Canada Media Fund | Antoine van Eetvelde | March 25, 2014

Disclaimer: The following content is intended to provide general information and does not constitute legal or tax advice of any kind. Refer to your local tax credit administrator for more specific guidelines on reporting crowdfunding income for tax credit purposes.

The end of 2013 and the beginning of 2014 saw a number of significant regulatory developments regarding crowdfunding, both here in Canada and in the US. In particular, the US and certain Canadian provinces made significant progress toward making investment crowdfunding a reality. In addition, the Canada Revenue Agency came forward with official comments on how crowdfunding fits into the current income tax framework.

What follows is a summary of the latest significant regulatory developments in North America.

The CRA takes position on crowdfunding

The Canada Revenue Agency (CRA) has broken its silence and come forward with official comments regarding how crowdfunding income should be reported from a taxation perspective.

In October 2013, the CRA released comments and technical interpretations in a series of published responses to specific questions on the issue. The technical interpretations state that while some crowdfunding situations require a case-based interpretation, the CRA’s general interpretation is that most donation- or rewards-based crowdfunding campaigns would be considered as “voluntary payments (or other transfers of benefits) received by virtue of a profession or by virtue of carrying on a business”, which are considered to be taxable receipts.

This ruling has important implications for creative projects that may want to access other forms of support such as production tax credits. While the CRA has not published an official position or guidelines with respect the interplay between crowdfunding and labour-based refundable tax credits (e.g., the Canadian Film or Video Tax Credit), this broader statement on crowdfunding monies may mean that project owners seeking tax credit support for their projects should report any crowdfunding income as they would report other forms of business income.

Equity crowdfunding is moving forward

Saskatchewan became the first Canadian province to officially make special provisions that legalize investment crowdfunding.

Following pressure from local entrepreneurs and in accordance with the province’s new growth plan, the Financial and Consumer Affairs Authority (FCAA) released a proposed equity crowdfunding prospectus exemption in October 2013, which led to a month-long public consultation process.

In December 2013, the FCAA approved and released the final Saskatchewan Equity Crowdfunding Exemption. The new exemption allows local start-ups and small businesses to sell securities to the general public (i.e., local, non-accredited investors) via crowdfunding as an alternative way to finance their business. The catch is that the exemption only applies to businesses and investors located in Saskatchewan, serving as a reminder of the core challenge of giving Canadian entrepreneurs and investors access to investment crowdfunding in a decentralized securities regulation system.

Related:  Two equity crowdfunding specific exemptions taking hold in Canada