Canada: The tax basics of crowdfunding for non-profits
27 March 2014
Posted by: Authors: T Maduri, R. Pyper, and D. Yee
Authors: T Maduri, R. Pyper, and D. Yee (Davis LLP)
Crowdfunding has received increased media attention in recent months due in part to its growing popularity, as most recently seen in the launch of kickstarter.com in Canada, and securities and tax regulators have taken note. In the United States, the Securities and Exchange Commission recently released a draft rule on equity-based crowdfunding that is described in detail here. The Canada Revenue Agency (the "CRA”) recently considered the tax implications of crowdfunding, which is particularly relevant for not-for-profit organizations ("NFPs”). This blog provides a simple introduction to crowdfunding for NFPs and its tax implications.
A Brief Overview of Crowdfunding
The CRA defines crowdfunding as operations undertaken to allow individuals and businesses to raise funds over the internet from the public towards a specific project. Good crowdfunding campaigns tend to be planned carefully, involve specific projects rather than general fundraisers.
Crowdfunding campaigns can take different shapes and may have different tax implications for the NFP or company raising funds. There are two main types of crowdfunding approaches relevant for NFPs:
- Donations-based campaigns: backers provide funds because they connect with the cause and want to support it and be seen to support it. There is no concrete benefit to them. This model is often used by NFPs for project-based fundraising; and
- Rewards-based campaigns: backers pitch in and get a reward for their contribution, of a value below what they paid. This reward can include a: t-shirt, tote, or unique experience.
Types of Crowdfunding Platforms
The most popular rewards-based platform in Canada is Kickstarter. There are limited eligibility requirements for who can create a project on Kickstarter (the main requirement is to be a permanent Canadian resident) but the project itself must fit into one of 13 defined categories. These include: art, comics, dance, design, fashion, film and video, food, games, music, photography, publishing, technology and theatre. An NFP aiming to raise funds on Kickstarter must put forth a clearly-defined project in order to meet Kickstarter’s funding requirements and not just a general fundraiser for the organization.
Kickstarter’s funding model is "all-or-nothing”, meaning that if a creator meets their fundraising goal in the deadline that they set, all of the backers’ (i.e., individuals funding the project) credit cards are charged when the deadline expires. If the project fails to meet its goal, no one is charged. Kickstarter’s philosophy behind this approach is that it involves less risk for everyone involved because creators will not be expected to create a $5,000 project if they have only raised $1,000 and it motivates backers and creators to spread the word about the project.
In return for backing a project, backers receive rewards, such as a copy of what is being produced (e.g., a CD or DVD) or an experience that is unique to the project. If a project is successful, Kickstarter charges a 5% fee on the collected funds, plus processing fees of approximately 3 - 5%. There are no fees applied if the funding is not successful.
An example of a more donations-based portal in Canada is the Centre for Social Innovation’s ("CSI”) Catalyst. Projects listed on Catalyst must be aimed at having a positive social or environmental impact. Projects using Catalyst also gain access to the CSI’s networks and support, with the advantage of having access to local networks in Toronto (where CSI is based) and networks in New York. Although Catalyst uses a more donations-based model, it is still necessary for the fundraiser to provide a reward for donors, which can be as simple as a thank-you tweet.
There is also the popular Indiegogo, which is a donation-based portal in the United States but accessible by anyone around the world with a bank account that accepts funds in USD, CAD, EUR, AUD and GBP. Registered 501(c)(3) charities in the US can issue tax receipts for donations directly on Indiegogo’s platform, but this is not available to charities registered in other countries. Indiegogo takes 5% of funds raised for any projects that hit their funding targets and 9% of funds for projects that don’t.
New CRA Guidance
In its technical interpretation on crowdfunding, the CRA indicated that the amount of money received by a taxpayer through crowdfunding will be included as income from carrying on a business. The CRA also indicated that crowdfunding-related expenses, such as promotional items to be provided to a donor as gifts for the donor’s financial donation, may be tax deductible from income or revenue raised from crowdfunding.
Although NFPs and charities do not pay tax, the Technical Interpretation is still relevant in that NFPs will have to account for funds raised through crowdfunding as revenue for their accounting purposes.
Charities may, in addition, issue a tax receipt for rewards-based donations but the advantage, or reward, must be less than 80% of the price of the donation. For example, if a donor were to make a $100 donation to a project, they can receive a $30 reward and a receipt for the difference in the donation and reward, being $70.
Charities must ensure that they make the receipt out to the true donor; if the true donor cannot be established, then no tax receipt can be issued by the charity. Recording the donor’s full name, address and telephone number will help charities to ensure that they are able to contact the donor in order to ensure that they receive their tax receipt.
Charities and NFPs should add a fee charged for using a crowdfunding platform, such as the 5% fee charged by Kickstarter, as an operating expense and record this expense in their income statements. Although charities and NFPs are exempt from income tax, it is still necessary to maintain accurate financial statements.
This article first appeared on lexology.com.