Is Crowdfunding Taxable (for Canadian GST/HST)?
Following up on our last post on recent proposed tax changes affecting Uber and other rides haring services, we continue the technology theme with a post on sales tax (GST/HST) and crowdfunding.
The following is based on a paper by Michael Cheung, JD Candidate (2018) for the Consumption Tax in Canada JD course at Osgoode Hall Law School and adapted with Simon Thang’s assistance for publication in GST & Commodity Tax, ed. Barry Hull (Carswell). It is not intended to be a full analysis but rather an illustration of potential issues to consider. For more detail, see the full article as published in GST & Commodity Tax, above. For a multi-jurisdictional analysis, see Sebastian Pheiffer, “A VAT/GST Perspective on Crowdfunding” in VAT and Financial Services: Comparative Law and Economic Perspectives (Springer, 2017).
This article describes the forms of online crowdfunding campaigns currently in use (such as Kickstarter, Gofundme and Patreon) and analyzes them from a Canadian sales tax (Goods and Services Tax/Harmonized Sales Tax, “GST/HST”) perspective. There is currently no specific guidance from the tax authorities for sales tax (although the Canada Revenue Agency has issued interpretations for income tax). As with most GST/HST issues, the key is characterizing the nature of the particular transaction and the relationships of the parties. The existing GST/HST principles seem to work, but crowdfunding will likely pose complications in practice due to its variety of forms and novelty. Each crowdfunding campaign must be examined closely.
- What is online crowdfunding?
A basic crowdfunding campaign typically operates as shown in Figure 1. An Entrepreneur (E) such as a start-up company wishes to solicit funds for some purpose. In order to communicate with potential Supporters (S) among the public, the Entrepreneur uses a third-party crowdfunding Platform (P). Potential Supporters evaluate the Entrepreneur’s pitch and decide if and how much they wish to contribute to the campaign. In some instances, the Entrepreneur may offer incentives to entice potential Supporters to sponsor the project. Contributions are collected through the Platform. For clarity, we assume all parties are Canadian-resident and all supplies are made in Canada, while recognizing this will often not be the case (we also do not address the application of provincial sales tax, or PST).
Current crowdfunding campaigns can be categorized into three discrete models:
- Donation-based model: Supporters are motivated by social and altruistic goals and receive no (or merely token) material benefit for their contribution.
- Rewards-based model: Supporters are eligible to receive a pre-defined benefit which may be based on the amount of money pledged.
- Profit-based model: Supporters are remunerated by acquiring some form of interest in the organization or its outputs which entitles them to payment.
- GST/HST Analysis
The first issue is the Supporter-Platform relationship, which is generally constant across all three types of crowdfunding models. The contributions are intended for the Entrepreneur and appear to be collected by the Platform as agent and held in escrow. As such there generally should be no GST/HST liability for the Platform in respect of Supporters’ contribution.
- Donation-Based Model
Platform-Entrepreneur Relationship: Typically, the Platform does not charge any fee to the Entrepreneur under a donation-based model. Thus, there is generally no “consideration” and no GST/HST, provided the parties are arm’s length.
Entrepreneur-Supporter Relationship: In a true donation-based model, Supporters’ contributions are voluntary donations. They are not “consideration for GST/HST purposes and should be non-taxable. However, the lines can get blurry. For example, Patreon allows Supporters to become “patrons of the art” and fund artists to create music or videos (typically online). The artist may produce content that is available to the public at large but typically also produces content exclusively available to Supporters. This appears to get close enough to a supply for consideration that Patreon collects EU value added tax (VAT) on contributions on Entrepreneurs’ behalf.
- Reward-Based Model
Platform-Entrepreneur Relationship: In this model the Platform connects Supporters to the Entrepreneur’s campaign in return for a fee. This is likely a taxable supply and the Entrepreneur is the person potentially required to pay GST/HST as it is obligated to pay the Platform’s fees. The main question is whether the Platform will be required to register and charge GST/HST. The normal GST/HST rules for registration and charging tax on the fee should apply. This would require considering rules for non-resident registration, “small suppliers,” the place of supply rules for determining GST/HST rate, and for determining if the supply is a service or intangible. Similarly, the normal GST/HST rules should apply to the Entrepreneur’s ability to claim input tax credits (ITCs) on the GST/HST charged by the Platform.
Entrepreneur-Supporter Relationship: This relationship is the one that will be most familiar and will be illustrated using North Aware’s crowdfunding campaign to fund production of a winter jacket. North Aware encouraged contributions by offering various incentives based on level of contribution. For example, when the company reached its goal Supporters who gave $1 received a virtual “hug”; those who gave $20 received a knit cap; while those who gave $590 received a winter jacket. Given the clear link to incentives, the contributions likely are consideration for future taxable supplies for GST/HST purposes (except perhaps in the case of nominal incentives). The main question is whether the Entrepreneur will be required to register and charge GST/HST to Supporters and the general rules mentioned above should apply. In addition, certain complications may arise. For example, when does GST/HST become collectible on contributions? What if the funds are released but Supporters never receive supplies because the business fails?
- Profit-Based Model
Platform-Entrepreneur Relationship: Assuming Platform provides a service, that service is likely intermediation. Thus, if the crowdfunding campaign gives Supporters some form of equity or debt in the Entrepreneur (below), the Platform could be viewed “arranging for” financial services as defined in paragraphs 123(1)(l) of the ETA. However, the exact form of the interest granted by the Entrepreneur, which could be affected by corporate law and relevant capital-raising regulations, would have to be examined. If the interest acquired by Supporters is not an exempt “financial instrument,” the Platform’s intermediation service would be taxable by default.
Entrepreneur-Supporter Relationship: Finally, in some profit-based campaigns Supporters acquire a share-like interest in the Entrepreneur. In fact, crowdfunding is sometimes viewed as an alternative to an initial public offering. The arrangement can also be structured as a loan by Supporters to the Entrepreneur. In either case, the interest is potentially exempt if it is a “financial instrument” as defined.
Simon Thang, LL.B, LL.M (Taxation) is tax lawyer advising exclusively in the areas of Canadian sales tax (GST/HST, PST), and customs and trade. He is the principal of Thang Tax Law.