This is the second in a series of two articles.
Economics, Resources and International Affairs Division
Crowdfunding – a practice in which many entities make small contributions through the Internet and social media – is an increasingly popular way for citizens, businesses and not-for-profit organizations to raise funds for charitable causes.
Although information on the impact of crowdfunding exists around the world, evidence is limited on the degree to which crowdfunding is a complement to – or a substitute for – traditional charitable giving in Canada.
With donation-based crowdfunding, individuals contribute to a project without expecting a financial return on their contribution. That said, donors may receive rewards, including gifts or other acknowledgements.
According to the Canada Media Fund, donation-based crowdfunding generally accounts for more than one half of all global fundraising; it is used in about three quarters of all campaigns that reach their fundraising goals.
A 2013 survey of Canadian charitable donors commissioned by Hewitt and Johnston Consultants found that 12% of the generation born between 1981 and 1995 has given to a crowdfunding campaign and 44% say that they intend to do so in the future.
Impact on traditional charitable giving
In Canada, the amount contributed through charitable donations has fallen in recent years. Some have speculated about the potential for donation-based crowdfunding to increase such giving.
According to some studies, donation-based crowdfunding can increase the total amount of charitable giving, as it can complement traditional charitable activities and raise awareness about a charitable fundraising campaign.
In addition, through online feedback, potential donors and groups that might benefit from the charitable giving – such as low-income families, women, marginalized youth, Aboriginal people, visible minorities and people with a disability – can more easily provide their views on improving the design of campaigns.
As well, a number of organizations and associations linked to those that engage in crowdfunding believe that donation-based crowdfunding provides charities with certain opportunities. In comparison with traditional promotional activities used by charities, crowdfunding can facilitate greater awareness among a larger number of potential donors. It can also enable the assessment of the degree of public interest in a particular charitable campaign.
Some charitable organizations and groups that advocate on their behalf suggest that donation-based crowdfunding may reduce funding to traditional charities. They feel that donations may instead be directed to social initiatives not related to a traditional charitable cause, such as providing one-time support to a family that has lost its home to a fire.
They emphasize the important role played by traditional charitable organizations in identifying and managing charitable campaigns that are more likely to have direct and long-term impacts on key societal issues.
Tax treatment of donation-based crowdfunding
The Income Tax Act requires registered charitable organizations and other qualified donees recognized by the Canada Revenue Agency (CRA) to report on their charitable activities.
According to guidance provided by the CRA on 16 August 2013 and 25 October 2013, the revenue obtained from crowdfunding is generally taxable business income. The cost incurred by a business to provide rewards, such as T-shirts, and the fees paid to undertake crowdfunding activities may be deducted from business income.
Various legal and tax advisory firms – including Davis LLP – have said that, although registered charities do not pay tax on their charitable activities, the CRA’s guidance is relevant. The CRA requires that registered charities record funds raised through crowdfunding as revenue for their accounting purposes.
According to Davis LLP, a registered charity may issue a tax receipt for a donation, and provide a reward that is valued at less than 80% of the amount of the donation. For example, in the case of a $100 donation to a crowdfunded project, a charity may provide a reward with a value of up to $79.99, and issue a charitable contribution tax receipt that is no less than $20.01.
Donation-based crowdfunding, fraud and fulfillment risk
The potential for fraud is thought to be lower in donation-based crowdfunding than in the lending-based and investment-based crowdfunding models.
According to a 2013 World Bank study, fraudulent donation-based crowdfunding projects are routinely removed from funding platforms following investigations by potential donors and/or platform administrators.
That said, anecdotal information suggests that fraudulent campaigns continue to exist and that there is a need for greater surveillance of crowdfunding activities.
More typically, projects financed through donation-based crowdfunding that provide rewards may be subject to what is known as fulfillment risk. Some fundraisers may not plan sufficiently for the costs of production and shipping, or for excise tax issues that may arise in relation to producing and distributing the reward.
As crowdfunding continues to gain popularity in Canada and around the world, further research may occur, including some related to administrative burdens on small businesses and not-for-profit organizations. Research may also be undertaken on regulation and accountability in relation to donation-based crowdfunding.
BBB Wise Giving Alliance. Crowdfunding for Charitable Causes, Summer/Fall 2013 Wise Giving Guide.
Ideavibes. Crowdfunding: How the wisdom of crowds and the power of social media are changing everything we know about fundraising. White paper, 2 June 2011.
Isakson, Trina. Beyond Giving and Volunteering: How and why individuals are exploring new ways to advance social good. 27Shift, Commissioned by Human Resources and Skills Development Canada, June 2013.
Rovner, Mark. The Next Generation of Canadian Giving: The Charitable Habits of Generations Y, X, Baby Boomers, and Civics. Commissioned by Hewitt and Johnston Consultants, September 2013.
Southin, Travis. Harnessing the Fundraising Potential of Charitable Crowdfunding in Canada. Prepared for the National Crowdfunding Association of Canada, 2013.
Stuckey, Brett, and Adriane Yong. Crowdfunding: A Non-traditional Source of Business Financing. Parliamentary Information and Research Service, Library of Parliament, Ottawa, 10 December 2014.
TVO. “Charity Goes Viral.” The Agenda with Steve Paikin, 26 March 2015.