According to one tax industry expert, Shopify’s win in its two-year fight against Canada’s tax authority could encourage other companies to challenge similar requests to provide client data.
Mohammed Al-Khooly
“I think this may empower a lot of these companies in Canada to be more encouraged to challenge the CRA on their requests rather than comply.”
CoPilotTax
Last week, the Federal Court of Canada sided with the e-commerce giant against the Canada Revenue Agency (CRA) by dismissing a request compelling Shopify to turn over information about Canadian merchants who use its software.
“I think this may empower a lot of these companies in Canada to be more encouraged to challenge the CRA on their requests rather than comply,” Mohammed Al-Khooly, a chartered professional accountant and co-founder and partner at CoPilotTax, a digitally focused accounting firm that caters to businesses, told BetaKit. “They could be more emboldened.”
The CRA used an “unnamed persons requirement” (UPR) to request personal information, banking details, and business data of Shopify merchants. The agency uses this mechanism to check for tax non-compliance by individuals or businesses whose identities it doesn’t have.
“CRA demanded 6 years of Canadian merchant data from us,” Shopify CEO Tobi Lütke wrote on X following the decision. “This felt like blatant overreach.”
The CRA has previously succeeded in obtaining UPRs to collect user data from other tech companies, including eBay in 2008 and PayPal in 2017. In the court’s eyes, the Minister of National Revenue overseeing the CRA failed to show these “Shopify merchants” were an “ascertainable,” or defined, group.
Al-Khooly said he was surprised by the federal court decision. He told BetaKit that he expected the court to consider Shopify sellers an “ascertainable” group, as it had with eBay sellers in a past ruling. He thought the CRA’s request was reasonable and within the scope of the law.
Tax lawyer David Rotfleisch told the Toronto Star in 2023 that Shopify would likely lose this case, adding it was “not worth them to throw more time and money at it.”
However, Al-Khooly added that the CRA targeted “PowerSellers” in the eBay case, a defined group that “might have been more specific” than the group of Shopify merchants.
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In 2023, the Minister of National Revenue filed an application to the federal court requesting six years of earnings data from Shopify’s Canadian merchants. The backlash was swift: Lütke said Shopify would fight the request, and Sen. Colin Deacon, a Halifax senator who is a tech founder and former CEO, called it a “fishing expedition.”
Obtaining third-party data via UPRs is part of a CRA strategy to crack down on tax non-compliance, outlined in the agency’s 2022 “Underground Economy Strategy.” The CRA defines the underground economy as “economic transactions in goods or services which are unreported, resulting in failure to comply with tax laws administered by the Canada Revenue Agency.” An affidavit written by CRA senior technical analyst Paul Kalil for this case says the agency had “concerns that Shopify’s ‘Merchants’ may be participating in the underground economy” and were not following tax law.
The CRA can demand the tax data for unidentified businesses as long as it receives judicial authorization. Two conditions must be met for approval: the person or group whose data is being sought must be “ascertainable,” and the request must be to check that the group is complying with Canadian tax law.
According to the ruling, Shopify claimed the CRA’s target group of Shopify merchants was “overly broad and inconsistently defined,” and that the CRA had not established a “good faith audit purpose” for its request. The CRA used terms such as “merchants” and “owners” interchangeably, which Shopify argued made the request unworkable.
The federal court ruled in Shopify’s favour and dismissed the CRA’s request. In the ruling, Justice Guy Régimbald wrote that the federal court could authorize a UPR when a third party is “able to understand who exactly is targeted by the UPR request” and what information they must provide. He added the court would not authorize a request that was “unintelligible, incoherent, or otherwise beyond its understanding.”
The CRA had filed a separate application in 2023 requesting Shopify merchant data on behalf of the Australian Tax Authority. The court also rejected this UPR because this type of request is meant to verify compliance with Canadian tax law only, according to the ruling. The court ordered the Minister of National Revenue to pay a total of $90,000 in legal costs to Shopify.
Disclosure: BetaKit majority owner Good Future is the family office of two former Shopify leaders, Arati Sharma and Satish Kanwar.
Feature image courtesy Shopify.