the asset is depreciated over time).
Conclusion
The CRA’s position on crowdfunding is always guided by the principle that the tax consequences of any particular arrangement depend on the facts and circumstances. Contact your Collins Barrow advisor for professional guidance if you are considering crowdfunding for your business.
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