April 21st, 2017
Are my crowdfunding efforts taxable?
Forward: the following post was prepared in response to an increasing number of tax related crowdfunding questions that NCFA Canada has received. In fact, Daryl Hatton, CEO/Founder of FundRazr provided the tax scenarios, Robert Gold and Shawn Bullen of Bennett Gold introduced us to Albert Luk of Devry Law who kindly prepared the following article to provide clarity on the topic. It's great to experience such an efficient network and to interact with others that have similar shared values of collaboration, transparency, and inclusiveness.
Are my crowdfunding efforts taxable?
"There's no such thing as a free lunch" is an often-used quote to communicate you cannot get something for nothing. For most tax authorities, the variation of that saying should be "there's no such thing as a non-taxable lunch." What many in the crowdfunding space thought was a non-taxable lunch may not, in fact, be tax exempt.
Reward based crowdfunding is generally defined as a type of fund raising where any monies received may result in the awarding of a good or service. For example, a movie producer seeking to finance its film can provide movie posters to anyone who donates more than $20 towards the film. One of the more famous instances of reward based crowdfunding is the Pebble Watch who used Kickstarter to raise over $10 million dollars and, in return, gave discounts on the watch when it was ready for production.
Some in the reward based crowdfunding space have worked under the assumption that any amounts received from the public are not income and not taxable. Unfortunately, Canada Revenue Agency ("CRA") does not take the same view.
Although all tax cases are decided on a case by case basis, CRA's general view at this point in time is that amounts received by crowd funders in relation to carrying on a business are taxable. Correspondingly, any expenses incurred for the purposes of gaining or producing may be deductible.
What does this mean in plain English?
Firstly, CRA will generally tax monies received in relation to a business. What constitutes a business is fact driven. Is reward based crowd funding to pay for a child's cancer treatment taxable? Most likely not since it is can be characterized as donation based crowdfunding and, if the campaign is a one-off, it may not be characterized as a business. However, an artist who is consistently seeking funding in order to finance the production of a film to be sold to the public is more likely to be viewed by CRA as carrying on a business. Again, these are determined on a case by case basis based on the facts at hand.
Secondly, what amounts given by the general public should be reported as income? CRA's general position appears to be all amounts received.
Thirdly, what expenses can be deducted against such income? CRA's general position is that any costs related to the reward (e.g. the cost to produce and ship the movie poster in our above example) and the fees paid to undertake crowd funding are deductible.
CRA's position on crowdfunding is generally not well developed. It is difficult to determine how CRA will deal with crowdfunding issues given the relative novelty of the industry.
From what little we know, there are at least 3 take-aways:
Crowdfunding is not a free lunch. It can be, in fact, a taxable lunch if CRA believes that crowdfunding is being used for the purposes of carrying out a business.
As with all tax matters, record-keeping is key. Taxes are more often about who has the best records and not who has the best story. If you are engaged in crowdfunding, be sure to keep records as to money received, costs of rewards and the costs of setting up a crowdfunding campaign.
As the industry continues to evolve, CRA will most likely pay more attention to anyone engaged in the crowdfunding industry. Just because one is small does not necessarily mean that one will escape CRA review. Please ensure that crowdfunding activities are accounted for and to inform your professional advisors that you are engaged in crowdfunding. In some cases, the penalties and interest for not declaring income are far worse than simply declaring the tax at the onset.
I wish you the best of success in all your crowdfunding activities.
Disclaimer: The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
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