In many cases, the money raised on crowdfunding websites like Kickstarter and Indiegogo — for everything from independent films to quirky device prototypes — might not amount to much, but it still counts as business income, according to the Canada Revenue Agency.
Tax attorneys and several media outlets reported earlier this week that a recent interpretation the CRA issued in response to a query about crowdfunding makes clear that if the money raised is related to professional or business activities, then it qualifies as income.
"The struggling artist may not see what he or she does as a business. They may just think, 'Hey, I'm raising money here to launch a record or produce movie,' " said Ted Citrome, a tax attorney with the Toronto firm Cassels Brock, in an interview with CBCNews.ca.
But no matter how small-scale the activity or how little the amounts pledged, if the funds are used to conduct business, they will be taxed.
"In our view, amounts received by a taxpayer from crowdfunding activities would generally be included in income pursuant to subsection 9(1) of the [Income Tax] Act as income from carrying on a business," the CRA said in an Aug. 16 letter that was made public this week.
Thank-you gifts could be tax deductible
Money raised through crowdfunding falls under the rubric of "voluntary payments (or other transfers of benefits) received by virtue of a profession or by virtue of carrying on a business" and as such is taxable, the agency said.
But that doesn't necessarily mean the person doing the fundraising can't deduct certain expenses associated with the crowdfunding campaign, the CRA said.
Many musicians or artists will, for example, offer those who donate money to their crowdfunding campaigns some small token of appreciation, such as a limited editions of their work or a band T-shirt, and these items might qualify for certain tax deductions.
"It is our view that the cost to a business to provide donor gifts (ex. cost of T-shirts) and fees paid to undertake crowdfunding activities may be deductible if the requirements of the [Income Tax] Act are otherwise met," the CRA said in its letter.
The CRA interpretation would not apply to money raised for non-profit or charitable activities such as disaster relief or political campaigns, which would be covered by the same rules that apply to other types of gifts and donations.
"If you're raising money to get surgery or something like that, then I don’t think anybody is intending this to be taxable," Citrome said.
Get good advice
Citrome says the CRA's clarification is a good reminder to those who might not even realize their small Kickstarter project could qualify as a business.
Because crowdfunding is a fairly new phenomenon that falls outside the traditional business model and includes such a broad range of activities, many of which are grass-roots campaigns or small personal projects not likely to make any money, its tax implications are not always well understood.
'What you might not think of as a business may, in fact, be a business, which can cause unwanted surprises.' - Ted Citrome, tax attorney, Cassels Brock
Many of the people using sites like Kickstarter and Indiegogo are not traditional entrepreneurs, Citrome said, and may not realize that what they're doing is a commercial transaction.
"They really should arm themselves with good tax advice to know what the consequence of their crowdfunding activities are," Citrome said.
"What you might not think of as a business may, in fact, be a business, which can cause unwanted surprises."
The other complicating factor, Citrome said, is that if the same funds were raised by issuing shares or by a loan, they wouldn’t be considered income.
"If you use crowdfunding to raise equity, you're just like any other corporation issuing its shares that way," Citrome said. "The money that comes in doesn't go to your income, it goes to your capital, and shareholders will be taxed on dividends and other distributions from the company, but there is no immediate tax consequence form raising the funds."
Equity crowdfunding could help startups
This kind of use of crowdfunding is increasingly being considered as a way to help startups and small businesses that might not be as adept at rustling up investors through traditional means.
Earlier this week, the Saskatchewan government launched public consultations on a pilot project that would allow small businesses to engage in "equity crowdfunding."
Under the program, small companies and start-ups would be able to make pitches online through crowdfunding sites to potential investors, who would be able to invest a maximum of $1,500 to buy a stake in the company on the condition that enough money was raised by a certain deadline.
Businesses would be able to make two six-month offerings of $150,000 each during a year.
"Instead of giving a donation or pre-purchasing a product, individuals are investing in a company, product, or service," the Saskatchewan's Financial and Consumer Affairs Authority said in a release announcing the public consultations, which began Oct. 7 and run until Nov. 6.
Equity crowdfunding offers a unique opportunity for people who are new to investing to gain experience, the agency said.
"The current rules for selling securities like shares, limited partnership units and promissory notes are believed to be expensive, complicated and time consuming for small businesses or start-ups," it said. "The Saskatchewan equity crowdfunding exemption will help small businesses and start-ups raise money while still protecting investors by, among other things, limiting the amount of money individual investors can lose."
Ontario recently allowed a limited form of equity crowdfunding for an entity called Social Venture Connection (SVX), created by the MaRS Discovery District in Toronto, which provides services and assistance to entrepreneurs.
SVX was given the go-ahead by the Ontario Securities Commission to operate an online portal that enables entrepreneurs to sell securities over the internet to so-called accredited investors who invest in projects and businesses that address social or environmental issues in Ontario.
The investors are limited to investing a maximum of $25,000 in a single offering and a maximum of $50,000 in total in all offerings in a calendar year.