Crowdfunding and Income Taxes in Canada
Last update: September 21, 2016
What are the fiscal consequences of a crowdfunding campaign in Canada? In the absence of specific rules, here are a few answers that will help you see more clearly when the time comes to complete your income tax returns following a campaign.
In Canada, the tax aspects of crowdfunding are determined on a case-by-case basis. “The Income Tax Act […] does not provide any specific rule applying to crowdfunding arrangements,” confirms the Canada Revenue Agency, for which “the tax treatment of crowdfunding arrangements depends on the agreements reached between taxpayers.”
The situation is the same in Québec. In an application for interpretation of the tax treatment of crowdfunding (reference number 13-019260-001), Revenu Québec stipulates namely that [translation] “the resulting tax consequences [of a contribution] cannot be established without an extensive analysis of the terms and conditions specific to each crowdfunding arrangement.”
General comments on the taxation of crowdfunding may nevertheless be issued on the basis of certain documents published in the last few years.
Income generated by a crowdfunding campaign
In its document #2015-0579031I7 on crowdfunding, the CRA upholds that “where funds are received by a taxpayer as a result of a crowdfunding arrangement for the development of a new product and that taxpayer carries on a business or profession, the CRA generally considers such funds to be taxable income (i.e., income from a source) unless it can be shown that the crowdfunding arrangement otherwise clearly represents a loan, capital contribution or other form of equity.”
In other words, a contribution made to a crowdfunding campaign must be considered as taxable business income, except in the case of loan-based or equity crowdfunding.
In Québec, Revenu Québec also deems that reward-based crowdfunding must be considered as taxable business income.
The issue is less clear when it comes to donation-based crowdfunding, where no gift is handed in exchange of a contribution and where the benefactor is not a charitable organization. The CRA’s interpretations do not specifically mention this situation, but in a section of the Income Tax Folio dealing with gifts, the CRA does point out that in the case of a crowdfunding campaign without any form of equity, “the amounts received by the business would be included in its income.”
As for donations collected by charitable organizations, they are not to be considered as taxable income.
Crowdfunding campaign expenses
If the funds raised (gifts and other voluntary payments) through a crowdfunding campaign are generally taxable, the expenses incurred during the campaign are therefore tax deductible.
“Of course, any reasonable costs incurred by the taxpayer that are related to such a crowdfunding arrangement would likely be deductible in computing that income,” points out the CRA in its document # 2015-0579031I7.
Taxable income and deductible expenses could therefore have tax impacts that cancel each other out in the case of creators seeking to finance a project though a crowdfunding campaign.
GST/HST (or GST/QST in Québec) and crowdfunding
Are creators obliged to collect and remit sales taxes on the money they collect through a crowdfunding campaign? In the absence of a specific policy in this regard, uncertainty surrounds the question of applying the GST/HST (GST/QST in Québec).
However, it seems that a creator who is not considered as a “small supplier” (simply stated, someone whose annual sales do not exceed $30,000 ) could be required to collect the GST/HST (or GST/QST) on taxable goods or services remitted though a crowdfunding campaign.
Each case must be analyzed individually but a musician who remitted a copy of his album in exchange of funding through a platform such as Indiegogo could therefore be required to remit the sales taxes applicable to the album (directly from the funds collected) seeing as online platforms do not directly collect the GST/HST (or GST/QST).
In all cases, whether in terms of income taxes or sales taxes, creators who finance a project through a crowdfunding campaign should consult a tax advisor for guidance on the correct way to proceed.