As CrowdFunding’s popularity increased it was only a mater of time before the Canada Revenue Agency (CRA) clarified legislation. In October of 2013 Revenue Canada stated that crowdfunding income is taxable. The Income Tax Act (subsection 9(1)) defined crowdfunding as business income, most campaigns provide a good or service to backers in exchange for funding. Campaign organizers can deduct any expenses related to the campaign and only the profits are taxed (demonstrated in the example below).
Are there any exceptions?…Yes.
- Donations only Campaigns (no exchange of goods and services, ex. medical campaign)
- Political Campaigns
- Equity CrowdFunding. The sale of shares is not taxed, although equity crowdfunding is not yet legal in most of Canada.
How do taxes affect crowdfunding?
1) Rewards Costing: If you are trying to make 1000 dollars profit, make sure you take into account the amount of taxes you will need to pay the CRA when setting your reward levels. If you are just looking to break even this is less important. The tax percentage depends on many variables, how much your will raise, where you are located, are you a company or individual? These are questions best suited for an accountant.
2) Personal Income Tax: Make sure to record the income you receive as a salary or fee after your campaign is successful on your personal income taxes.
TIP: Keep your receipts, and expense what you can while working on a campaign!
Campaign: You are raising funds to produce a new documentary on Vancouver’s Craft beer scene. You reach your goal of $10,000, and finish the campaign with $11,298.
Rewards: You provide all backers at 10 dollars and over with a free download of the film. Anyone donating over 25 dollars receives free entrance and a t-shirt at the film’s screening.
How much is taxed? Well this depends on your expenses during the campaign.
Assume the following costs:
- Film Crew ($5,000)
- Producer & Campaign Manager ($500 each)
- T-Shirts ($2,000)
- Launch Party Venue for Backers ($2,000)
- Trailer Production for the campaign ($1000)
- Admin Expenses/Food/Etc. ($300)
In this case the expenses actually exceeded the amount raised by 2 dollars, you wouldn’t have to pay taxes and you’d get to create an awesome project! If your expenses were only $10,000 you’d pay taxes on the $1,298 profit.
The following examples are taxable:
|Film Production||Wish I was Here|
|Advanced Sales||Pebble Watch|
The following examples are not taxable:
|Political Campaigns||Township Council 2014|
|Surgery/Medical (Donations)||Kidney Transplant|
|Equity Crowdfunding||(Proposed Legislation)|
Why is equity crowdfunding not taxed?
Dividends issued to shareholders are taxed along with the capital gains when the share is sold. Raising money via CrowdFunding is very similar to traditional securities therefore the laws are mostly in existence around how they will deal with shares. The part that is to be determined is how to protect shareholders from fraud which the currently public markets address but crowdfunding is looking to open up a new medium for early stage companies. I’ll make sure to keep readers informed as legislation changes.
Please be aware that the foregoing article provides an overview and is not considered legal or financial advice.
If you are looking for a CrowdFunding Advisor contact us for more information about Ryan’s rates and services.