Features | From Pivot Magazine

The trouble with taxing the gig economy

If the CRA doesn’t figure out how to tax the gig economy, it risks losing billions

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photo of business person holding butterfly net with illustration by Leeanandra Ci of currency with wingsSelf-employment income is difficult to track since it lacks the web of official reporting requirements that attends employment income (iStock/Leeandra Ci)

There’s barely a sector, slice or nook of the business world that hasn’t been disrupted in some way by the app-based sharing economy. From taxis to home repairs to banking to web content—all have felt a squeeze from this tidal wave of digital collaboration. Now it’s the taxman’s turn. As much of the underground economy shifts from under-the-table cash payments to digital income earned beneath-the-screen, the ability of federal and provincial governments to collect taxes owing is also being disrupted. With the global sharing economy predicted to hit $335 billion by 2025, and with Canadians already eager participants, the gig economy tax gap is becoming a problem. How will Canada respond?

Spurred by concerns about the underground economy, the Canada Revenue Agency recently launched a research project to calculate the tax gap—that is, the tax bill Canadians likely owe but haven’t paid. Based on 2014 data, the CRA estimates unpaid taxes at $8.7 billion from domestic personal income, $2.9 billion for GST and up to $3 billion arising from personal income hidden offshore—for a total of $14.6 billion. It’s a big number. But the CRA study readily acknowledges “compliance challenges related to technological change” will push it higher.

“The digitization of the sharing economy means people can now access markets around the world instantly and inexpensively,” observes John Oakey, Collins Barrow’s director of national tax services, based in Halifax. “And as more and more people participate, the possibility of their trades falling into the underground economy becomes a bigger problem.” Once it was a wink and a palm-full of bills for the carpenter who built your deck or the mechanic who changed your oil; today it’s ride-share drivers and web designers plying their trade on Fiverr who may not be handing over their share of taxes.

The people who work in the sharing economy are almost entirely self-employed, and self-employment income is difficult to track since it lacks the web of official reporting requirements that attends employment income. If all 2.2 million self-employed Canadians were fully audited, the CRA has calculated, up to $3 billion more in taxes would be assessed, or $1,224 per person, per year (both figures in 2009 dollars). As the sharing economy lures greater numbers of people into self-employment, this tax gap grows in step. This includes both determined tax evaders as well as those who may simply be unaware of their tax obligations. “We are seeing a bigger ‘ignorance factor’ arising from the sharing economy,” says Bruce Ball, CPA Canada’s vice-president, taxation, and a member of the federal minister of national revenue’s Underground Economy Advisory Committee. “A lot of people participating in these new areas simply don’t understand the tax implications of their activities,” he says.

If all 2.2 million self-employed Canadians were fully audited, the CRA has calculated, up to $3 billion more in taxes would be assessed.

“Challenges come from an increase in the number of taxpayers engaged in underground economic activities,” admits CRA spokesperson Dany Morin, citing the responsibility of taxpayers to properly report all income they earn, whether digital or tangible. “However, these challenges are easily overcome with the use of technology that enables the CRA to identify those tax­payers engaged in the ‘sharing’ and ‘gig’ economies.”

Morin’s optimism arises from the one essential aspect of the entire app-based sharing economy—a centralized digital platform that brings buyers and sellers together. Whether you’re staying at an Airbnb apartment or hiring someone to hang a big screen TV via TaskRabbit, there’s going to be an electronic record of that exchange. “The ability to track what people are earning has become significantly easier,” says Oakey, pointing to a series of court cases that forced eBay to turn over data on their biggest Canadian sellers for tax compliance purposes. The same technology that’s facilitating the growth in the underground economy may thus hold the key to reining it in.

That, of course, assumes buyers and sellers don’t decide to settle accounts privately and in cash, outside the app, once they’ve made contact. As well, since most apps resist giving up any crucial data voluntarily, extracting all the necessary evidence one platform at a time can be a daunting task. Determined tax cheats may also try to avoid justice simply by moving from app to app. Given all this, Oakey suggests, it’s likely the CRA will eventually abandon its current ad hoc approach in favour of something more efficient and comprehensive. In the long run, he figures participants in the sharing economy will face some sort of federally legislated pay-as-you-go system in which personal income tax is deducted from every transaction on every app, not unlike how income tax is withheld at source for the more traditionally employed work force. “It might take decades,” he says. “But eventually it’s going to get much simpler for the CRA to figure out who’s earning what.”

The same scenario will likely hold true for sales taxes, suggests Mitch LaBuick, partner in indirect taxes at BDO Canada in Edmonton. Anyone who’s not declaring income from the digital sharing economy is unlikely to register for HST/GST or provincial sales tax. But then again, the CRA has the ability to follow those transactions by accessing the platform data. Governments have also acted swiftly to close potential loopholes. In the 2017 federal budget, for example, Ottawa settled the question of whether Uber was responsible for collecting HST/GST by amending the definition of a taxi business.

Transplanting the European VAT system to Canada and the U.S. is obviously complicated by politics.

All this leads inevitably to the problem in taxing not just sharing-economy platforms, but any digital-only service operating across borders. “If you don’t have a physical presence in the province, how does the government collect that tax?” asks LaBuick. While the federal government has so far resisted demands for a so-called “Netflix tax” imposed on all digital and intangible goods and services, Quebec is breaking new ground.

Starting this January, foreign firms selling “intangible” products and services to Quebec consumers will be required to collect and remit the province’s sales tax—covering Netflix subscriptions as well as sales made on foreign-based digital platforms. “This is the way things are going,” says Maryse Janelle, tax partner at Raymond Chabot Grant Thornton in Montreal. She notes the new system is largely modelled on the European Union VAT system that features a simplified registration procedure for digital platforms. “It is easy, convenient and not an unfair burden on suppliers,” says Janelle. “And it allows government to avoid a loss of taxes.”

Transplanting the European VAT system to Canada and the U.S. is obviously complicated by politics. But a recent court ruling is pushing the U.S. in that direction, and Canada would certainly benefit from being inside any continent-wide system. “Ultimately, the complications [of sales tax collection in the sharing economy] will reach a tipping point and everyone—business and government together—will want a centralized, simplified solution,” says LaBuick.

A simple solution, that is, until the anonymous world of cryptocurrency takes over everywhere and upends tax collection all over again.