David Spratley Quoted in Business In Vancouver Regarding Second Life

Published: Tuesday, 13 November 2007

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First published in Business in Vancouver November 6-12, 2007; issue 941 | Curt Cherewayko

Taxing events in your business Second Life

The virtual world that’s being used to generate real money also features real tax and buyer-beware issues

It may be a virtual world, but Second Life is becoming a platform for Canadians to generate real world income that is as taxable as any other revenue.

Lower Mainland legal experts are now offering advice to people looking to conduct legitimate business in Second Life, lest the taxman come knocking on their real world door.

“I look at it as this is online revenue and it’s no different than any other online revenue,” said Andre Choquette, principal of Choquette & Company Accounting Group Inc.

“The defence of the naïve taxpayer is typically not a defence.”

The Canada Revenue Agency has recently shown interest in the income Canadians generate online. In a federal court ruling in September, Ebay Canada Ltd. was ordered to provide the CRA with the personal data of all its high-profile users, a precedent that could be used to gain access to information about Second Life users.

“That tells you that Revenue Canada is looking very keenly at online revenues,” said Choquette. “I don’t think it’s going to be any different, what’s going to be derived from Second Life.”

Brad Alvarez, CRA spokesman in Vancouver, confirmed the agency’s stance on income generated by Second Life users through the sale of everything from cellphones to real estate.

“Once they pull the money out and it becomes tangible and real, then they need to report it.”

Business deals in Second Life are completed in Linden dollars. Users can “cash out” their Linden dollars, which are converted to real American dollars (L$265 equal US$1).

Choquette, known as Azno Simons in Second Life, provides consulting services for established businesses considering expanding into the virtual world.

He recommended that anyone doing business in Second Life should set up two avatars, which are a user’s character representation in the virtual world.

One avatar is then used strictly for business interactions; the other is used for all other Second Life activities.

Then, at tax time, he or she can download the business avatar’s transaction history.

“It gives it that separation, which is what Revenue Canada insists on,” said Choquette.

“When you have a business, you have to separate your business entity from your personal entity.”

Canadians make up 3.14% of Second Life’s population.

In July, Canadians spent 811,560 hours in Second Life using the 17,615 active avatars that are registered in Canada.

“I think we’re seeing more and more real people migrating to these types of systems as entrepreneurs, for opportunities,” said Jason Boyer, a chartered business valuator with PricewaterhouseCoopers LLP in Vancouver.

Boyer helps companies maximize the value of their Second Life ventures and determine the risks associated with conducting business in the virtual world.

“I think transparency of financial information is paramount,” said Boyer.

“You want to have information that’s readily available; proof that your business is producing X dollars in revenue and X dollars in cash flow.

San Francisco’s Linden Lab, the maker of Second Life, doesn’t interfere much in the virtual world. It allows its economy to grow organically.

However, Linden can control the world’s environment and its policies.

That creates risk for any business within Second Life that is potentially affected by changes to landscape or laws.

For example, a number of residents and businesses were upset when Linden removed telehubs (teleport stations), which decreased land values around the hubs. “It’s the same process as a real world business,” said Boyer.

“It’s all about perceiving the risks related to the ability of that business to produce cash flows in the future.”

Vancouver’s Davis LLP recently opened a law office in Second Life.

The law firm will not be providing legal advice online, but will use the office as a connecting point for potential clients to learn about the firm, and receive general legal information.

Davis LLP has considered using the virtual office as a secure conference room where it can arrange client meetings that are similar to teleconferences and video conferences.

David Spratley, a lawyer with Davis’ video game law and interactive entertainment group, offers this advice to business or individuals who buy in Second Life:

“Be aware that it’s not the same as buying a real world physical object. You don’t necessarily know what you’re getting.

“You don’t necessarily know that the person selling owns it or isn’t infringing on someone else’s rights.”