Social media influencers and game streamers can earn hundreds of thousands of dollars per year and are paid in both cash and merchandise.
What many of them don't realize is that the $3,000 free trip to Hawaii that they received as promotional consideration may end up costing them $1,500 in taxes, the $400 belt they received and reviewed could cost them $200, and that $75 skin cream they received and blogged about could cost them $37.50.
In fact, social media influencers should quickly come to terms with the fact that they are required to declare and pay taxes on all their income — whether this income is cash or non-monetary such as gifts, trips, clothing, dinners and anything else that they are given to review or write about.
In its efforts to ensure that all Canadians are compliant with tax legislation and pay their fair share of taxes, the Canada Revenue Agency (CRA) is starting to heavily crack down on non-compliance in the "platform economy," which includes four general types of businesses:
- Sharing businesses: car sharing (e.g. Uber), home sharing (e.g. AirBnB), etc.;
- Gig economy: short-term or short-contract-based work (e.g. Fiverr, TaskRabbit);
- Peer-to-peer: selling goods and services directly from person to person (e.g. Etsy, eBay, Craigslist);
- Social influencers (including gaming streamers): income earned through social media platforms (YouTube, Instagram, Twitch)
Income tax consequences
Whatever the type of income one generates, they must pay income tax on it. Of course, investments will lead to capital gains tax, but income irrespective of the mode of compensation will result in income tax payable. This means that people involved in the platform economy will be liable to fileincome tax returns and pay tax on their entire income, including the value of t rips, skin cream and free tickets.
And it does not matter how one is paid. One may be paid in cash or gift cards. They may also be paid with trips, clothing and freebies. The Income Tax Act and CRA do not differentiate between a trip and cash. Nor between a gift card and a free jacket. Nor between that jacket and a cheque.
And when one quantifies their income in order to file a return, an important question becomes "What is this jacket worth?" This is where the grey area lies. I would suggest that the value of that jacket is not necessarily the MSRP (manufacturer's suggested retail price). Rather I would suggest that one find the lowest available price for the same jacket (or trip) online and then document this price. You will definitely need to justify this price in the case of an audit. This is for sure.
And remember: for influencers who write about the gifts they receive, an auditor can simply read all of their posts and come up with a list of all the items received. And the starting point for the auditor will be the MSRP.
When video gamers stream their games online and do product placements in return for cash or gifts and when social media influencers do the same, along with considering the value of the gifts they receive, they also must think about HST (or GST) consequences.
At the core of what they do for others, streamers and social media influencers provide a service. And when they provide more than $30,000 of services, just like any other service provider (except for HST-exempt service providers, such as physicians), they are required to charge HST.
But what happens when a video game streamer or an influencer receives $100,000 worth of products for their services instead of cash? The answer is that (if they are in Ontario for example) they must also collect $13,000 of HST from their clients.
The CRA doesn't care if they didn't actually collect the HST; the agency wants the HST money regardless, and in the case of an audit the influencer will be deemed to have collected the HST. In other words, the game streamer or influencer will have a $13,000 bill from the CRA for the HST that they should have collected. This is in addition to the income tax payable on having received that $100,000 worth of merchandise, which in Ontario, at the highest bracket in 2021, would be about $53,000.
So, receiving $100,000 worth of gifts could potentially lead to a $66,000 liability to the CRA.
Penalties for non-compliance
People must also keep in mind that on top of the income tax and HST payable upon the receipt of cash and gifts, in the case of an audit where non-compliance is discovered, penalties will apply. Oftentimes auditors choose to apply the "gross negligence" penalty which in the case of income tax is 50 per cent of the tax outstanding, and in the case of HST is 25 per cent.
So even if an influencer declared all their cash income and failed to declare $100,000 in gifts, the penalties for this non-compliance could be $26,500 for the income tax and $3,250 for the HST — a total of $29,750 in penalties. With the $66,000, adding the penalties brings us to $95,750. And when interest is applied this amount could actually exceed the value of the gifts themselves.
For those who are just now realizing that they should have declared all their non-monetary income or those who are currently non-compliant for whatever reason, the Voluntary Disclosures Program provides some relief for the last 10 tax years if certain conditions are met:
- The disclosure must be voluntary — not pursuant to a letter from the CRA or an audit, etc.
- The disclosure must be complete.
- A penalty must be applicable.
- The information must include some information which is at least one year past due.
- One must pay the taxes outstanding.
It is recommended that anybody who has not declared all their income (cash or non-monetary items) should consult a tax lawyer to discuss filing a voluntary disclosure. Especially in light of the fact that the CRA is focused on finding cases of non-compliance — both in the platform economy and otherwise
Originally Published by The Lawyer's Daily, January 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.