Principal Issues: What is the tax treatment of a crowdfunding in a given situation?
Position: Question of fact, but in the given situation, we are of the view that this crowdfunding could be business income.
Reasons: See below.
FEDERAL TAXATION ROUND TABLE 11 OCTOBER 2013
2013 APFF CONFERENCE
Question 24
Tax treatment of crowdfunding
Crowdfunding is a way for a person or business (fundraiser) to collect small amounts of money from multiple people (contributors), including through social networks and the internet.
The funds can be raised to hold a cultural event, produce a film or album, support the victims of a natural disaster, finance the development of a technological product, finance a business, etc. There is no financial institution between fund applicants and contributors, the solicitation generally being direct.
This funding model is not new, but is growing with the popularity of the internet and social media. Fundraisers can thus reach a large number of contributors at little cost and on a very large scale. Furthermore, there are multiple crowdfunding platforms on the internet with the aim of facilitating exchanges between fundraisers and contributors.
The contribution can be in the form of a donation or in exchange for a non-monetary compensation, for example a copy of the produced album, tickets to attend the financed show or an invitation to the launch of the produced film or, in some cases, subject to the requirements of the Securities Act, share capital of the company, a share of the profits or interest.
Since, to our knowledge, there is very little written information on the applicable tax treatment, it would be of interest to obtain the views of the tax authorities.
While in the event that shares are issued (subject to the requirements of the Securities Act), the tax treatment is relatively straightforward to understand, it may be less so in other situations. In order to facilitate explanations and understanding, here is a concrete example of a business project that would use crowdfunding:
For each $25 "donation", the entrepreneur would offer a "reward" of $10 cash value to the "donor" (for example, a copy of an album produced at a cost of $6 each). The entrepreneur would also pay a fee of 7% of the "donation", or $ 1.75 in our example, which is levied by the platform offering crowdfunding (4%) and by Paypal (3%) which manages monetary transactions.
Question to CRA
Could the Agency explain to us the tax treatment applicable to crowdfunding in this example respecting the following points:
- Is the $25.00 to the entrepreneur taxable and potentially subject to paragraph 12(1)(x)?
- Is the $10 an expense of the entrepreneur in whole, or in part ($6)?
- Is the $1.75 an expense of the entrepreneur?
CRA Response
Depending on the facts and circumstances of a specific situation, the CRA is of the view that the money received through a crowdfunding arrangement could inter alia be a loan, a capital contribution, a gift or revenue to be included in the computation of income or a combination thereof.
Since the terms and conditions of these types of arrangements may vary greatly from one arrangement to another, the CRA cannot make a final determination of the tax consequences of a particular crowdfunding arrangement without a full review of all facts and documents relating to that arrangement.
Only after an examination of a particular crowdfunding arrangement, either during an audit or as part of an advance ruling request, could the CRA reach a final conclusion as to the tax consequences resulting from that arrangement.
In the situation described in the question, the CRA is prima facie of the view that $25 could be business income. However, the CRA cannot make a final determination without a complete review of all the facts of this arrangement.
Isabelle Landry
(450) 623-0193
2013-049570