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Direct Sellers Involved in Tax Schemes?

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Direct Sellers and the distributor and representative businesses that work closely with them should be no stranger to oversight and scrutiny from all levels of government, no matter where they operate.

The Canada Revenue Agency (“CRA”) recently added one more headache for in-house Law Departments and other Compliance Professionals with Direct Selling Companies, issuing a warning exclaiming: “Watch out for tax schemes involving multilevel marketing businesses!” (the “Warning”).

That effectively requires all Direct Sellers operating in the Canadian marketplace to review their Policies and Procedures (and other training materials) to ensure their salesforces comply with all relevant rules regarding the recruitment of further participants into the Direct Selling Plan, and with particular reference to how potential the tax benefits of joining a Plan are referenced, if at all.

CRA Warning

The CRA’s Warning was released October 12, 2023, and warns Canadians to be on the lookout for tax schemes that encourage participants to deduct expenses and claim business losses to offset taxable income through a direct selling plan.  The CRA notes that “many participants in a multilevel marketing business[es] earn minimum amount (sic) of income…” but are “encouraged by company promoters to deduct excessive personal and business expenses”.  This generates regular business losses which allow the participant to potential receive a large tax refund which CRA alleges they may not be entitled to.  

Despite the CRA’s concerns, it may well be possible for the various “independent contractors” participating in Direct Selling Plans to operate as independent business owners and in doing so, deduct reasonable business expenses from their business revenues.  In doing so, they ought to rely on their own professional advisors.

Other Restrictions on Promoting Direct Selling Plans

While not expressly addressed in the Warning, CRA’s overall message dovetails nicely with various existing restrictions on the promotion of Direct Selling Plans found in Canada’s Competition Act

For example, members of the industry should generally be well-aware of the prohibition on income and lifestyle representations, which may NOT be made unless the representation constitutes or includes fair, reasonable and timely disclosure of compensation actually (or likely to be) received by typical participants in the Plan (see section 55(2) of the Competition Act)  — typically taking the form of a Statement of Typical Participant’s Earnings which must accompany each individual earnings/lifestyle representation.

The Warning also brings to mind the separate requirements under Canada’s “anti-spam” legislation (colloquially known as “CASL”) which govern the sending of commercial electronic messages without express or implied consent, subject to certain exceptions. 

Takeaways

While the CRA Warning makes no reference to any specific incidents or scheme, nor targets any specific Direct Selling companies operating in Canada, all Direct Selling companies in the Canadian marketplace should take notice.

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