Equity Crowdfunding in Canada
Start-ups and early-stage companies in six Canadian provinces can now raise capital through crowdfunding websites.
In May 2015, British Columbia, Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia adopted new crowdfunding rules that allow start-ups and early-stage companies to raise money online and tap into a wider pool of investors.
Investment- or equity-based crowdfunding lets investors buy a stake in a venture with the hopes of reaping some profit, unlike donation or reward models. “Equity crowdfunding is emerging as a way for businesses, particularly start-ups and small issuers, to raise capital,” explain the Canadian Securities Administrators.
In 2014, the average value of an equity-based campaign ranged from US$175,000 in North America to US$342,260 in Asia (according to Massolution).
But while it “presents the potential for greater rewards, as the value of equity increases in accordance with the business’s success [...] it also presents greater risk to equity holders: in the event that the venture fails, investors tend to be subordinate to creditors in line for repayment,” states Massolution’s 2015CF – Crowdfunding Industry Report.
This explains why increased significance is placed on domestic legal environments. Under the new start-up crowdfunding exemptions, companies (issuers) are required to meet nine key conditions in order to issue shares to investors through crowdfunding websites:
- The issuer’s head office must be located in a participating jurisdiction;
- The issuer must distribute eligible securities of its own issue through an online funding portal;
- The issuer must distribute eligible securities using an offering document under the required form made available through the online funding portal. The offering document includes basic information about the issuer, its management and the distribution, including how the issuer intends to use the funds raised and the minimum offering amount;
- The issuer group cannot raise aggregate funds totaling more than $250,000 per distribution and is restricted to no more than two start-up crowdfunding distributions per calendar year;
- No person can invest more than $1,500 per distribution;
- The distribution may remain open to up to a maximum of 90 days;
- The distribution must be made through a funding portal that is either relying on the start-up registration exemption or operated by a registered dealer. Registered dealers that operate funding portals must meet their existing registration obligations under securities legislation and confirm to issuers that they currently meet or shall meet certain conditions provided in the start-up registration exemption;
- The issuer must grant individual purchasers a contractual right to withdraw their offer to purchase securities within 48 hours of the purchaser’s subscription or notification to the purchaser that the offering document has been amended; and
- None of the issuer group’s promoters, directors, officers or control persons (collectively the principals) can be a principal of the funding portal.
Equity crowdfunding in the rest of Canada
Other provinces and territories are still working on their own equity-based crowdfunding rules. The Crowdfunding Exemption proposed in March 2014 by the Ontario Securities Commission offers a broader model allowing for a maximum of $1.5 million to be raised each year. However, it also requires crowdfunding portals to be registered as dealers with securities regulators.
Ontario is working with the provinces that have adopted start-up exemptions to harmonize its own regulations and is expected to publish new rules by the end of 2015.
Saskatchewan repeals its 2013 crowdfunding exemption
In December 2013, Saskatchewan became the first Canadian province to officially enact special provisions to legalize investment-based crowdfunding. The exemption allows local start-ups and small businesses to sell securities to the general public (i.e., local, non-accredited investors) via crowdfunding as an alternative way to finance their operations.
Because Saskatchewan adopted the new start-up crowdfunding exemptions in May 2015, it has repealed its old exemption. Nevertheless, the 2013 exemption remains in force for distributors already open under it.
Is crowdfunding income taxable?
In October 2013, the Canada Revenue Agency (CRA) came forward with official comments regarding how crowdfunding income should be reported from a taxation perspective.
The CRA stated that while some crowdfunding situations require a case-based interpretation, most donation- or rewards-based crowdfunding campaigns would be considered as “voluntary payments (or other transfers of benefits) received by virtue of a profession or by virtue of carrying on a business,” which are considered to be taxable receipts.
This ruling has important implications for creative projects that may want to access other forms of support such as production tax credits.
While the CRA has yet to publish an official position or guideline with respect to the interplay between crowdfunding and labour-based refundable tax credits (e.g., the Canadian Film or Video Tax Credit), this broader statement on crowdfunding monies may mean that project owners seeking tax credit support for their projects should report any crowdfunding income as they would report other forms of business income.
Under this interpretation, there should be no implications regarding eligibility for production tax credits if you have raised funds through crowdfunding.
Note: The above does not constitute legal or tax advice. Refer to a legal consultant or your local tax credit administrator for more specific guidelines on reporting crowdfunding income for tax credit purposes.
Published on August 7, 2015