Canadian tax agency rules crowdfunding income is taxable
In a typically Canadian fashion, the Canadian federal government’s Canada Revenue Agency (CRA) quietly announced earlier this summer that revenue gained from crowdfunding is considered taxable income. The announcement, which came in response only after a member of the public asked, was issued on August 16 but made public at the beginning of October.
“In our view, amounts received by a taxpayer from crowdfunding activities would generally be included in income pursuant to subsection 9(1) of the [Income Tax] Act as income from carrying on a business,” the letter says in part.
“It is important to recognize the scope of the CRA’s announcement, which was meant to address crowdfunding as part of an ongoing business operation,” said Paul Prendergast, a tax specialist at Taylor McCaffrey in Winnipeg.
This means that “one-off” crowdfunding campaigns for emergency medical treatments or to raise funds for improving the local kiddie park do not have to worry about the grey suits knocking at the door.
More likely to be caught by said suits are musicians and artists using crowdfunding sites. For those breaking into the industry, a good gig may be 50 bucks and a bar tab, so when a decent amount of crowdfunding support comes their way, the first call probably is not to Revenue Canada. “If the musician is making music and being paid to do so, they are considered a business by the CRA and should be prepared to pay tax on their earnings,” Mr. Prendergast offered.
Reaction to date has also been typically Canadian, with many giving a simple shrug and saying something akin to “Well, what are you going to do huh?”
Traditional businesses seem to be taking it in stride and the smart ones assumed the worst early on. Joanna Griffiths, a Toronto entrepreneur who generated $60,000 via Indiegogo for her high-tech lingerie line Knix Wear this spring, told The Globe and Mail that on the advice of a tax lawyer she claimed every dollar received from the Indiegogo campaign as revenue when her fiscal year ended in July. On whether or not new Canadian businesses should use crowdfunding as a capital raising tool, she said, “In general, people should just have an understanding of what they’re getting themselves into with crowdfunding… They’ll have to really look and plan and think about whether it is worthwhile for them.”
The news is not all bad, for in the same letter the CRA stated that expenses such as donor gifts and paid fees that are related to crowdfunding may be deductible if other conditions are met.
“If a band has promised a CD in return for a pledge, the band can deduct a reasonable amount off the pledge for production of the disc and for mailing that to the supporter,” added Mr. Prendergast.