What to do when clients raise money online

Why read this?

• › Your client is a sole proprietor and is crowdfunding a business

What to do?

Claim it as business income

1. Crowdfunding websites don’t usually issue tax slips. Your client must track revenue, says Joseph Gill, corporate securities and tax lawyer with McKercher LLP. She should keep all documents, such as transaction emails, for her records, but they’re not required for the return.

NOTE: If your client doesn’t report all income, CRA may take back 10% or more of the amount she doesn’t declare.

2. Fill out T2125, Statement of Business or Professional Activities.

• List the URL of the crowdfunding campaign under “Internet Business Activities.”
• Calculate GST/HST if:
  • the campaign gives backers a finished product; and
  • the business has over $30,000 in revenue, or your client has registered for GST/HST, says Philippe Brideau, CRA spokesperson.

  NOTE: Check provincial tax rules for PST treatment.

  TIP

  If the backer gets something of “nominal value” in return, like a t-shirt, federal sales tax doesn’t apply, CRA says. CRA defines “nominal value” as less than $75 or 10% of an individual’s contribution, whichever is less.

  Tip

  If your client’s return for 2014 is significantly different than 2012 or 2013, CRA recommends the current-year option.

• Enter the result of Line 8299 on Line 162 of the return.
• Deduct the crowdfunding platform’s fees and the cost of backer gifts in Part 4 of the form.
• Deduct expenses like office supplies and postage in Part 5.
• Deduct any home business expenses on Line 9945 and enter the result on Line 135 of the return.
• Attach T2125 to the return.

3. Tally all income on Line 150 of the return.

4. Calculate CPP contributions.

• Complete Schedule 8, CPP Contributions on Self-Employment and Other Earnings.
• Enter the amount of contributions from Line 10 of Schedule 8 on Line 421 of the return.
• Enter the amount of credits from Line 11 of Schedule 8 on Line 222 of the return and Line 310 of Schedule 1.

Pay tax

Tip

If your client wants to apply her refund to her 2015 taxes, attach a note requesting that happen to the return.

5. Since crowdfunding income isn’t taxed at the source, your client could owe tax. If she owes more than $3,000 for 2014, or in the past two years, she must pay at least quarterly, says CRA. Your client can choose to pay tax based on either her prior-year income or current-year income, or to let CRA calculate it.

• Use P110 Paying Your Income Tax by Installments to calculate net tax owing.
• Claim any tax already paid on Line 476 of the return.
  • CRA will issue Form INNS1, Installment Reminder, or Form INNS2, Installment Payment Summary, which list payments already made, for your reference. These are only available in paper form.

How to crowdfund

• Set up an account on a crowdfunding website.
• Set deadline for contributions. Offer backers incentives, like finished products or gifts, for their contributions.
• If the project is funded, creators get money through an electronic transaction service, direct deposit or wire transfer. The crowdfunding site takes a 4% to 5% fee, and there may be an additional fee for the money transfer
• The creator completes the project and is obligated to fulfill promised incentives to backers.

Sources: Kickstarter and Indiegogo

Sources: Nick Moraitis, CPA, CA, TEP, tax partner at Fuller Landau in Montreal; Joseph Gill, corporate securities and tax lawyer at McKercher LLP in Sasktatoon, Sask.; Philippe Brideau, senior spokesperson for CRA.

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