The last couple of months have been turbulent for Shopify. Things don’t seem to end soon for the Canada-based e-commerce giant. Adding to the woes, Canada Revenue Agency (CRA) has now asked Shopify to provide it with six years’ worth of merchant records. The CEO of Shopify, Tobi Lutke has vowed to fight the demand from the Canada Revenue Agency.
“I don’t particularly want a fight with the CRA (Canada’s tax authority)- but we got asked to backchannel them six years of records for all Canadian Shopify stores,” Tobi Lutke wrote on Twitter.
Some really good thoughts on this case by Senator Colin Deacon https://t.co/pzLw5tZJyo via @colindeacon
— tobi lutke (@tobi) June 28, 2023
“This feels like low-key overreach to me. We will fight this,” further read the tweet. As per a report by Store Leads, a database of e-commerce stores, a total number of 121,651 live Shopify stores are present in Canada.
What is The Case?
The CRA, in an email told Global News that the information obtained via Unnamed Person’s Requirements (UPRs) is used to “identify taxpayers that may have been non-compliant”. It is also used to verify whether income has been reported appropriately and has satisfied “their filing obligations under the Acts administered by the CRA”.
“We collect information where it is lawful and directly related to compliance activities. The CRA must obtain judicial authorization before issuing a requirement to a third party to get information about one or more unnamed persons,” wrote Sylvie Branch, a spokesperson for the CRA.
Confidentiality provisions “of the Acts we administer,” prohibits CRA from commenting or disclosing taxpayer information. In its response to the reported request for merchants’ records, CRA did not specifically take the name of Shopify. To get authorisation to obtain these records, CRA filed a notice with the Federal Court in April. The records are meant to help the government verify if Canadian merchants are obeying the Income Tax Act and the Excise Tax Act.
What is in The Shopify’s Records?
The CRA, in a notice of application, said that Shopify’s records comprise sales amounts, identity and other relevant account details of the merchants, but maintained that “the minister does not know the identities of the relevant merchants.” Parties involved in the matter are requesting a one-day hearing to take place between February 13 and March 17, 2024.
“If the court grants the order, ordering Shopify to provide the records, data, Shopify must comply. If it doesn’t, there are potential criminal sanctions. If the court finds that the CRA is doing too broad a fishing expedition, it can refuse to grant the order sought. If this occurs, Shopify has no legal obligation to turn over the data,” said tax lawyer James Rhodes as quoted by The Globe and Mail. As it is CRA’s job is to gather income taxes and GST/HST from businesses, it seems impossible to see the court denying the request.
As per a report published on fintel.io, “most analysts believe that Shopify handing over these records to the CRA might be bad news for some customers, but it shouldn’t affect the platform’s reputation”. At present, it doesn’t appear to pose a problem for Shopify until the agency acquires the data and decides how many of the 121,000 stores will undergo a tax audit. Till then, “investors can’t be certain that the process won’t result in several stores shutting down, thereby reducing Shopify revenues,” the report stated.
CEO’s Response
It is understood that Lutke is not willing to look as if he and Shopify can readily provide information to the CRA. Fintel in its report wrote that Lutke is merely trying to appear sympathetic to its over 121,000 Canadian stores. However, it is a fight with little chance of success for Shopify. As the legal battle will consumer time and resources, it can adversely affect Shopify stock, stated the report.
Shopify CEO also shared a LinkedIn post by Senator Colin Deacon captioning it, “some really good thoughts on this case”. The post by Deacon read that CRA is on a fishing expedition as it is targeting small businesses. CRA should ask banks for their records but it won’t.
” I’m truly troubled by the fact that the first time the Canada Revenue Agency – Agence du revenu du Canada does something like this, they target an innovative new entrant versus an incumbent (Okay, yes Shopify is ~17 yrs old, but the incumbent banks are 10x older… on average they are even 25 years older than Canada). Think about it. Has any bank ever been targeted by the CRA to hand over the past six years of POS and banking records of all their business customers? Can you imagine the outcry if they did? (Think back to the Canadian Bankers Association outcry over Statistics Canada | Statistique Canada’s proposal five years ago.),” he wrote.
He said that CRA is intentionally disadvantaging Shopify, calling the e-commerce platform as one of the most successful businesses in the history of Canada. “The CRA is on a fishing expedition but, yet again, they’re targeting small businesses, not individuals or businesses who use offshore tax havens (something that Senator Percy Downe has been trying to get them to focus on for decades). To demonstrate that it is not intentionally disadvantaging one of the most innovative and successful businesses in Canadian history (and its customers), the CRA needs to ask the #BigBanks for exactly the same information. The banks’ POS and banking data would be just as helpful on this CRA fishing expedition,” he further wrote.
History of Conflicts
This is not the first time the CRA has demanded information from an e-commerce company. In 2017, the agency asked PayPal to turn over details regarding its account holders and number of payments and the amount paid or received by them between January 2014 and November 2017. CRA gave 45 days to the company to provide all the required information. It also demanded records from eBay.
Over the last two years, Shopify slashed its workforce in multiple layoffs. Shopify stock also plummeted after the CEO admitted that he wrongly estimated the COVID-19 pandemic’s impact on Shopify’s growth rate. After taking responsibility for the first round of layoffs, Lutke called the second set of layoffs a way to focus on its primary goal instead of spending resources on “side quests”. Besides slashing the workforce, Shopify also sold its logistics business to Flexport, a supply chain management firm, minimised the number of meetings staff has to attend and changing the employee compensation model. Last year, Shopify offered employees a “total rewards wallet” that enables them to choose between cash and equity for their compensation.
