Crowdfunding sites like Kickstarter, IndieGoGo and GoFundMe can be attractive to many entrepreneurs looking for opportunities to raise capital for a new venture. However, the use of these sites can raise significant legal issues from a securities and tax perspective.
For instance, the Canadian Revenue Agency recently issued a bulletin containing the following statement:
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.
See CRA technical interpretation 2015-0579031I7 for more details.
This is only one among many potential pitfalls that can arise from the use of crowdfunding tools without careful planning.
We recommend that entrepreneurs approach these tools with extreme caution and seek qualified legal advice before launching a crowdfunding campaign. Although our firm does not provide legal advice with respect to tax or securities issues, we can recommend qualified local counsel to assist you.