by Sam Arraj
If this is the first time you hear the term Crowdfunding, visit the National Crowdfunding Association of Canada’s website at http://ncfacanada.org/crowdfunding/ to get familiar with the term.
You are an artist at the early stage of your career and have been looking for money to finally put together that special project that will allow you to pursue your passion. You start your Crowdfunding campaign on any of one of the many Crowdfunding platforms. After a few months of social media awareness campaigns your raise a few thousand dollars. Excellent, right? No so fast – the tax man wants a piece of the action. This is not so bad if you raise a few thousand, but what if you raise tens of thousands? The tax liability could be significant, especially if you have already spent the money.
Late in 2013, the Canada Revenue Agency (CRA) reviewed the tax implications of funds obtained through Crowdfunding. CRA notes that amounts received by a taxpayer from Crowdfunding activities, related to a business, would generally be included in income under Subsection 9(1). A project such as producing a recording by a musical group or person is considered to be a project related to business. That being said, Crowdfunding campaigns that are not related to business are tax free.
If you’re an unincorporated artist, then you will have to include the income on your statement of business activities on your personal tax return. Depending on the other income generated during the year, whether from employment or business, the income from your Crowdfunding Campaign could have some serious financial consequences.
The key thing is to determine whether the Crowdfunding campaign was related to business. You’re probably thinking: “Well, how could it be that producing a recording is a business?” Well… you will have to convince the CRA that the recording was strictly for personal use, because most recordings relate to putting your products to some manner of commercial use. If you’ve released it on iTunes or any other platform, you are essentially running a business. Not only should you include the income from the Crowdfunding, but you will also have to include your income from iTunes sales and any royalties earned from performance or mechanical rights.
There is a caveat here – many artists structure their Crowdfunding appeal as a pre-sale of the finished product. By way of example: let’s say that each of 100 fans sends $20 under this program. Simple math shows that the artist has received a $2000 advance to help offset recording costs, but when the final CD is manufactured, the artist would be obligated to mail each of the contributors a CD, postage paid. If the artist has written all of the compositions on the CD, the mechanical royalties are all internal. So, assuming that each CD cost $2 to manufacture and $3 to mail, the artist has still netted $15 per CD, but HST/GST would be payable on the sale price of $20, which is still income! I will cover income from a business or a hobby in a future newsletter article.
If it’s determined that the campaign was related to business, you might be able to claim expenses related to Crowdfunding efforts. I would advise you to talk to your accountant to determine whether the campaign was taxable or not and what expenses are deductible.