Shopify Inc. (TSX: SHOP) CEO Tobi Lütke has pledged to vigorously oppose the Canada Revenue Agency’s (CRA) demand for access to tax records from over 121,000 Canadian businesses. Lutke referred to the CRA’s request as an “overreach” and expressed his intention to fight back.
In a tweet, he stated that the Ottawa-based e-commerce giant had been asked to provide six years’ worth of records for all Canadian Shopify stores through a backchannel. Lütke firmly believes this request goes beyond what is necessary and indicated that Shopify would not comply without a fight.
“I don’t particularly want a fight with the CRA (Canada’s tax authority)- but we got asked to backchannel them 6 years of records for all Canadian Shopify stores. This feels like low-key overreach to me. We will fight this,” Lütke tweeted.
In response to the situation, a spokesperson for the CRA issued a statement on Sunday explaining that the agency must obtain judicial authorization before compelling a third party to disclose information about unnamed individuals.
“The Canada Revenue Agency uses the information obtained through Unnamed Persons Requirements (UPRs) to identify taxpayers that may have been non-compliant, and verifies that they have appropriately reported their income and have satisfied their filing obligations under the acts administered by the CRA,” the statement said.
The statement emphasized the CRA’s commitment to safeguarding taxpayer information and adhering to privacy standards. It further clarified that confidentiality provisions prevent the agency from disclosing or commenting on taxpayer information.
Although specific details regarding the CRA’s inquiry into Shopify’s records have not been disclosed, it is not unprecedented for the agency to target e-commerce platforms over concerns of tax evasion. Past instances include investigations into PayPal and eBay, particularly focused on high-earning sellers who were required to report their earnings to the agency.
Federal Court records reveal that the minister of national revenue filed a notice in April pertaining to Shopify, citing relevant sections of the Income Tax Act and Excise Tax Act related to acquiring documents or information with authorization. These acts necessitate approval from a Federal Court judge to obtain documents from third parties, in this case, Shopify.
“Shopify maintains records that include the identity, sales amounts and other relevant account details of the merchants,” said in the filing. “The group is ascertainable and the identities of the relevant merchants are known to Shopify.”
Mohammed Hassan, a partner at Toronto-based accounting firm Tax Heroes, commented that it appears likely that the CRA or the minister of national revenue will meet the requirement set by the court. To satisfy the court, the group in question must be ascertainable and linked to tax compliance, indicating that the request is not arbitrary.
Hassan highlighted previous instances involving the CRA’s requests for records, such as the case of Canadian cryptocurrency exchange company Coinsquare. He noted that while the general statute of limitations for auditing is three years, the CRA can investigate further if evidence suggests misrepresentation or gross negligence.
Regarding Lütke’s statement, Hassan suggested that it is likely intended to protect the reputation of Shopify merchants.
“Most likely the court will issue that order and they [CRA] will be able to get that,” he added.
The timing of this request coincides with Shopify’s announcement of a 20% reduction in its workforce following layoffs of 1,000 employees the previous summer. Shopify’s first-quarter earnings report, published on May 4, disclosed earnings of $68 million for the quarter ending March 31, 2023. Additionally, revenue rose by 25% to $1.5 billion compared to the previous year.
Hassan suggested that the CRA’s request could potentially lead to audits of certain merchants, particularly those who may not have reported all their earnings or failed to charge appropriate taxes.
Shopify Inc. last traded at $84.11 on the TSX.
Information for this briefing was found via CTV News and the sources mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
