Tax litigator urges cryptocurrency traders to be wary of Canada Revenue Agency's large-scale audit

Federal Court issues order which can compel cryptocurrency exchange to give certain information

Tax litigator urges cryptocurrency traders to be wary of Canada Revenue Agency's large-scale audit
Norman MacDonald, head of tax litigation at Rogerson Law Group

Cryptocurrency traders who have yet to report their trading profits should be aware that the Canada Revenue Agency is taking action against those who have not appropriately reported profits from cryptocurrency transactions, wrote a Toronto-based tax litigator.

According to Norman MacDonald, head of tax litigation at Rogerson Law Group, this is part of a broad audit covering the period from Jan. 1, 2013, to Mar. 19, 2021, spearheaded by the agency’s cryptocurrency section.

The Federal Court has issued an order allowing the national revenue minister to require Coinsquare Ltd. to provide certain information relating to unnamed persons, following the minister’s successful application for a judicial authorization under ss. 231.2(2) and (3) of the Income Tax Act and under ss. 289(2) and (3) of the Excise Tax Act.

The information that Coinsquare, Canada’s largest cryptocurrency exchange, should produce includes the names and details of all active and inactive customer accounts, whether held alone or jointly with other individuals or businesses, as well as customer bank accounts, transactions, cryptocurrency types, trading activity, know-your-customer documentation and addresses. The agency intends to use this data to decide whether Coinsquare customers have filed the necessary income tax returns, payroll remittances, and GST/HST returns.

MacDonald urges lawyers to remind cryptocurrency traders to get their affairs in order, report their income, and keep accurate records of their cryptocurrency transactions. Ideally, they should maintain a trading journal that records all their trades by date, the price paid, the price received, and profits or losses realized per trade.

Even for transactions beyond that period, failure to self-report can result in traders being subject to an audit, arbitrary assessment, penalties, interest or criminal prosecution, MacDonald says. He notes that the agency does not have a time limit for assessing someone for failure to report.

According to MacDonald, the agency treats a cryptocurrency as a commodity, more specifically as a digital asset, subject to tax when one disposes of it. CRA will likely consider business income if someone trades frequently with a view to short-term profit, which means that taxpayers should include it in income at 100 per cent. On the other hand, if one buys a cryptocurrency to hold onto it as an investment over a more extended period, the agency is more likely to treat it as a capital gain, which is taxed at 50 per cent of the realized capital gain.

MacDonald notes that the agency can more easily obtain a person’s foreign banking information, considering that most tax haven jurisdictions have signed tax information exchange agreements with the Canadian government.

“So, if you think that you’re safe because you’ve been using an offshore bank in Bermuda, you’re wrong,” MacDonald says.

MacDonald adds that tax authorities do not consider cryptocurrency legal tender because it operates beyond the central banking authority or government control. Instead, the CRA would treat it as a barter transaction for businesses that accept cryptocurrency as payment. Thus, such companies should report the value of the cryptocurrency received at the time as income.

MacDonald expects that the agency will seek similar orders against other cryptocurrency exchanges in the future, given that this is an ongoing project of its cryptocurrency section.

MacDonald helps taxpayers assert their rights when they believe that they have been wrongly assessed or treated unfairly by the Canada Revenue Agency and other government taxing agencies.

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