Crowdfunding is defined by Wikipedia 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." It
is an increasingly popular vehicle for raising funds for specific
projects, such as the creation of a music album or artistic work,
the purchase of a capital asset, or the financing of a start-up.
That trend has led a number of taxpayers to seek guidance from the
Canada Revenue Agency (CRA) about the tax implications of raising
money via crowdfunding. The following comments summarize the
CRA's views on the topic.
Depending on the facts and circumstances, money raised through
crowdfunding could represent:
a capital contribution (a form of equity);
a gift or a windfall;
business income; or
a combination of some or all of these.
Loan or equity
It is unlikely that crowdfunding will be treated as a
loan or as equity since crowdfunding initiatives rarely result in
the creation of a debt or equity interest in the entity raising the
In the event that this does occur, the money raised would not be
subject to tax as it would not represent income but rather amounts
that would ultimately be returned to the lenders or the shareholders.
Gift or windfall
A crowdfunding initiative might also be treated as a
gift or a windfall. The courts have defined a bona fide gift
a voluntary transfer of property
from a donor who freely disposes of his or her property
to a donee who receives the property given
with no right, privilege, material benefit, or advantage
conferred on the donor or any person designated by the donor in
exchange for the donor making the gift
A windfall is similar to a gift in that it does not create a
right, privilege, material benefit or advantage for the donor, but
it adds the further requirement that the recipient has neither
sought, solicited nor made an organized effort to receive the
payment. Consequently, crowdfunding will tend to fit more naturally
into the category of gift than of windfall.
To the extent that money raised through crowdfunding constitutes
a gift or a windfall, the amount received will not be taxable.
When crowdfunding occurs in the context of a business
(whether in the start-up phase as funding for the creation of a
new product, service or enterprise, or in the course of operations
of an established business), the CRA considers that crowdfunding
proceeds constitute business income "unless it can be shown
that the crowdfunding arrangement otherwise clearly represents a
loan, capital contribution or other form of equity."
Such proceeds would be taxable. In addition, to the extent that the
recipient is not a small supplier, the CRA would consider GST/HST
to have been collected on the proceeds. It should thus be reported
on the appropriate GST/HST return and remitted to the CRA.
Deduction of expenses
To the extent that crowdfunding proceeds are used to pay the
expenses of a business, their inclusion as taxable revenues may not
be a concern given the deductible nature of the expenses. The CRA
anticipates that many outlays and expenses funded by crowdfunding
money will be deductible in the course of carrying on business.
Should 100% of the crowdfunding proceeds be spent on deductible
expenses subject to GST/HST, there would be neither income nor
sales taxes owing as a result of deductible expenses and input tax
credits. However, if crowdfunding proceeds are spent on capital
assets, there may be a mismatch in timing between the income
inclusion (at the time of receipt) and the deduction (as the
deduction of the asset is depreciated over time).
The CRA's position on crowdfunding is always guided by the
principle that the tax consequences of any particular arrangement
depend on the facts and circumstances. Contact your Collins Barrow
advisor for professional guidance if you are considering
crowdfunding for your business.
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.
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