Raising capital through crowdfunding can be tantalizing, but it has its pitfalls

Considering crowdfunding as a way to raise capital for your business idea? Be careful. Be very careful.

That’s Mariska Loeppky’s view as crowdfunding (the practice of funding a project or venture from a large group of people, usually through the Internet) gains legitimacy.

Loeppky, who is director of tax and estate planning with the Investors Group, says that this relatively new funding source can be attractive to entrepreneurs. It doesn’t cost much to set up a page to solicit the masses at popular crowdfunding sites like GoFundMe and Kickstarter, there is a big pool of investors they can potentially reach and money can be raised quickly through a variety of people.

But Loeppky says crowdfunding seems to work best, and garners the most investment, when a product or an idea goes viral — something that is difficult to pull off. “There’s no rhyme or reason to that and you are competing with so many things,” Loeppky says.

Raising capital through crowdfunding could also have tax implications. Loeppky says there is a distinct possibility the Canada Revenue Agency will consider money raised through crowdfunding as income. If the Agency makes that call, entrepreneurs will have to pay tax on anything they raise. She advises business owners in Atlantic Canada and elsewhere to prepare for crowdfunding capital to be taxed and budget accordingly. “If you use crowdfunding to raise funds to develop a new product, that capital contribution has to be repaid,” Loeppky says. “So instead of having to raise $5,000, you have to raise $8,000 to have $5,000.”