Tax Hyperion May 2015 Issue | Karen Stilwell, Counsel — McInnes Cooper

Canada Revenue Agency (“CRA”) has recently published a new administrative position, 2015-0579031I7 — Crowdfunding, clarifying its position on the general income tax consequences of crowdfunding in Canada.  As aptly defined in a Canadian Tax Focus article, Volume 3, Number 4, November 2013, crowdfunding “… is the practice of raising small amounts of money ….. from many people in order to fund a project.” It typically involves solicitation in one form or another on the internet in order to reach as wide an audience as possible. Most importantly, crowdfunding refers to a method of raising funds, which method does not, on its own, imply the nature of the resulting receipt for tax purposes. Consequently, there has been uncertainty regarding the taxation of funds received through crowdfunding methods. As briefly set out in an earlier CRA opinion, 2013-0484941E5, the default approach of CRA is to treat such funds as income from a source under subsection 9(1)

of the Income Tax Act (Canada) (the “Act”). This more recent opinion expands on the earlier and more constricted position. It is suggestive of a broader stance to be taken by CRA in determining the taxation of funds raised from the crowd, but still emphasizes a strong default position in favour of taxing such amounts as income from a source in a business context. This position as well as CRA’s silence on other issues raises additional questions that will no doubt in the future require answers, especially in the event that crowd-funding arrangements continue to become more common and potentially lucrative.  Given the unlimited number of ways in which a crowdfunding project may be arranged, it follows that there is no one type of receipt, taxable or non-taxable, to which crowdfunding arrangements may give rise. In this most recent opinion document, CRA accordingly acknowledges that “… monies received by a taxpayer under a crowdfunding arrangement may represent a loan, capital contribution, gift, income, or a combination thereof.” CRA further notes that each situation will be analyzed on a case-by-case basis to determine the nature and appropriate taxation of funds received through crowdfunding arrangements.

Echoing the view previously set out in its 2013 opinion document, CRA emphasizes in this latest view that, in a business context, it will take the default position that funds raised through crowdfunding arrangements constitute income from a source. CRA will furthermore take this position unless it is clearly demonstrable in the circumstances that such funds represent some other form of receipt such as a loan or capital contribution. Again echoing the view set out in its 2013 document, CRA indicates that it has not yet evaluated the income tax consequences that will obtain in circumstances where crowdfunding arrangements are used to raise equity funds or are accompanied by the issuance of securities. Though CRA notes that arrangements in which funds are raised in exchange for securities are not currently commonplace in Canada, it is not clear why a principled position on this issue could not be generated. CRA indicates, however, that it plans to generate an opinion on this issue after consideration by securities regulators of crowdfunding arrangements is completed in due course.  In this opinion, CRA also reiterates its position on gifts in a business context. In its view, voluntary payments received by virtue of a profession or in the course of carrying on a business constitute taxable receipts. No further legal analysis is provided to support this conclusion; however, a sketch of the implications of this view is provided in circumstances where funds are raised through a crowdfunding arrangement and no equity is issued in return to the crowd-funders. CRA writes, “Assume a business uses crowdfunding as a method of raising funds for the development of a new product and the contributors do not receive any form of equity. The amounts received by the business would be included in its income pursuant to subsection 9(1).”

View:  Crowdfunding raises money … and tax questions

This default position taken by CRA, especially in light of the spartan example provided, is very general indeed. This administrative view furthermore provides no helpful suggestions regarding the types of facts that will, in the view of the CRA, militate in favour of adopting a conclusion regarding the proper taxation of funds raised through crowdfunding arrangements other than “taxable under 9(1)”. In the absence of more fulsome discussion of such factors, questions arise of whether and how contributions that are to be treated as income may be distinguished with certainty from contributions that are to be treated as capital or as gifts. The CRA’s default position, when combined with its somewhat conspicuous silence on the tax treatment of crowdfunding arrangements that involve the issuance of securities, is therefore perhaps less helpful than it appears at first blush. Based on the foregoing, it would appear that the takeaways for taxpayers and their advisers from this latest administrative view on crowdfunding are more cautionary than anything else. Taxpayers planning to raise funds from the crowd are well advised to obtain professional advice on the tax nature of such funds. In circumstances where a taxpayer decides to take a position that is inconsistent with the CRA's default position - taxable under 9(1) - it will be advisable to keep any and all documentary or other evidence that may later assist to avoid the imposition of penalties should the CRA take an opposing position. This remains an evolving area of law and until we have clear legislative or judicial guidance, uncertainty it appears will reign.

Source:   Tax Hyperion May 2015 Issue

The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country.  NCFA Canada provides education, research, leadership, support and networking opportunities to over 1100+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada.  Learn more About Us or visit ncfacanada.org.