An alternative practice of fundraising, called “crowdfunding”, is becoming more common as conventional forms of fundraising are becoming less feasible in today’s tough economy. Crowdfunding is a way of raising funds for a project, usually via the internet. Various types of fundraising campaigns (disaster relief, political campaigns, scientific research, and start-up costs for new companies) are completed through crowdfunding and the people who contribute usually receive incentives such as gifts or promotional items. However, the people who contribute do not receive any form of equity or profit in lieu of their donation(s).
In August, 2013, the Canada Revenue Agency (CRA) released a CRA Document in response to a crowdfunding query. Our AG Tax professionals have prepared an overview on the query and the possible tax consequences of crowdfunding.
CRA Query Case Background
The Canadian taxpayer making the query asked if the funds obtained from crowdfunding (for the production of a musical group’s recording) are considered taxable business income. Additionally, the taxpayer wished to learn if the expenses related to the crowdfunding campaign are considered tax deductible.
CRA’s Response to the Query
The CRA Document 2013-0484941E5 was released on August 16, 2013 in response to the query. The results of the query were:
Amounts received from crowdfunding are taxable
Amounts received by a taxpayer from crowdfunding activities are generally included in the taxpayer’s income pursuant to subsection 9(1) of the Income Tax Act as income from carrying on a business, and any related business expenses are deductible. As indicated in paragraph 4 of Interpretation Bulletin IT-334R2, Miscellaneous Payments, miscellaneous or voluntary payments (or other transfers of benefits), received by virtue of a profession or by virtue of carrying on a business are taxable receipts.
Certain expenses related to crowdfunding may be tax deductible
Expenses related to crowdfunding efforts incurred by a taxpayer for the purpose of gaining or producing income from a business (within the meaning of paragraph 18(1)(a) of the Income Tax Act) may be tax deductible.
The cost to the business in providing donor gifts and the fees paid to undertake crowdfunding activities may be tax deductible if the requirements of the Income Tax Act are met.
It is the taxpayer’s responsibility to ensure that all fundraising activities are properly accounted for when filing tax returns.
Properly applying the Income Tax Act to situations and identifying what is taxable, or tax deductible, can be a complex process. Taxpayers should seek professional advice in order to maximize deductions, and prevent CRA penalties from incorrect filing. The specialists at AG Tax have years of experience dealing with the ever-changing tax landscape, and can assist with these new and potentially complex issues in a timely, accurate and cost-effective manner.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance
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