Crowdfunding redux

by Jini Stolk

It might seem that I’ve been unusually bullish about crowd fundraising. I’ve definitely been fascinated by the ways in which successful crowdfunding is reliant on strong relationships and networks; that when supporters rally to save a company they care about they can achieve surprising turnarounds; and that notable success stories as well as a few failures contain important lessons for anyone venturing down the crowdfunding road.

It’s certainly clear that when crowdfunding is done well it’s a powerful new way to reach out, well beyond the usual suspects, for support – and that the crowd is more willing to take a chance on innovative arts projects – expanding the number, and potentially the type, of projects that have a chance of success.

Imagine Canada has brought up concerns that the plethora of crowdfunding campaigns might be taking a bite out of charitable donations, and is making it hard to differentiate between personal, business, and charitable causes (not to mention a growing number of fraudulent appeals.)

Wild West? Brave New World? Inexorable Wave of the Future? Great Way to Go Around Conventional Funding Bodies or Donors ? Or do you agree with Jonathan Jones in The Guardian that where art is concerned, the crowd is an idiot?

However you lean, you’ll be glad to know that CSI and HiveWire have just published a free, comprehensive guide to crowdfunding success. It covers every aspect of creating, running and completing a successful crowdfunding campaign, based on learnings from 27,000 nonprofit campaigns. It’s a comprehensive, practical guide tailored to nonprofits and charities, but valuable also to social impact projects considering crowdfunding.

This terrific piece by Theatre by the Bay’s Alex Dault in Canadian Theatre Review is more specific to the potential and downside of Indie Theatre crowdfunding campaigns.

Returning once again to the wisdom of Alan Brown. “New technologies are reshaping the giving patterns of ordinary people who understand that they can play a small, meaningful part in changing the world, or at least their own community.”

But Boards and Managing Directors take note! As with so many things, there are CRA implications to consider. Here, forwarded by my legal colleagues at CSI, is a summary of the Canada Revenue Agency’s views on the tax implications of raising money via crowdfunding:

  • Depending on the facts and circumstances, money raised through crowdfunding could represent: a loan; a capital contribution (a form of equity); a gift or a windfall; business income; or a combination of some or all of these.
  • It’s unlikely that crowdfunding will be treated as a loan or as equity since crowdfunding rarely results in the creation of a debt or equity interest in the entity raising the money. (In the event that this does occur, the money raised would not be subject to tax as it would not represent income but rather amounts that would ultimately be returned to the lenders or shareholders.)
  • A crowdfunding initiative might be treated as a gift or a windfall. A gift is defined by the courts as “a voluntary transfer of property to a donee with no right, privilege, material benefit, or advantage conferred in exchange”; a windfall is similar to a gift, but because it requires that the recipient has neither sought nor made an organized effort to receive the payment, crowdfunding will tend to fit more naturally into the category of gift than of windfall. To the extent that money raised through crowdfunding constitutes a gift or a windfall, the amount received will not be taxable.
  • When crowdfunding occurs in the context of a business (whether in the start-up phase as funding for the creation of a new product, service or enterprise, or in the course of operations of an established business), the CRA considers that crowdfunding proceeds constitute business income “unless it can be shown that the crowdfunding arrangement otherwise clearly represents a loan, capital contribution or other form of equity.” In such cases, crowdfunding proceeds would be taxable and subject to GST/HST.

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