Crowdfunding Is Taxable – CRA

 In a nutshell, crowdfunding is a process where startup businesses try to raise funds from the online community. In order to do that, they list their ideas on popular crowdfunding websites such as Indiegogo or Kickstarter. If the idea attracts the online crowd the latter can support it by pledging money. Before choosing any of those crowdfunding platforms you should do your own research, as, for example, Kickstarter cannot be used to fund e-commerce, business, and social networking websites or apps, or to fund software projects not run by the developers themselves. Indiegogo, on the other hand, is “available to anyone to raise money for anything”. And so on.
In Canada, all crowdfunding platforms are limited by the fact they can’t offer equity crowdfunding. Which simply means that you cannot offer “investors” any form of ownership in your business in exchange for their money. So the company receiving the funding promises to give back something in return if it reaches its target. The scenario described by the Canada Revenue Agency (CRA) in their interpretation letter involves a project such as producing a recording by a musical group, or a project relating to developing a product for market. The person making the contribution (or “investor”) generally receives an incentive gift such as a copy of the finished product (for example, a musical recording) or promotional items such as T-shirts, depending on the amount of money he pledges.
Further in their interpretation letter the CRA explains that funds received through crowdfunding are business income, rather than a windfall, and therefore, taxable. “In our view, amounts received by a taxpayer from crowdfunding activities would generally be included in income pursuant to subsection 9(1) of the Act as income from carrying on a business”. So the funds gathered from the “crowd” may result in a large tax bill. And if you initially thought that you only needed, let’s say, $30,000 in crowdfunding for your project, now that figure goes higher simply because the CRA wants its share.
Is there any good news? Following the CRA’s logic, there should be some financial relief. Because if the funds received through crowdfunding are business income, then relevant expenses can be deducted on your income tax. Therefore the cost of all those T-shirts and other promotional items that you give to the “crowd” in return for their funds can and should be deducted from a “business income”, which is the money you raised.
So if you want to avoid unwanted surprises contact your tax professional before raising money for your start up.

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