Crowdfunding has gotten the attention of the CRA

You pour your blood, sweat and tears into your new startup project. You have a terrific, innovative idea and the only thing standing behind you and your idea is funding.

After pondering the ways that you can raise money, you determine that one of the more recent internet-based methods, crowdfunding, is most appropriate. But this money is far from free. In fact, as of last week in a direct tax interpretation, the Canada Revenue Agency has directly commented on crowdfunding saying that it’s taxable.

Crowdfunding?

Crowdfunding is a relatively new phenomenon where startup businesses list their ideas on popular crowdfunding websites such as Kickstarter and Indiegogo. If the idea gets support from the online community, users can choose to support the project by pledging money. Depending on the amount of money they pledge, the company receiving the funding promises to give back something in return if they reach their target. For example, if a mobile app developer needs $50,000 to launch his slick new app, he might offer to give a free download of the app for all those that pledge $20, or may offer to additionally include bonus app downloads and a t-shirt for anyone pledging more than $50.

All this to be said, crowdfunding has become hugely popular. To just give an idea, Kickstarter claims to have helped raise almost $900 million in funding since its inception in 2009. And where there’s smoke, there’s fire, at least as far as the CRA is concerned.

Finally some guidance on crowdfunding

There is a substantial amount of money flowing into Canadian businesses due to crowdfunding as of late, and since this is a relatively new way for businesses to receive money, the way this inflow of money is treated in the tax system has not been cleared defined, that is, not until recently. A new tax interpretation was just released last week and I’ll save you the boredom of reading through it.

The tax interpretation is interesting (to accountants at least!) in that it says that crowdfunding resembles a transaction where one party exchanges money for goods (in the example above it was a free app downloads or a t-shirt). As there is no exchange of equity, the money received must therefore be considered as business income. All this to be said, this money is taxable, and depending on the amount of funding raised through these campaigns, this can have huge tax consequences depending on your tax bracket.

Is your crowdfunding campaign a business?

The real heart of the interpretation is whether the crowdfunding campaign constitutes a business or not. Many people listing their campaigns on these sites may not consider themselves a business and may just be trying to get their passion to market without even thinking of the possible repercussions. They might be surprised to find out that while they don’t consider themselves a business, the CRA does, which may result in a large surprise tax assessment. If you are unsure if what you are doing constitutes a business activity, then you should seek advice or research further on the subject.

Don’t forget to claim any expenses in relation to your crowdfunding campaign

So the CRA has effectively determined that your precious funding is taxable. But not so fast. In addition to raising money, you were also giving out t-shirts, memorabilia, app downloads and other gifts in return for pledges. This stuff costs money. As a result, any costs associated with the crowdfunding campaign that were incurred for the purposes of producing income from a business are tax deductible. This can save you a chunk in taxes, so don’t forget to get these expenses down to reduce your tax burden or even increase any loss carryovers.

The CRA and crowdfunding

This is the very first tax interpretation we have received from the CRA in regards to crowdfunding, and we can be assured that it won’t be the last. It’s important to keep monitoring this situation because at the very end of the day, the bottom line of your target funding can be affected. When you originally thought that you only needed $50,000 in crowdfunding for your project, now that figure is likely higher since some of it needs to be paid out in taxes. One thing is certain though, the CRA is very much aware of how big crowdfunding has become, and this will have an effect on startups across the country.