The Globe and Mail | Tim Cestnick | Sep 10, 2014

Crowdfunding seems to be taking the world by storm. It’s the idea of matching up people who want to raise capital for a particular purpose with those who are willing to provide it, using the Internet and social media to connect them. Most of the amounts contributed are small, but when you add the contributions of potentially thousands of people, it can be an effective way to raise quite a bit of money.

I’ve seen crowdfunding provide money for charitable causes, personal causes, music or other artistic productions, research, and to start businesses. Take Pebble Smartwatch, for example, which raised $10.27-million (U.S.) from 68,929 backers, or Oculus Rift, a virtual reality headset for gamers, that raised $2.44-million from 9,522 backers.

The tax rules

The fact is, the taxman is still contemplating the taxation of crowdfunding. It’s a new concept and the CRA hasn’t said much about it yet, although the first guidance came last fall in the form of technical interpretations (letters to taxpayers who had asked for the taxman’s views). The CRA said that each arrangement must be looked at on its own merits, but that crowdfunding receipts could be treated as a loan, capital contribution, a gift, income, or a combination of these four – depending on the arrangement.

Related:

• Are my crowdfunding efforts taxable?

• Crowdfunding financing is taxable income

In the end, I expect that the tax treatment will very likely depend on what the backer, or funder, gets in return, which could be nothing (a donation model), a reward of some kind, a presale or advance access to a product, equity, or debt.

In the case of reward-based models, amounts received will generally be included in the income of the recipient as income from carrying on a business (if you’re in fact carrying on a business). The good news is that the recipient, in this case, will be able to deduct expenses incurred in connection with the crowdfunding campaign.

In equity-based models, the funds raised shouldn’t be taxable since they are paid as capital in the company, and in the case of lending models, the funds should not be taxable because they are loans to be repaid; the interest paid on the loans should be deductible.

A donation model is less clear; I expect amounts will be taxable as with a reward-based model if a business is carried on.

Tim Cestnick is president of WaterStreet Family Offices, and author of several tax and personal finance books.

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