Crowdfunding has been defined 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". Crowdfunding has been used to support various activities, ranging from disaster relief and political campaigns to commercial enterprises such as motion picture promotion and start-up company funding. In a recent technical interpretation (CRA document number 2013-0484941E5), the Canada Revenue Agency ("CRA") was asked for its view on the tax treatment of funds received by a taxpayer via crowdfunding.
It appears that the CRA's comments are intended to apply to a specific scenario where a person who contributes funds to a commercial venture, such as producing a musical recording, may receive a free product or promotional item, but would not receive any equity and would not be entitled to a share of the profits from the venture. The CRA stated that it generally considers crowdfunding proceeds to be taxable as business income, and would not constitute a tax-free "windfall". This treatment is consistent with the CRA's position in Interpretation Bulletin IT-334R2 Miscellaneous Payments, that voluntary payments received by virtue of a profession or by virtue of carrying on a business are taxable receipts. The CRA also stated that certain expenses, such as the cost of producing promotional items given to donors and the cost of financing activities, may be deductible if the requirements for deductibility in the Income Tax Act are otherwise met.
The CRA's position will raise the after-tax cost of crowdfunding, which may significantly impact independent artists and start-up businesses that cannot access capital from more traditional sources. The technical interpretation does not address the tax treatment of crowdfunding proceeds used for a non-business purpose, such as humanitarian aid. Based on the reasons set out in the technical interpretation, taxpayers receiving crowdsourced funds should not be subject to tax where no business is carried on. The tax treatment of crowdfunding proceeds would also presumably be different if contributors received equity in the venture. In Ontario, equity crowdfunding is generally prohibited; however the Ontario Securities Commission recently issued an exemptive relief order to permit Social Venture Connection, the non-profit part of the MaRS Discovery District in Toronto, to sell securities over the internet to accredited investors, as described in greater detail in an article by my colleague Brian Koscak, available here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
