'If Canadians could figure out how to get paid to play Call of Duty, the CRA needs to figure out how to tax that' Author of the article: Christopher Nardi
OTTAWA – Every time Kylie Jenner — a massively popular American social media influencer and member of the Kardashian family — posts an advertisement for a product on her online accounts, she reportedly earns over $1 million from the brand.
Canada also has its fair share of social media influencers. Take Evan Fong, a Toronto area videogame commentator and streamer better known as VanossGaming, who reportedly raked in US$17 million in 2018 by attracting eyeballs to his social media channels such as YouTube.
The CRA is watching you: Auditors scouring social media for unreported income from influencers
Another influencer, Laval-raised video game streamer Félix “xQc” Lengyel, reportedly earned nearly US$2 million in 2020 on Twitch, an extremely popular live streaming service online. His job? Playing video games in front of tens of thousands of fans, who often pay money to subscribe to his channel and can even donate money to him.
Fong and Lengyel (who is now based in the U.S.) are just two random examples of the breathtaking revenues that some Canadians are earning through online platforms. And numbers like those have caught the Canada Revenue Agency’s attention.
If somebody’s declaring less than $5,000, and they have a Mercedes Benz in their Instagram posts, it’s clear that there’s a question to be answered
The CRA is jumping on hundreds of Canada’s top social media influencer’s pages, parsing their content to spot any obvious signs of wealth or gifts. Then, they open up the individual’s tax filings and compare what they see online with what the person previously declared as earnings.
“If somebody’s declaring less than $5,000, and they have a Mercedes Benz in their Instagram posts, it’s clear that there’s a question to be answered there,” said Ted Gallivan, Assistant Commissioner at the Canada Revenue Agency and head of the agency’s compliance programs branch, in an interview with the National Post.
Scrutinizing social media is only one of the new methods the CRA is using to tackle tax evasion or avoidance by individuals working in the platform economy, a vast and booming sector where Internet or mobile applications serve as the main medium for promoting and selling a product of service.
Though they applaud the CRA’s efforts, some experts wonder about the privacy and ethical issues when tax authorities start going through taxpayers’ social media.
For the CRA, the platform economy is broken down into four categories: the sharing economy (such as AirBnB, Uber or Lyft), the gig economy (Doordash), peer-to-peer sales (eBay or Kijiji vendors) and social media influencers (Twitch, YouTube, Instagram). It’s an economy worth tens of billions of dollars at least in Canada alone.
But the novelty of these platforms, and the fact they operate solely online, is forcing the CRA to innovate in its auditing and verification techniques (such as parsing through people’s online public presence).
And in some cases, the results of the social media monitoring have been surprising. Gallivan says there has been a small number of “very large discrepancies” detected, meaning that their public life shows they “obviously have multiple sources of income”, but their latest income declaration is… $0.
We come to a social media platform, and we would ask ourselves: who are the power users, the power sellers, or any kind of top tier and then simply consult their tax returns
These influencers can be anything from people who make a living off product placement on their Instagram account with thousands or sometimes millions of followers, entertainers who rake in revenue from ads that play before their YouTube videos or fans who pay monthly subscriptions to watch them play video games online.
“We come to a social media platform, and we would ask ourselves: who are the power users, the power sellers, or any kind of top tier and then simply consult their tax returns,” said Gallivan.
“The social media sites themselves can give a sense of somebody’s popularity and revenue. And then within the posts themselves, prize money or assets they’ve received are right there. So you have the physical evidence that facilitates a conversation with the person about their obligations,” he added.
In addition to surveying social media accounts for Canada’s top influencers, the agency’s auditing division created a new, distinct unit that focuses “exclusively on the platform economy.” The unit currently staffs 60 people drawn from CRA’s more traditional auditing teams.
“They do a mixture of preventing non-compliance through something like e-invoicing, and then education, and then traditional audit,” he said.
E-invoicing is an automated digital exchange of transaction documents between two parties done directly through their accounting or sales systems. Not only is it more often more convenient for organizations, but it also creates a traceable trail of documents for CRA auditors.
The growth of the platform economy in Canada has been eye-popping in the last decade. According to Statistics Canada, revenues just from short-term accommodation in 2018 were 10 times more than in 2015, jumping from $265 million to $2.8 billion in the span of three years.
An earlier study of the gig economy by the same agency showed that 8.2 per cent of Canadian workers said they were part of the gig economy in 2016, up from 5.5 per cent roughly one decade earlier.
If Canadians could figure out how to get paid to play Call of Duty, the CRA needs to figure out how to tax that
“We know that segment of the economy is going to grow,” Gallivan said. “The gig economy and platform-based sales are definitely the future.”
“If Canadians could figure out how to get paid to play Call of Duty, the CRA needs to figure out how to tax that,” said Gallivan.
To do so, the agency’s new platform economy audit and verification team is conducting a series of “exploratory audits”. The idea is for auditors to test and identify the best techniques to spot any undeclared revenues tied to the platform economy.
To date, the assistant commissioner says the agency has completed 40 such audits and reassessed roughly $500,000 in total suspected unpaid taxes. There are another 200 audits currently underway.
“Those 40 audits are really almost learning opportunities for the CRA. We’re not yet operating at scale. We’re doing these audits to really understand what’s the most efficient way to get at this, what’s the fine line between where we can nudge by telling people we have information versus a full audit. So I don’t think they represent maturity at all,” Gallivan said.
CRA also uses two software tools called Chainalysis and Cypertrace that help it track cryptocurrency transactions — which can be used as payments on certain digital platforms — as well as detect potential fraud and money laundering.
“The software tools kind of help us estimate what is the actual income flow so that we can compare that to the tax return,” he said.
It’s kind of unusual for the CRA to go spy on taxpayers
But is all of this enough to tackle the emerging risk of aggressive tax avoidance or evasion in such a booming market for Canadians?
Two renowned Canadian tax experts interviewed by National Post applaud the agency’s desire to tackle the issue so early on, noting that it’s interest in the platform economy is “bang on”. But they have concerns as to how it’s being done and even if the CRA is investing enough resources.
“CRA is actually doing a good job with respect to taxing these social media influencers. This is a relatively new space, which is growing very quickly,” said Arthur Cockfield, associate dean of Queen’s University faculty of law and tax law expert. “That’s why I think the CRA is right to do its test audits and monitoring at this stage of the game, and then get ready for the future.”
He, just like Gallivan, believes that tax evasion or avoidance in the platform economy is still a drop in the water compared to the traditional underground economy (think the construction or hospitality industry, for example), but that is inevitably poised to change.
“It’s going to persist, and it’s only going to get worse,” Cockfield said.
But he admittedly has concerns about how CRA is sniffing around Canadians’ social media accounts, which he feels is possibly overly invasive despite the public nature of such postings.
It prompts a lot of taxpayer privacy concerns on my part
“It’s kind of unusual for the CRA to go spy on taxpayers, which raises interesting policy, ethical and maybe even legal issues. Do they have the legal authority to investigate you when there is no evidence of individual wrongdoing?” he asked.
“It prompts a lot of taxpayer privacy concerns on my part. I’m not disagreeing with the CRA strategy in the sense that it’s a pragmatic strategy that could work. But it does raise privacy issues.”
David Rotfleisch, founding partner at Rotfleisch & Samulovitch, also agrees that the underground platform economy will likely emerge as a “significant” issue for the federal government and that CRA should hone its tools to deal with it as quickly as possible.
Considering that, he thinks the federal government desperately needs to beef up its platform economy verification unit.
“I really have concerns about the ability of 60 people to solve this problem going forward. It’s a whack-a-mole thing, and you need a lot of people to whack all the moles. It keeps growing, and I don’t see how 60 people can keep up with that,” he said.
But Gallivan says that the team is small for now because the agency is still focused on using the carrot while sharpening the stick. In other words: educating taxpayers involved in the platform economy on their tax obligations instead of jumping straight to audits.
A lot of undeclared income derived from this emerging industry is due to the fact it is so new — and thus people don’t understand their tax obligations — and because the users are generally younger, Gallivan adds.
“It can be a slippery slope too. You can play a video game just for fun or connection the first time and you might get $50, or a coupon or anything like that. So it starts innocently enough. But then it starts to be tens of thousands of dollars, and in some cases you’ve reported even millions of dollars,” he said.
“I think the newness and that transition from it being something you’re doing for fun to it starting to be business income and your full time job. So we definitely want to lead with a message of education.”
When it comes to methods, Rotfleisch argues that CRA auditors should continue to “think outside of the box” and find “creative audit methods” to help detect when a taxpayer isn’t paying their fair share.
“I have no sympathy for people who have a Mercedes in the driveway and who are reporting zero dollars on their tax filings.”
But like Cockfield, Rotfleisch warned that methods like parsing through social media posts could present dangerous pitfalls for the CRA. For example, luxury items displayed on social media could have been purchased after receiving a hefty inheritance, which is non-taxable.
“I’m very much afraid CRA may jump the gun in certain cases, and that can create an uphill battle for the taxpayer,” Rotfleisch said.
All that being said, both him and Cockfield thinks the CRA should still focus on the areas it’s regularly been losing court cases lately: large corporations.
“CRA recently lost a case involving a company named Camco, where the present value of the revenue loss is a billion dollars. That’s a lot of money,” Cockfield said.
“In other words, they’re going after thousands of these influencers, who are bringing in as much tax as one corporate taxpayer.”