National Post - FP Startups  |  Armina Ligaya | October 9, 2013

Artists and budding entrepreneurs who turn to crowdfunding to finance their early-stage ventures and passion projects will now have to face the tax man.

The Canada Revenue Agency has issued comments that indicate if a person gives funding towards a business venture, such as a musical recording, and receives a finished product or a promotional item — but not equity or a share of the profits — that money will be treated as business income and subject to tax.

The CRA’s comments released this week clarified a grey area for entrepreneurs, and is a stance which makes it more expensive to crowdfund a project.

This could significantly impact independent artists and start-up businesses who can’t access seed money in ways other than crowdfunding, said Ted Citrome, an associate in the tax group at Cassels Brock & Blackwell LLP.

“For profitable companies that are looking to crowdfunding as a way of funding a commerical venture, it will raise the cost of financing,” he said. “It will be more expensive for them to raise the funds.”

The CRA’s view on crowdfunding came to light in a technical interpretation, given in response to a query submitted earlier this year and released publicly last week.

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“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,” wrote the CRA in the technical interpretation.

In comparison, traditional financing for a business secured by issuing common shares or issuing debt would not be taxed, said Jamie Golombek, the managing director, tax & estate planning with CIBC Private Wealth Management in Toronto.

“They might have assumed that crowdfunding is similar to other types of financing in which you just go ahead and spend the money,” he said. “Where it is actually very different and the crowdfunding itself is the business income of the project or the company. It may certainly cause some plans to be revised.”

But it is consistent with CRA’s past policy, said Mr. Citrome, in which the money that comes in from a business is going to be subject to tax.

Joanna Griffiths, who raised $60,450 through an Indiegogo campaign in May and June this year to fund her Toronto-based high-tech lingerie line Knix Wear, said the ruling made sense and didn’t impact her business. Her company played it safe and claimed the amount raised from crowdfunding as income when their fiscal year ended in July, based on feedback from a tax lawyer, she said.

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“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,” she said.

Craig Asano, executive director of the non-profit National Crowdfunding Association of Canada, welcomed the clarity.

“There were a lot of cases where entrepreneurs were trying to be clever as possible to bundle products in kind,” he said. “And that’s where it became tricky, because the entrepreneurs would say, ‘Well, we’re using this new vehicle to raise funds, however we’re giving gifts away.’ But tax agencies certainly see it as advancing their business model, and it should be deemed taxable.”

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