Taxation of Crowdfunding
By: Bobby B. Solhi, J.D.
Entrepreneurs or others that may seek to raise money for their business or cause via crowdfunding through popular hubs like KickStarter may be subject to tax on such proceeds.
Canada Revenue Agency (CRA) Interpretation on Crowdfunding
In a recent CRA Technical Interpretation, the CRA determined that funds raised through crowdfunding would be generally subject to income tax as a source of income from carrying on a business pursuant to s. 9(1) of the Income Tax Act (ITA).
The taxpayer requested the CRA’s position on whether raising money by crowdfunding for a project to produce a recording by a musical group or a project relating to developing a product for market would be subject to tax. The contributors would receive an incentive gift such as a copy of the finished product (like a recording) or promotional items such as t-shirts. The contributors did not receive any form of equity in the project.
The CRA provided that such funds would generally be subject to income tax and that the the costs of the gifts to the contributors could be consider expenses for which the fundraiser could deduct in calculating their taxable income.
The tax implications of crowdfunding would be different where the funds raised through crowdfunding provided the investor will a stake in the business – for instance, shares or units in the company. Such a contribution would not generally be income to the fundraiser but rather a capital contribution with no immediate tax consequence. The investor, however, may be subject to tax on dividends or other income derived from their investment. They may also be subject to tax on their subsequent sale of the shares or stake in the business.
Good Tax Advice
For those that may look to crowdfunding as a means to raise funds, or to investors, it is advisable to seek proper legal and tax advice on raising capital and investments.
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TaxChambers LLP is collaborating with Andersen Global® in Canada.