The internet seems to constantly be evolving new uses, not to mention new additions to the lexicon. A popular concept recently has been ‘crowdfunding’, in which people bypass traditional methods of accessing funding for a project by using the internet to make a direct appeal to the public. This strategy has been put to use to raise funds for just about everything, from startup companies to charity drives, from t-shirt designs to academic research projects, and of course for every imaginable personal purpose – one man famously attracted pledges totalling over $70,000 to make himself a potato salad. Websites like Kickstarter, Indiegogo, and gofundme have become major facilitators, each specializing in hosting particular kinds of projects and taking a percentage-based ‘processing fee’ off the top of every transaction.
It is interesting to watch the established tax administration and policy try to conform to this previously-unforeseen development. A good illustration of the new issues to be tackled can be found in the recent case of Elijah Marsh. Three-year-old Marsh made national headlines this year when he perished after wandering out of his grandmother’s Toronto home into the unforgiving February weather. His tragic story garnered mass attention, and a crowdfunding appeal to pay for his funeral costs topped $173,000. This is of course far in excess of the actual funeral costs. The person managing the appeal has indicated that the excess funds will go directly to the Marsh family. Will it be taxable income to them?
There has been little public indication of how the CRA intends to handle tax issues arising from crowdfunding, with the exception of a ruling letter published in 2013 (doc. 2013-048494). The letter is in reply to someone who was dealing with a business situation: they were developing a product for market and had been raising funds for the project via crowdfunding. The contributors received incentive gifts (e.g. promotional t-shirts) based on their level of contribution, but no equity – a common crowdfunding strategy. The inquirer wanted to know whether funds received from crowdfunding are business income, and whether the related expenses are deductible.
The CRA seemed to have a clear opinion on the matter:
In our view, amounts received by a taxpayer from crowdfunding activities would generally be included in income pursuant to subsection 9(1) of the Act as income from carrying on a business….Voluntary payments (or other transfers of benefits) received by virtue of a profession or by virtue of carrying on a business are taxable receipts.
Whether certain expenses are deductible is a question of fact. 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 Act may be deductible. It is our view that the cost to a business to provide donor gifts (ex. cost of T-shirts) and fees paid to undertake crowdfunding activities may be deductible if the requirements of the Act are otherwise met.
This seems reasonable in a commercial setting. However, the law on which it is based would obviously not translate to personal situations, so the tax implications of proceeds of personal crowdfunding remain unclear. There are also some general questions that this letter does not address, such as what happens if the purpose of the funding request fails. For example, a campaign by gossip blog Gawker to purchase an alleged video of Toronto’s then-mayor Rob Ford smoking crack raised over $200,000, but the anonymous drug dealers selling the video ultimately backed out. It is not clear whether the recipients of the funds might be taxable on receipts.
Of course, if the beneficiary is a registered charity, crowdfunding might be viewed just as another form of public fundraising for which receipts could be issued (and hopefully the same view would be taken in the case of a non-profit organization, minus the charitable receipts of course).
Until Canadian policy on the topic develops further, it may be worth keeping an eye on developments in the international legal community. The European Commission has published a consultation paper on crowdfunding, and in late 2013 the American Securities and Exchange Commission developed a set of proposed rules to allow companies to use crowdfunding to raise up to $1 million annually from the general public, providing equity or a stake in the company in return for the investment. This latter development is particularly interesting, as it changes securities laws in place for nearly a century that restricted those persons from whom money could be raised to “accredited investors”, or those who earn at least $200,000 per year or are worth at least $1 million. It also appears to be attempting to force crowdfunding into the public share model, something far less flexible which – we feel comfortable predicting – will only be replaced by yet another new, more flexible, inventive internet workaround.
Alexandra Tzannidakis is a lawyer with Drache Aptowitzer LLP. She would be pleased to hear from you at firstname.lastname@example.org.