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CRA move to obtain PayPal information not yet an enforcement action

Although PayPal has informed certain business account holders that it was recently ordered to release the details of their transactions to the Canada Revenue Agency (CRA), this alone does not constitute an enforcement action or an audit by the taxman, Canadian tax lawyer David J. Rotfleisch writes in The Lawyer’s Daily.

Following previous audits of Uber to obtain information about drivers and a court order for the records of eBay PowerSellers, it was just a matter of time before the taxman set its sights on the digital payments platform, says Rotfleisch, founding tax lawyer with Rotfleisch & Samulovitch Professional Corporation.

As Rotfleisch explains in the article, s.s. 231.2(3) of the Income Tax Act and the equivalent Excise Tax Act section dealing with GST permit the minister of revenue to seek a court order for a requirement to provide information and documents relating to certain unnamed persons — referred to as an Unnamed Persons Requirement.

“Often referred to as a fishing expedition, the order requires information from a taxpayer not to audit that taxpayer but to audit third parties, usually customers of that person. Case law allowing these types of Unnamed Persons Requirements is now well established,” says Rotfleisch.

In November, he says, PayPal was issued a Federal Court of Canada order requiring it to provide the CRA with specific information about PayPal business account holders who sent or received a payment between Jan. 1, 2014, and Nov. 10, 2017. CRA began an audit of PayPal in January 2017 and argued that the court order was required to combat the underground economy.

As Rotfleisch notes, it does not appear that PayPal fought very hard against the order being issued. It consented to the motion being argued in writing — but did raise two grounds of opposition.

These, he says, are “namely that the authorization sought by the minister would interfere with the privacy of PayPal’s clients and that the Unnamed Persons Requirement is overbroad and unreasonable given the absence of any threshold amount for each transaction targeted by the requirement.”

However, writes Rotfleisch, the court said the expectation of privacy with respect to business records such as those targeted by the Unnamed Persons Requirement is very low and that intrusion into the privacy of third parties can be authorized if the requirements of paragraphs 231.2(3)(a) and (b) of the ITA and paragraphs 289(3)(a) and (b) of the ETA are met.

“The court also ruled that the Unnamed Persons Requirement relates to an ascertainable group of persons and is not overbroad, as it is limited to corporations and individuals holding a business account with PayPal and seeks transactional information aggregated on a yearly basis, for a period of four years,” he adds.

In addition, Rotfleisch says, PayPal did not file any evidence to support a claim that the Unnamed Persons Requirement is overbroad.

PayPal was given 45 days from Nov. 10 in which to release the information in compliance with the court order and has indicated it intends to do so. It is required to provide the information in Excel format on a USB key, he writes.

“With these details it should be a simple matter for CRA to data mine transaction volume over a certain dollar amount and compare it to income reported on taxpayers’ tax returns,” writes Rotfleisch.

A detailed audit questionnaire will likely be forthcoming if there is a discrepancy, says Rotfleisch, as all business transactions carried out in Canada, by Canadian residents or non-residents, are fully taxable and have to be reported to CRA. And, he says, when annual sales exceed $30,000, GST/HST may have to be charged.

Although PayPal has contacted business account holders advising that the details of their transactions are being forwarded to CRA, Rotfleisch says this does not yet constitute an enforcement action by the taxman.

“If the taxpayer has unreported business income or uncharged and unreported GST/HST, and has not yet been directly contacted by CRA on another matter, they should still be eligible to submit a tax amnesty (Voluntary Disclosure Program or VDP) application. This will mean no tax prosecution or tax penalties and a possible reduction of taxes owing,” he adds.

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