Should You Worry About Crowdfunding Tax?

As tax season nears its end, campaigners have a lot to think about according to last year’s Canada Revenue Agency APFF Conference Federal Round Table. On the topic of crowdfunding tax, the CRA released the following statement:

“Funds raised by a taxpayer through (reward-based) crowdfunding activities will likely constitute business income to the taxpayer. Correspondingly, the CRA has clarified that in their view expenses relating to such crowdfunding activities should generally be deductible by the taxpayer in computing its taxable income…The CRA’s statements clearly leave the possibility open for funds received in the context of equity-based crowdfunding to be treated as a capital contribution.”

This means that many projects raising money online need to claim their pledges as business income, regardless of the total amount. In saying this, campaigners may have room to deduct expenses like incentives and marketing. While some projects will be exempt — particularly nonprofits and select creative projects — it goes to show the importance of anticipating crowdfunding tax. Since many unconventional entrepreneurs and innovators want to seize the opportunity and raise capital online, it’s increasingly important to promote awareness in the community concerning all legal proceedings. Crowdfunding tax is only one factor.

Of course, there are still details to iron out, not just in Canada but across North America. With equity crowdfunding, however, taxes are much more complicated. In many cases, startups will need to operate and distribute dividends like all other businesses, taxes included. If laws open up and amateur investors begin to purchase equity, this will affect them financially.  In America, many laws are still underway, so those eager to launch an equity campaign should stay up-to-date on this .

As many industry experts point-out, businesses “pre-selling” products via rewards-based crowdfunding need to recognize the fact they may incur sales tax at the end of the campaign. To avoid any spring surprises, calculate your taxes and incorporate them into your campaign’s budget. To help in this respect, some portals offer users tax guides (ie. Kickstarter and Indiegogo). Although such guides offer good advice, it’s still best to consult a financial adviser before launching a crowdfunding campaign.