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Tax treatment of crowdfunding receipts

By Doug Carroll | February 20 2014 07:16PM

At issue
You don’t have to be a resident of Toronto to be familiar with the media scrums surrounding its current mayor. Worldwide interest was piqued midyear 2013 when a gossip website sought to gather funds from the public to purchase an alleged video purportedly showing his worship engaged in compromising activities. No video purchase ultimately resulted, and the gathered funds are apparently headed to charity.Politics and voyeurism aside, this has brought to the public consciousness an emerging mode of sourcing funds for projects ranging from innovative product ideas to movies and music, known as “crowdsourcing” or “crowdfunding”.The idea is to collect relatively small amounts from a large number of contributors, generally through social media and the internet.

On the regulatory side, the Ontario Securities Commission conducted a consultation ending in early 2013 to determine how to approach this fast-developing field.

Until recently there has been little guidance on the tax implications of this activity, but by the end of 2013, the Canada Revenue Agency (CRA) had waded in to provide a bit more clarity.

2013-0484941E5 (E) – Crowdfunding

Issued in August 2013, this CRA technical letter considered a project such as a recording by a musical group or a project relating to developing a product for market. Each contributor would receive an incentive gift such as a copy of the finished product (for example, a musical recording) or a promotional item such as a T-shirt. Contributors would not receive any equity.

The author opined that amounts received in this manner would likely be considered business income under ITA s.9(1).Reference is also made to paragraph 4 of Interpretation Bulletin IT-334R2 Miscellaneous Payments, which states CRA’s view that voluntary payments are taxable when received while carrying on a business.

As quid pro quo, expenses related to crowdfunding efforts, including those incentive gifts, may (depending on the facts) be deductible under ITA s.18(1)(a).

2013-0508971E5 (E) – Crowdfunding, 2013-0509101E5 (E) – Crowdfunding

These two CRA letters, issued within days of one another in October 2013, were penned by the same official with virtually identical content.

The content recounts the nature of crowdfunding, including reference to the fact that some Canadian securities regulators are considering changes to existing rules that may better facilitate the raising of equity funds by way of crowdfunding. As a given arrangement could represent a loan, capital contribution, gift, income, or a combination thereof, the author states that the CRA would have to review the facts, circumstances and documentation to provide an opinion.

Still, some insight is offered into the (un)likelihood that crowdfunding receipts would be treated as non-taxable windfalls. Per IT-334R2, a windfall requires at least (1) that the recipient has made no organized effort to receive the payment and (2) that the recipient has neither sought nor solicited the payment.

Practice points

  • As securities regulators have not yet provided a clear set of rules for crowdfunding, would-be money-raisers should be aware that their actions could at some point be subject to review and possibly sanctions. This applies doubly-so for investment professionals licensed through some of those same regulatory bodies.
  • As the general principles approach outlined in the CRA letters suggest, it is likely that many types of receipts obtained through crowdfunding activities will be taxable. Good records will assist in identifying those sources when required, and in reinforcing claims for associated expense deductions.
  • There do not appear to be tax issues of any substance for crowdfunding contributors, at least not at this point. Enjoy the T-shirt.>
     

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