A tax fishing expedition is where CRA goes to a third party to obtain general third party information that may aid them in auditing taxpayers rather than the subject of the information order. The latest high profile CRA fishing success wason November 10, 2017 when PayPal was served with an order from the Federal Court of Canada forcing them to forward specific information to CRA about PayPal Business account holders who sent or received a payment between January 1, 2014, and November 10, 2017. It is common practice for CRA to go to Federal Court demanding that third parties, including shared economy platforms, release information about their users in order to carry out tax auditing of the shared economy vendors. Challenges to these orders have generally been unsuccessful and the courts have permitted this type of broad CRA third party tax audit information gathering. In fact CRA is presently in Federal court requesting that the Bank of Montreal, Royal Bank and Toronto-Dominion Bank provide records of deposits, cheques and electronic funds transfers associated with Bank Hapoalim's correspondent accounts from April 1, 2011, to Sept. 30, 2017.
CRA knows how easy it is to use the shared economy for profit. CRA is also aware that not all shared economy participants are properly reporting their income and GST/HST obligations, thereby integrating the shared economy with the underground one.It is a simple matter for CRA to obtain transaction information from PayPal or Stripe and to data mine that information to enable a very focused tax audit.The underground economy is a major target of CRA tax evasion investigations, as CRA has said repeatedly, so this PayPal court order was just a matter of time.As part of the shared economy tax audit focus, CRA has previously carried out an audit of Uber to obtain information about drivers and several years ago obtained a court order for the records of eBay powersellers.
PayPal has 45 days from Nov 10, 2017 in which to release the information in compliance with the Federal Court order and have indicated that they intend to do so. The motion was argued in writing, and PayPal’s grounds to oppose were the privacy rights of their clients and that the order was overly broad. Both of these arguments were rejected by the Federal Court. An appeal is unlikely to succeed so compliance is the only sensible approach. PayPal has released a FAQ and says that it will have to submit the following information to CRA related to its business account holders, the specifics of which were set out in the court order:
- The full name of every individual or corporation holding a business account that has a Canadian address;
- The date of birth of each individual holding a business account;
- The business name, if applicable;
- The telephone number(s) of the corporation or individual holding the business account, if available;
- The full address(es) of the corporation or individual holding the business account;
- The email address of the corporation or individual holding the business account;
- The Social Insurance Number and/or Business Number of the corporation or individual holding the Business Account, if available.
The following information on transactions made by the account holder:
- The total number and value of received transactions for each calendar year between January 1, 2014 and November 10, 2017.
- The total number and value of sent transactions for each calendar year between January 1, 2014 and November 10, 2017.
The information will be provided by PayPal to CRA in excel format on a USB key as per the court order. Once CRA has these details from PayPal it should be possible to data mine transaction volume over a certain dollar amount and compare the results to business income reported by a taxpayer on a business income T2125 form. If there is a discrepancy a detailed tax audit questionnaire will normally be sent to the taxpayer. All business income earned in Canada, by Canadian residents or non residents, is fully reportable and has to be reported to CRA and GST/HST will have to be charged if annual sales reach $30,000 or more. A business PayPal account is not necessarily indicative of income being earned but is certainly suggestive of the existence of a business that has to be reported to CRA. The test in determining if income has to be declared is what is the exact nature of the activity. An incidental sale of excess coins from a coin collection, or spare astronomy equipment by a hobbyist, is likely not business income. The ongoing purchase and sale of coins or telescopes is probably a business but consultation with our top Canadian tax lawyers may be required to decide on any tax filing obligations.
So what should a PayPal business account holder who has just received the email notification from PayPal that the details of their transactions are being forwarded to CRA do? If there is unreported business income or GST/HST and they have not yet been directly contacted by CRA they should still be eligible to submit a voluntary disclosure program application (VDP or tax amnesty). This will mean no tax prosecution or tax penalties and a possible reduction of interest on taxes owing. If it is clear that no business was carried out, then they should wait for contact from CRA and then reply with details showing that there was no business activity. While a tax professional may not have to be engaged at that time it is always better to have professional tax submissions in all cases to ensure that the proper information is provided. If the CRA tax auditor does not accept those submissions then one of our experienced Canadian tax lawyers should then be immediately retained before any appeal periods expire.
There is a potential problem with the changes proposed to the VDP. CRA has not responded to any of the submissions that they have received. However we are informed by CRA staff who work in the voluntary disclosure program that the systems are being changed in anticipation of January 1 changes. It therefore appears that the voluntary disclosure program rules are expected to change on January 1, 2018 without taking into account the valid objections raised. This type of situation, a mass release of data to CRA by a third party, may no longer qualify for tax amnesty under the new rules.