CRA targets Shopify customers, wants six years of tax records from Shopify

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The Canada Revenue Agency has set its sights on Shopify Inc. SHOP-T customers and is seeking six years of their tax records from the e-commerce company.

It is the latest headache for Ottawa-based Shopify, which has had to slash jobs, change its compensation structure, and sell its delivery and warehousing operations, in an attempt to get back to its core e-commerce business and improve its ailing stock price.

The federal government started the process to obtain the information from Shopify earlier this year, according to a notice of application disclosure dated April 14 on the Federal Court website.

It is not known whether the CRA has any evidence that Shopify’s customers have not been complying with federal tax laws.

But because the CRA is seeking tax information about Shopify’s clients from Shopify itself and not directly from the company’s customers, it must obtain permission from a judge under the so-called unnamed persons requirement in the Income Tax Act. No order has yet been issued, according to the Federal Court website.

“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,” said James Rhodes, a lawyer with Taxation Lawyers. “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,” he said.

Mr. Rhodes said Shopify had already signalled its intention to fight the CRA by filing a motion of appearance with the Federal Court. That was dated April 21, a week after the federal government’s initial filing.

Shopify’s chief executive Tobias Lutke said late on Friday that his company would fight federal tax authorities.

“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,” Mr. Lutke said in a tweet.

Jamie Golombek, tax expert with CIBC’s private wealth unit, said the agency is likely trying to verify that Shopify’s customers reported all of their income for tax purposes and properly collected GST and HST on sales.

The CRA has successfully used the ‘unnamed persons requirement’ to audit businesses’ customers, such as when it went after Home Depot’s commercial customers in an attempt to crack down on the underground economy in the construction industry.

The agency said on Sunday that it takes the security and privacy of all taxpayer information very seriously.

Shopify analysts said the CRA request would prove to be a bigger problem for Shopify’s customers than the company itself.

“Any risk to Shopify is low and more than likely there is greater risk to an individual merchant from a tax liability point of view,” said Rick Watson, chief executive with RMW Commerce Consulting, an e-commerce consulting firm.

Mr. Watson said Mr. Lutke’s tweet about fighting the CRA would curry favour with Shopify’s customers and is part of its public-relations strategy of showing that it is a “friend of merchants.”

Another Shopify expert said If a judge rules in the CRA’s favour, Shopify would simply be complying with Canadian laws. “I don’t think there would be a material impact on the company from a reputational or business standpoint,” said Dan Romanoff, a senior tech analyst for Morningstar Inc.

Shopify did not respond to a request for comment on Sunday.