1 April 2015 Internal T.I. 2015-0579031I7 - Crowdfunding

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: General income tax consequences of crowdfunding in Canada.

Position: See memo.

Reasons: The law.

April 1, 2015

International Relations Income Tax Rulings Directorate
Office Division Business and Employment
Legislative Policy Division Division
Michael Cooke

Attention: Guylaine Robert, 2015-057903
Director

Crowdfunding

We are writing in response to your email dated March 31, 2015, in which we were asked to respond to an urgent request from XXXXXXXXXX concerning the Canada Revenue Agency's (CRA) approach to crowdfunding and the income tax implications we have identified.

Comments

The CRA understands that crowdfunding is a way of raising funds for a broad range of purposes, using the internet, where conventional forms of raising funds might not be possible.

Depending on the facts and circumstances, monies received by a taxpayer under a crowdfunding arrangement could represent a loan, capital contribution, gift, income, or a combination thereof. However, since the terms and conditions of these types of arrangements may vary greatly from one situation to another, the CRA's approach is to evaluate each situation on a case-by-case basis before making a determination on the income tax consequences of a particular crowdfunding arrangement.

Notwithstanding the above, where funds are received by a taxpayer as a result of a crowdfunding arrangement for the development of a new product and that taxpayer carries on a business or profession, the CRA generally considers such funds to be taxable income (i.e., income from a source) unless it can be shown that the crowdfunding arrangement otherwise clearly represents a loan, capital contribution or other form of equity. Of course, any reasonable costs incurred by the taxpayer that are related to such a crowdfunding arrangement would likely be deductible in computing that income.

It has been our experience that typically crowdfunding (at least in Canada) does not involve the issuance of securities; however, in some jurisdictions we understand that this might be permitted. We are also aware that some securities regulators in Canada are considering whether changes to existing regulatory rules are needed to better facilitate the raising of equity funds in Canada by way of crowdfunding and when this takes place the CRA will evaluate the income tax consequences at that time.

The CRA has referred to crowdfunding on CRA's website in Folio S3-F9-C1: Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime under the heading "Gifts and other voluntary payments". The following paragraphs may be of interest (reproduced below):

Gifts and other voluntary payments

1.3 The term gift is not defined in the Act. In common law jurisdictions, the courts have said that a bona fide gift exists when:

•There is a voluntary transfer of property,
•A donor freely disposes of his or her property to a donee, and
•The donee confers no right, privilege, material benefit, or advantage on the donor or on a person designated by the donor.

1.4 Whether a transfer of property has been made voluntarily is a question of fact. In order for a transfer to be considered voluntary, there must be no obligation to make such a transfer. Amounts received as gifts, that is, voluntary transfers without consideration and which cannot be attributed to an income-earning source, are not subject to tax in the hands of the recipient.

1.5 However, sometimes individuals receive a voluntary payment or other valuable transfer or benefit by virtue of an office or employment from an employer, or from some other person. In such cases, the amount of the payment or the value of the transfer or benefit is generally included in employment income pursuant to subsection 5(1) or paragraph 6(1)(a). (See also Guide T4130, Employers' Guide - Taxable Benefits and Allowances.) Similarly, voluntary payments (or other transfers or benefits) received by virtue of a profession or in the course of carrying on a business are taxable receipts.

Example 1

Assume a lawyer was retained to perform certain services for the class "A" shareholders of a corporation. If the class "B" shareholders considered that the lawyer's work had also benefited them, any payment made by the class "B" shareholders to the lawyer would be taxable income. This is so despite the fact that there was no contract or obligation between the class "B" shareholders and the lawyer concerning this payment.

Example 2

Assume a business uses crowdfunding as a method of raising funds for the development of a new product and the contributors do not receive any form of equity. The amounts received by the business would be included in its income pursuant to subsection 9(1).

We trust that this information will be helpful.

Yours truly,

Eliza Erskine
Director
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch