Canada Revenue Agency to Audit Canadian eBay PowerSellers

Canada’s Minister of National Revenue recently announced the Canada Revenue Agency’s intention to audit certain Canadian sellers (so-called high volume “PowerSellers”) of products on eBay, which is the world’s largest global online marketplace. The Canadian tax authority, which has long been concerned about a lack of tax compliance in respect of electronic commerce, wants to determine if those sellers have properly reported the income earned from their online sales.

The Canada Revenue Agency’s decision to audit the eBay sellers follows a series of Federal Court decisions confirming the tax authority’s ability to force eBay’s Canadian companies to disclose the names and other contact information of the Canadian PowerSellers. The Canada Revenue Agency had successfully applied to the Federal Court to require eBay to provide the names and contact information of the sellers. eBay then challenged the Federal Court’s decision, arguing that the names and contact information were “foreign-based information” stored on servers in the United States owned by a U.S. eBay company. Because the contact information was “foreign-based information”, argued eBay, the Federal Court did not have the power to authorize the Canada Revenue Agency to force eBay’s Canadian companies to disclose the information.

The Federal Court of Appeal ultimately rejected eBay’s arguments, finding that the information sought by the Canada Revenue Agency was not “foreign-based information” because that information was easily accessible by eBay’s Canadian companies. It was not necessary that eBay’s Canadian companies actually download the information to computers in Canada. It was enough that eBay’s Canadian companies had access to the information online.

The Canada Revenue Agency will begin its audits at the end of summer 2009. In the meantime, it is encouraging eBay sellers who/that have not reported all of their business income from eBay sales to come forward before the audits begin, under the Canada Revenue Agency’s Voluntary Disclosures Program. This is an amnesty program that lets a taxpayer disclose unreported income without fear of prosecution or penalties, if (among other things) the disclosure is complete and is made before the tax authority begins enforcement action against the taxpayer.