Since 2017, the Canada Revenue Agency ("CRA") has maintained an online guidance document, titled "Compliance in the platform economy", which focuses on taxpayers earning income through smartphone and internet applications. In this document, CRA identifies four categories of "platform" income:
- Sharing economy: Income generated through platforms that allow users to leverage the use of their assets, such as Uber (vehicles) and Airbnb (real estate).
- Gig economy: Income generated through platforms that allow users to offer short term work agreements, such as Fiverr.
- Peer-to-peer (P2P): Income generated through platforms that allow the direct sale of goods between individuals, such as eBay and Etsy.
- Social media (or social influencers): Revenue earned through social media platforms from ads, subscriptions, product placement, and product promotion, such as YouTube, Instagram, and Twitch.
This bulletin provides further details on the fourth category: social media influencers. This is particularly in light of comments made by CRA officials in late 2020 indicating that CRA will be increasing its enforcement efforts against influencers making over $500,000.00 a year.
Since earning money as an influencer on social media platforms is a relatively new way to earn income, the spectre of increased enforcement should raise important questions that any aspiring—or existing—influencer should keep in mind.
This bulletin will specifically address the following topics:
- the various forms of income that individuals may earn through one or more social media platforms;
- CRA's position on the treatment of certain types of income inclusions and exclusions relevant to social media influencers;
- GST/HST considerations for social media influencers;
- issues that may arise when social media influencers travel or provide services to jurisdictions outside of Canada; and
- CRA's increased enforcement efforts against social media influencers, and how to mitigate the risk of such enforcement efforts.
How People Earn Income Through Social Media
Social media influencing has blossomed in the past few years to become very big business. In early 2021, YouTube's CEO Susan Wojcicki commented in a letter to creators that the platform had paid out over $30 billion (USD) to creators over the preceding three years and that these amounts are only increasing as more and more people shift to online viewing. Programs like YouTube's "Partner Program", which allows creators to share in the platform's overall advertising revenue, have expanded their membership with increasing rapidity.
Canada has been home to many successful influencers (also referred to as "content creators"). Media coverage around the announcement of CRA's enforcement efforts noted that Evan Fong of VanossGaming, a video game streamer with over 25 million YouTube subscribers, earned $17 million (USD) in 2018. A 2019 report out of Ryerson University's Faculty of Communication & Design Audience Lab (PDF) noted that 40,000 Canadian YouTube channels had sufficient size and popularity to participate in the platform's Partner Program, which generated the equivalent of 28,000 full time jobs in Canada. These numbers, and those of influencers working on other platforms, have almost certainly continued to grow since Ryerson University reported those figures.
The variety of possible models for building these online-based revenue streams are very diverse. Successful YouTube channels earning significant revenue include everything from successful launches of offline brands with new online identities (e.g., various cooking magazines that have launched video channels), to smaller, independent companies producing content (e.g., independent film studios that have turned to YouTube to increase their viewership), to individuals working alone (e.g., vloggers). Each such YouTube channel could be classified as essentially its own business, which raises real questions about how that business is best organized, not only as a matter of practice, but also with respect to ensuring that its tax liability is well managed. These can be complicated questions, especially considering how quickly smaller channels can "go viral" and suddenly find themselves earning significant revenue.
YouTube is not, however, the only place people are earning revenue through content, personal branding, and the many other activities that have come to be widely known as "influencing" online. Instagram and Twitch are other excellent examples of platforms that host influencers and help them build significant audiences (and there are many others, both big and small).
Generally, there are four key sources of revenue that drive an influencer's income. Each platform is most closely associated with one or more of these revenue streams, but most influencers earn money through a combination of sources, either by making use of multiple tools on a single platform or by building their brand across multiple platforms.
YouTube's advertising algorithm is the best example of a programmatic ad technology that directly creates revenue for content creators. YouTube's programmatic ads are placed by AdSense, Google's advertising technology. AdSense selects the type of ad to be viewed based on what it knows about the viewer of the content. This means that the content creator need only create an ad-slot within their YouTube video and YouTube will automatically place an ad tailored to the viewer. YouTube and the content creator then share in any revenue that the ad produces, usually based on the viewer's response to the ad (i.e., a "click" generates revenue). The revenue that is generated through this stream thus depends on the number and types of viewers that the content creator can attract with their content and any relevant keywords.
Memberships and Tips
Well-known as a platform for video game streams (although its content selection has become more diverse over the last several years), Twitch, and platforms like it, are built on a revenue-sharing model that allows streamers to share revenue with the platform earned on subscriptions to their content that their viewers have purchased. Twitch, through its Affiliate and Partnership programs, allows viewers to pay certain streamers a monthly fee to access premium features with respect to such streamers, such as ad-free streams and unique interactions. A portion of the fees from subscriptions then flows to the streamers to encourage them to continue to create content to draw viewers to Twitch.
Twitch also allows for a second, related form of revenue: "tips". Viewers can pay content creators directly through the platform. Much like tipping in other sectors of the economy, the reasons people tip are idiosyncratic. Nevertheless a culture of rewarding streamers in real time for doing certain actions, interacting with their audience, or just as a display of gratitude, continues to grow on Twitch and other platforms.
Sponsorships can be a very diverse category, since it can include everything from embedded content (e.g., "this video is brought to you by"-style ads) to specially-produced content to highlight an advertiser's products and services. What differentiates sponsorships from programmatic ads is that the influencer and the advertiser work together directly to place the ad; there is no platform intermediary doing the work for them. Payment in these situations is also not restricted to cash. A sponsorship might give the influencer special access to products at reduced prices or commission on linked sales, rather than a simple payment of cash.
One important point to keep in mind for sponsorships is that the Canadian Competition Bureau has made clear that these kinds of relationships must be disclosed under Canadian law. According to remarks by the Deputy-Commissioner, "[i]f an influencer receives payment in money, commissions, free products or services, or discounts, or if they have a personal or family connection to the company, they must disclose that information to consumers".
Finally, there is a catch-all category of other types of revenue that influencers earn based on their online content creation. This can include everything from merchandising (as many influencers maintain online shops selling branded clothing and other goods), offline experiences (such as, meet-ups, concerts, or other ticketed events), and offline collaborations with brands.
Tax Issues for Influencers
Successful influencers are likely to have complicated personal tax situations because they will earn income from multiple different streams, many of which will pose difficult questions of potential inclusions and exclusions. They may also choose to earn their income through a corporation, which introduces complications of paying corporate taxes and tax issues on receiving the money for their own personal use (such as by paying themselves a dividend). Generally, unless they form a corporation, influencers will be considered to be sole proprietors earning business income, which means that they have a requirement to document their income and expenses and pay into the Canada Pension Plan at the appropriate level.
While this bulletin is not meant to be comprehensive, below we summarize some of the key considerations influencers should have in mind as they plan their tax strategy.
Income Inclusions and Exclusions
Inclusions are taxable amounts that increase a taxpayer's income for the year. According to CRA's "Compliance in the Platform Economy" document, income inclusions for influencers can be both monetary and non-monetary, including, but not limited to, in respect of:
- subscriptions to channel(s);
- advertising (clickbait and brand advertisements);
- calls to action;
- merchandise sales;
- trips; and
- referral codes.
This list raises particular questions with respect to non-monetary compensation an influencer might earn for their services. CRA has made clear that "barter" transactions—when any two persons agree to a reciprocal exchange of goods or services and carry out that exchange (thus usually without using money)—are subject to tax just like their cash equivalents. Influencers need to carefully consider if they have barter income that they need to report and if so how such income is to be valued. For instance, an influencer that accepts a free trip in exchange for promoting a travel company on their Instagram page will need to include the equivalent cash value of the trip in their taxable income. This could cause issues as the influencer may have a tax liability for such a transaction but did not earn cash with which to pay such tax liability from such transaction.
Deductions, on the other hand, reduce a taxpayer's income for the year. As a general rule, money spent in the interest of earning income can be deducted from gross revenues. CRA directs influencers to its general guidance on business expenses for help in determining what expenses are deductible. Some of those listed online include:
- business start-up costs;
- bank charges;
- office expenses;
- staff salaries; and
Each of these categories is subject to particular rules (i.e., technology used to produce content, like cameras, may be treated by the CRA as capital property that is not immediately fully deductible) and there are many others that might apply in specific circumstances. Appropriately maximizing available deductions can quickly become a complicated question.
Anyone that earns more than $30,000.00 a year making "taxable supplies" in the course of commercial activity must register with CRA and begin collecting GST/HST (sales tax) and paying it to the CRA. A "small supplier", earning less than $30,000.00, may voluntarily choose to register and collect sales tax. CRA maintains online guidance that defines these terms for the purpose of GST/HST, but most goods and services qualify for sales tax. CRA has also made available guidance as to when a business should register.
Registering for GST/HST is an administrative burden, but it does provide the benefit of allowing the taxpayer to claim "input tax credits" - credits that allow taxpayers to recover the sales tax they paid on expenses they incurred while earning income.
These may be complicated issues for an influencer to handle, since some goods and services are exempt from sales tax and others are "zero-rated"; both such treatments of goods and services affect taxes to collect and remit and input tax credits that may be claimed. Influencers should also be careful to keep appropriate records (e.g. account statements, receipts) documenting any form of income they have earned through their efforts (whether monetary or non-monetary) to ensure that they meet CRA's evidentiary requirements.
International Tax Issues
Influencers also need to be aware of the international dimensions of Canadian tax law. If they travel extensively, issues of whether they are "resident" in Canada for the purposes of the Income Tax Act may occur. Similarly, income taxes paid to a foreign jurisdiction may generate tax credits that can be used to reduce taxes owed in Canada. Anyone selling goods internationally should also consider what sales tax issues may arise, either in Canada or in the country to which they are shipping goods. Generally, accounting issues are also likely to complicate an influencer's finances if income is earned in foreign currencies (including as barter transactions), which will need to be converted back to Canadian dollars to be taxed.
In addition, the Government of Canada has indicated, in its Fall Economic Statement 2020, that it intends to introduce a new "digital sales tax" that covers cross-border supplies of digital products and services in the summer of 2021. Although this new tax is aimed more at platforms than at influencers themselves, its precise implications for influencers will only become clear once the Government of Canada releases the final version of this tax.
Enforcing the Taxation of Influencers
CRA has made its intention to increase its efforts in enforcing the taxation of influencers clear. In comments to the Globe and Mail, the CRA's assistant commissioner said that CRA plans to use "open-source intelligence"—an information-gathering method that relies on publicly available information, such as social media posts—to identify influencers that may not have appropriately paid their taxes. Some influencers have apparently already been identified and contacted through these methods.
That being said, CRA has made available tools to assist influencers who may have in the past underreported their income. For anyone (not just influencers) that has previously earned income, but has not properly reported it, CRA's "Voluntary Disclosures Program" ("VDP") allows tax payers to mitigate many of the worst consequences of non-compliance. The VDP is available for either income taxes or GST/HST. Under either stream, taxpayers who have unintentionally underpaid their taxes will be relieved from prosecution, and, depending on the circumstances may be relieved from paying penalties and granted partial relief from interest on amounts owning.
Taxpayers must apply to the VDP and be accepted by the CRA, which considers the circumstances of both the taxpayer's non-compliance (e.g., did the taxpayer make efforts to avoid detection, was there gross negligence) and disclosure. Access to the VDP requires five elements. It must:
- be voluntary;
- be complete;
- involve the application or potential application of a penalty;
- include information that is at least one year past due; and
- include payment of the estimated tax owing.
Of course, a taxpayer who believes that they underreported their income would need to consider using the VDP before CRA begins enforcement efforts against them, which could include an audit or examination, requests or demands for information, or if the CRA has already received information about the taxpayer (e.g., through open-source intelligence).
Non-compliant taxpayers are subject to various penalties that include significant late payment penalties and interest charges, which compound for each tax period in which the taxpayer is found to be non-compliant. If CRA finds that the taxpayer was grossly negligent, it may impose further penalties of up to 50% of outstanding income taxes owed and 25% of outstanding GST/HST payments.
This bulletin lays out the basics of the tax implications, and complications, that influencers face. However, this is a new and quickly developing field that is subject to rapid change as online platforms alter their relationships with content creators and income streams newly develop (or disappear). With CRA now vocal about turning its attention to enforcement in this space, influencers should be mindful that they have appropriately structured their affairs to maximize their tax benefits.
These are urgent concerns and influencers should consider if they require professional advice. While this bulletin only provides information and does not constitute professional advice, our professionals would be happy to help individuals with more questions about this and other taxation topics.
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.