Crowdfunding – What is it? Are there Income Tax Implications?

Over the past couple years, crowdfunding has become a popular way to raise money online. As I only have a passing understanding of this concept, I have done a little research to enhance my own knowledge and for those of you not familiar with crowdfunding, provide a bit of a primer.

What is Crowdfunding?

 

According to the National Crowdfunding Association of Canada, crowdfunding is “the raising of funds through the collection of small contributions from the general public (known as the crowd) using the Internet and social media. … The key to crowdfunding in the present context is its inextricable link to online social networking and its ability to harness the power of online communities in order to extend a project’s promotion and financing opportunities. ...More recently, crowdfunding is becoming an increasingly common form of raising funds in the technology and media industries; including music, film and video games.”.

The top ten business crowdfunding campaigns as of April, 2014 are listed in this Forbes article.

Crowdfunding Models

There are four major crowdfunding models; however, there are multiple variations of these models.

(1) Donation Model – Crowdfunding is used to support a social cause or a charity by raising donations. These contributions are typically altruistic in nature and typically, official income tax receipts are not issued.

(2) Reward Model – Supporters receive non-financial rewards such as discounts on the product and early access to the product or service.

(3) Lending – Investors make interest bearing loans to the start-up.

(4) Equity – Investors obtain an equity stake in the company, similar to investing in any public company, although there may be ownership restrictions.

Regulatory

The regulatory system in Canada is a little all over the place for each province. In March 2014, the Ontario Securities Commission, the largest regulator in Canada, published four new prospectus exemptions including a crowdfunding exemption. The OSC provided a 90-day public comment period (ended June 18, 2014). These exemptions are intended to facilitate the raising of capital by businesses at different stages in their development, while maintaining an appropriate level of investor protection.

Canadian Lawyer Magazine  summarizes these exemptions for crowdfunding as follows:

1. Only Canadian reporting issuers and non-reporting issuers that are not investment funds, real estate issuers, or blind pools may access the crowdfunding exemption.

2. Issuers will be permitted to raise only up to $1.5 million total in any 12-month period. There is no limit to how often an issuer utilizes the crowdfunding exemption in any 12-month period, provided the issuer does not exceed the aggregate limit.

3. Issuers may only offer prescribed securities — for example, common shares or preference shares that are relatively simple.

Consistent with the policy of minimizing risk; investors will not be permitted to invest more than $2,500 per offering and more than $10,000 total in a calendar year.

Income Tax

 

The CRA has stated in a technical interpretation  (2013-0484941E 5) that funds received from crowdfunding campaigns are generally taxable as business income. The amounts taxable would generally be where the contributor receives a product or promotional item. Where equity or debt is issued in exchange for funding, those amounts will not be taxable.

The interpretation dealt with raising funds for a musical recording, where the contributors would receive a free recording or promotional item, but would not receive any equity or be entitled to a share of the profits from the venture.

The CRA went on to state that whether certain expenses are deductible is a question of fact. “Expenses related to crowdfunding efforts incurred by a taxpayer for the purpose of gaining or producing income from a business within the meaning of paragraph 18(1)(a) of the Act may be deductible. It is our view that the cost to a business to provide donor gifts (ex. cost of T-shirts) and fees paid to undertake crowdfunding activities may be deductible if the requirements of the Act are otherwise met.”.

Crowdfunding is an ever-evolving area, with regulatory and tax authorities constantly trying to keep up. If you intend to raise funds via crowdfunding, it is essential you obtain regulatory and tax advice before you start; hopefully from a professional if you can afford it, or at minimum from an organization such as the National Crowdfunding Association of Canada which may be able to provide some direction if not advice.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

The Burden of Singledom

I started writing The Blunt Bean Counter for 3 reasons:

1. I thought it would provide an interesting diversion from my usual daily professional life (little did I know a blog is like having a part-time job).

2. As a marketing tool, to my target audience of private corporation owners. As my header says “This blog is about income tax, business, the psychology of money and investing topics and is meant for taxpayers no matter their income bracket, but in particular for high net worth individuals and entrepreneurs who own
private corporations".

3. To improve financial literacy from an income tax perspective. I felt there was lots of tax and financial advice coming from people who really had no idea what they were talking about.

I have balanced my intent to market to my target audience with the reality that most Canadians and many of my readers are not necessarily corporate business owners or high net worth individuals. While my underlying posts are written for entrepreneurs and will continue to be so; I try where possible to provide information that can be of assistance to readers of all income levels.

When I write about topics such as clients who have $100,000 capital gain misreporting issues on their flow-through shares or whether you should bonus your corporations income when the corporations income exceeds $500,000; I often think to myself “the average person must think I live in a different world”. The reality is I do. Many of the people I deal with are very wealthy. However, I am always cognizant that some of these posts may be almost insulting to some people.

When I wrote my 6 Part series on retirement, I really struggled with the numbers I would use in my examples. I had started using huge retirement incomes and then settled on a range of $71k to $131k. For some of my clients, $131k is less than their annual spending; however, I wanted the series to be applicable to the broadest range of people. I thought I had somewhat accomplished this goal when I received an email from a reader thanking me for writing the series, but basically saying that the retirement nest egg numbers I

came to were not only depressing but obscene to her. She suggested that my series like most retirement articles had not considered single people. She also noted that there are substantial numbers of single women who after paying for rent, their kids and maybe even caring for their parents have no money left to save for retirement and I should consider such people.

I wrote back to her that as per my header, she was not my target market and that the series was not written for lower income Canadians. However, I told her that I understood her frustration with the fact most financial articles did not consider single people and moderate to lower income Canadians and I would see what I could do.

I then emailed Rona Birenbaum, a well known and often quoted financial planner whom I have worked with in the past and who, like me typically deals with high net worth clients. I asked Rona if she would be willing to write a post of financial considerations for single people and whether she would be willing to write a second post for single people who make moderate to average salaries and have a hard time meeting daily expenses, let alone saving for retirement. Rona accepted my offer and today she writes about "The Burden of Singledom" and on Wednesday in part two of her series writes about the additional burden of being single when you earn an average salary.

I thank Rona for her contributions and without further ado, here is part one of her series.

The Burden of Singledom

By Rona Birenbaum


Whether single by choice or circumstance, singles bear full responsibility for their financial well-being. The financial media most often focuses on financial planning for couples, although more and more there are case studies highlighting the financial concerns of those who go it alone.

This blog post attempts to highlight the special financial planning considerations for single men and women.

The main differences and related planning considerations are discussed below:

One income engine

• Financial security is as much about income generation as it is about expense control and saving. Singles cannot rely on a partner to supplement their own earning ability. They also don’t have an income back-stop during times of unemployment, due to career transition, maternity/paternity leave, disability and the like.

• Insure, insure, insure. Disability insurance is essential for singles, with critical illness insurance being a
  
  secondary consideration. Life insurance makes sense if there financially dependent children and/or parents. Also, make sure that you have an emergency fund representing 3 months of cash flow for the unexpected or a period of unemployment.

Limited time off for family needs

•  Many employees use family days and vacation days to take children to doctor’s appointments and to support aging parents. Single people only have one pool of days off to draw on, potentially leaving them with little or no time for actual vacation.

• Invest in your physical and mental health. It may not be possible to eliminate the need to take time off to support children and parents, however, minimize personal sick days by taking care of yourself. Self-care is also an excellent stress management strategy for those with complete responsibility for themselves and their family.

No income splitting

• One of the most generous tax breaks established in recent memory is the ability for married retirees to split pension income (pensions, RRIF payments, annuities, CPP, OAS). Singles miss out on this entirely.
  

• Take advantage of all available tax breaks. RRSPs for retirement, RESPs for education savings, and TFSAs for emergency savings. Other eligible tax credits include: children’s fitness tax credit, children’s art tax credit, first time homebuyer’s tax credit, public transit tax credit, first time donor’s super credit. For details on all of these credits and to confirm eligibility to go this CRA website. Don’t forget to deduct child care expenses up to $7,000, and moving expenses if the distance from your new home to your place of work or school is at least 40 kilometres closer than from your old home to your work or school. The 40 kilometres is measured by the shortest normal route open to the travelling public.

Solo retirement funding

• Singles are entirely responsible for securing their retirement cash flow. It’s also almost universally true that two can live cheaper than one.

• Participate fully in group retirement savings plans that include a component of employer matching. Also, a financial plan will assist in determining the amount of savings necessary to fund a secure retirement. The sooner a plan is done and adhered to, the better the chance of achieving financial security in retirement.

Managing finances on your own can feel overwhelming at times. Solid financial planning can give singles a feeling of confidence and control over their current finances and future security.

Rona Birenbaum is the founder of Toronto fee for service financial planning firm, Caring for Clients. Rona is frequently contacted by the media as a resource on a wide range of financial planning subjects. This information is general in nature and is not intended to constitute specific tax advice for any individual. It is best to speak to your tax professionals for specific advice.

10 Ways to Avoid a Tax Audit

Two weeks ago, Adam Mayers the Personal Finance Editor of the Toronto Star wrote a column on 6 tips to steer clear of an income tax audit. The tips included suggestions from Henry Korenblum, a tax manager in Toronto with Crowe Soberman LLP and yours truly.

I liked Adam’s idea so much, I decided to Dave Letterman it, and prepare a list of the top 10 ways to avoid a tax audit for personal income tax returns (except I will not work my way down from ten to one).

Before I present my list, I want to elaborate on Adam's comments on the difference between an information request and an audit, as I find many people are unclear about the distinction.

Information Requests

As Adam noted, these requests are typically innocuous. The CRA usually sends a letter asking for back-up information relating to a deduction or credit claimed on your return. Generally these requests are to provide support for items such as a donation tax credit, medical expense claim, support payment claim, a child care expense claim, a children's fitness tax credit claim or an interest expense claim. These requests are fairly common and more often than not, relate to personal income tax returns that were E-filed. Typically, once you provide the information requested, you do not hear anything further from the CRA.

Audit

 

An audit, which can take the form of a desk audit (which are typically undertaken to review an item that the CRA finds unusual in nature or specifically wants to review) or a full blown audit, are invasive and stressful and often result in a tax reassessment of some kind.

Top Ten Tips to Avoid a Personal Tax Audit

1. Avoid conflict (only being slightly sarcastic here). Many audits are triggered by a scorned spouse/lover, business partner you have had a falling out with or a dismissed employee. Many hostile divorce negotiations end quickly when one spouse tells the other they will be snitching to the CRA if they don’t get what they want. On the other hand, in acrimonious divorce negotiations, the threatened spouse often tells the "snitch" spouse to go ahead, since after the CRA takes everything they will get nothing. As you can see, these negotiations can get quite interesting to say the least.

2. File your return on time. Late filed returns often seem to pique the CRA’s interest.

3. Do not write explanatory notes or letters to the CRA with your return. I have often been referred new clients who had the crazy idea the CRA wanted to hear why they did or did not do something and created far larger problems for themselves by trying to explain away one issue, while creating multiple other issues. I always thought reading these letters would be the most amusing part of working for the CRA.

4. Unless you have a travel log to support your auto expenses, be reasonable in the percentage of business use you claim in respect of your auto expenses.

5. Don't make up expenses. If you don't have actual receipts to support the expense, do not make the claim.

6. I know this is easier said than done, but if you are separated or divorced, try and agree in your separation agreement who will claim which expenses and which credits. Often both spouses claim the same children and same expenses on both returns. The CRA does not really appreciate duplicate claims.

7. Report foreign income, especially income from countries we exchange information with. Many people earn income in the U.S. or U.K. and do not report that income. The CRA exchanges information with both of these countries and they are like a “dog on a bone” once they realize you have not reported this income; plus the penalties can be very large.

8. Report the rental income attributable to the owner. For some unknown reason, many people seem to think the legal ownership of a rental property (and investment accounts) is irrelevant for tax purposes. I have seen several circumstances where spouses jointly own a rental property and they decide to just have the lower income spouse report 100% of the rental income (and often the spouse not reporting the income paid for the property). While this is often difficult for the CRA to find, they are not too impressed when they ask for a purchase and sale agreement and see that one of the legal owners has not reported any of the rental income or capital gains.

9. If you claim expenses as an employee, commission salesperson or self-employed business, do not claim personal expenses. I have seen people claim suits, dresses, nanny expenses (as administrative), facials, personal travel, etc. Claiming these expenses automatically casts a cloud over your honesty and auditors get their antennae up high.

10. File a departure tax return if you leave Canada. I have seen many situations where people move overseas or are transferred and do not file a final Canadian return, or file the return, but do not answer the question on the return about the date they left Canada. The CRA then keeps sending requests to file and often leads to an unnecessary review of their returns and residence.

I Guess Someone Other than my Mom is Reading this Blog

Over the last month, I have had over 21,000 unique visitors to The Blunt Bean Counter and over 75,000 page views; due in large part to my six-part series on "How Much Money do I Need to Retire? Heck if I Know or Anyone Else Does!". I am very pleased that so many people found value in the retirement series! (The series is now in Flip Book form - link here.) I would like to thank my loyal blog followers and welcome the many new ones. I appreciate you reading my ramblings.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Credit Cards - Tax, Budget and Repayment Issues

Today I want to talk about credit cards. In particular, I intend to discuss three issues.

1. The first issue being why you should consider having more than one credit card, despite the added annual card fees.

2. The second being how despite the credit card companies best intentions, they often come up short when trying to help their cardholders track their spending habits.

3. Finally, the ludicrous minimum balance repayment reminder.

I currently have three credit cards in my wallet. I use a CIBC Aerogold for my personal expenses and to accumulate Aeroplan points. I also have an American Express card I use for any expenses I consider business in nature that my firm does not reimburse me for (such as auto). Lastly, I have a BMO MasterCard that I use strictly for my firm Cunningham LLP’s business related expenses. 

Income Tax Simplification

The main rationale for having three credit cards is that they stream my expenses neatly into personal expenses that are not deductible for income tax, personal expenses that are deductible for income tax and business expenses that are deductible for income tax. Should I be audited, I will simplify the auditor’s life and hopefully give them no reason to re-assess me. If you do not have your own business, you may still want to consider a second card if you have significant employment or commission expenses you wish to segregate.

Many of my clients are mesmerized by their Aeroplan or similar travel plan points and use one card for their personal, employment and/or business expenses. This is an audit nightmare waiting to happen and will cause most auditors to automatically get their backs up that you are trying to expense personal expenses, even if that is not the case. Thus, I always suggest that my clients stream their expenses through multiple credit cards or at minimum two cards. The obvious downside to this attempt to keep the taxman happy is that it is detrimental to your point accumulation; although as per this blog on taxable benefits, you must be careful to adhere to the CRA rules.

The same concept holds for Lines of Credit (“LOC”). Where possible, always obtain two LOC’s, one for personal use like home renovations, trips and cars and one for investment or similar loans. The clear streaming minimizes audit time and potential reassessments. If you cannot obtain two LOC’s, ensure you clearly track and breakdown all advances between personal and investment uses and allocate the interest based on what proportion of the total LOC owing is investment use.

Tracking Credit Card Spending

On my Aeroplan card, Visa has attempted to help me, by categorizing my expenses for the month on the last page of my statement. I think this could be a very useful and practical idea, but only if Visa took the categorization a step further and provided a few more categories. For example, my wife and I always want to know how much we spent on groceries in any given month, but the grocery costs are lumped together with retail purchases and not easily determinable. Anything in $US is considered foreign currency; however, within the foreign currency category, I really want to know how much is travel or vacation spending versus retail purchases. Hotel, entertainment and recreation are also lumped together. Stuff like this drives me crazy. It is so close to being useful, but just far enough away to be useless. I would like to know if Visa asked its users for input on devising the categories, as just four or five more would have made this a useful report – at least for me.

Minimum Payment Information

Lastly, has anyone looked at the reminder on the last page of their Visa statement? On a recent Visa bill which included the costs of my 25th anniversary vacation, I noted a reminder on the last page that said “If you only make the minimum payment every month, it will take approximately 95 years and 9 months to pay the entire balance shown on this statement.” Talk about long-term debt! (Blogger's Note: In the comment area below, Sacha Peter, who is the blogger behind the Divestor blog, notes that the minimum payment information became a statutory requirement for credit card companies in 2010).

For some people, ensuring they maximize their travel points is an obsession. However, I suggest you consider the benefits of free travel rewards against a potential tax reassessment and the time and aggravation of an audit the next time you use your only credit card. As for the budgeting aspect, the credit card companies need to go back to the drawing board; in my case I can wait 95 years until they get it right.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.