CRA: Crowdfunding Receipts Are Taxable

The CRA has released an opinion (2013-0484941E5) clarifying that funds derived from a crowdfunding campaign are generally taxable as business income under subsection 9(1). Crowdfunding is the practice of raising small amounts of money (perhaps $20 to $40 per person) from many people in order to fund a project. Previously, many crowdfunding campaigns had assumed that these funds were to be treated as gifts or as capital. Although the treatment of the money as business income may come as a surprise to some, the CRA's opinion is unlikely to have negative effects on crowdfunding campaigns.

The specific scenario discussed in the CRA document concerns the production of a recording by a musical group or a project relating to developing a product for market in the following context:

  • crowdfunding operations are undertaken to allow individuals and businesses to raise funds from the public for a specific project;

  • the person contributing to the crowdfunding project generally receives an incentive gift such as a copy of the finished project (for example, a musical recording) or promotional items such as T-shirts; and

  • the contributors do not receive any form of equity in the project.

Relying primarily on Interpretation Bulletin IT-334R2 ("Miscellaneous Receipts"), the CRA said that the crowdfunding money would generally be included in income from carrying on a business pursuant to subsection 9(1). The CRA reasoned that monies from crowdfunding constitute voluntary payments (or other transfers of benefits) received by virtue of a profession or by virtue of carrying on a business. Additionally, the CRA has stated that crowdfunding-related expenses incurred by a taxpayer for the purpose of gaining or producing income from a business may be deductible, but questions are likely to arise about whether expenditures meet the requirements of paragraph 18(1)(a). For example, if a crowdfunding campaign that sets out to raise $150,000 to pay for a prototype of a product achieves its goal, are only the expenses incurred during the fundraising process (such as salaries) deductible, or can the taxpayer deduct the $150,000 payment for the prototype? More generally, if the campaign only seeks to raise money for the prototype and nothing more, can it be said that the campaign is seeking to make a profit? These questions were unfortunately not addressed by the CRA.

The CRA document is also silent with respect to the emerging market of equity crowdfunding (that is, crowdfunding in which the investors receive a small equity stake in the company). Will the funds derived from equity crowdfunding be treated in a manner similar to traditional financing such as the issuing of common shares? Will the crowdfunding venture be entitled to seek specific deductions related to financing measures such as the deduction in paragraph 20(1)(e)? Will the equity investors be entitled to claim losses, or do they lack an expectation of profit from the crowdfunding venture?

At present, Ontario and Saskatchewan have put forward proposals for securities regulation of business financing through crowdfunding. Those proposals (if enacted) appear to lend support to the argument that funds derived from equity crowdfunding are capital in nature and therefore are to be treated as capital for tax purposes.

As noted above, the CRA's opinion is unlikely to have a negative effect on crowdfunding in Canada: many campaigns currently operate on the assumption that their funds are taxable business income and report accordingly. In addition, many campaigns raise only enough money for a particular purpose and spend it all on that purpose (and therefore have no taxable income to report).

Joseph Gill
McKercher LLP, Saskatoon

Canadian Tax Focus
Volume 3, Number 4, November 2013
©2013, Canadian Tax Foundation