Are Canadian Cryptocurrency Reporting Requirements Coming? A Toronto Tax Lawyer Analysis
Posted: Tuesday, October 13th, 2020
The new U.S. tax form for 2020’s personal income tax has been released by the IRS, and many U.S. taxpayers have noticed the addition of a new question. After asking the U.S. taxpayer to fill in his or her personal information, the first question is stated as follows:
“At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
While cryptocurrency such as Bitcoin, Litecoin, and Ethereum has attracted major attention from U.S. and Canadian tax revenue agencies in the past decades, this is a new development where taxpayers are asked to directly declare whether they have had any cryptocurrency-related transactions or holdings in the past tax year. This signals the next step in cryptocurrency tax enforcement for U.S. as well as Canadian taxpayers.
Current CRA Cryptocurrency Policies
Currently, the CRA does not have a similar question on its T1 personal income tax forms for Canadian taxpayers. Nevertheless, CRA’s position is that cryptocurrency transactions are taxable under the Income Tax Act. The CRA’s internal tax law position regarding cryptocurrency is that cryptocurrency is considered a commodity and not a currency. Therefore, any gain from cryptocurrency transactions can result either in taxable business income or taxable capital gains.
When cryptocurrency is used to purchase a taxable property or service, the seller must collect and remit HST based on the fair market value of the cryptocurrency.
It is important to remember that the CRA’s position is not the law. While there is no issue that cryptocurrency transactions are taxable transactions one way or another the correct tax law characterization of cryptocurrency will ultimately be decided by new case laws as well as new legislation from the Canadian Parliament regarding the tax treatment of cryptocurrency. Please see our article discussing the tax treatments of cryptocurrency in-depth [https://taxpage.com/articles-and-tips/bitcoin-cryptocurrency-canadian-reporting-requirements-and-tax-planning-tips/]
Generally speaking, the CRA would look at a host of factors in determining the characterization of cryptocurrency gains as either taxable business income or taxable capital gains. These factors are:
- The nature of the property sold;
- The length of the period of ownership;
- The frequency or number of other similar transactions by the taxpayer;
- Work expended on or in connection with the property realized;
- The circumstances that were responsible for the sale of the property;
- The motive of the taxpayer.
These factors are not exhaustive in determining capital gains and business income. Furthermore, the taxpayer must calculate his or her cryptocurrency tax consequence upon each transaction. For example, when a taxpayer exchange certain amount of bitcoin for ethereum, he or she must calculate any taxable gains or losses at the moment of the transaction when it occurs. Canadian taxpayers with cryptocurrency income would be well-served by consulting an experienced Canadian tax lawyer to advise him or her on the nature of his or her cryptocurrency gains.
Cryptocurrency Tax Compliance
Since 2018, Canada has participated in the Joint Chiefs of Global Tax Enforcement. The Joint Chief of Global Tax Enforcement consists of five countries: Canada, the United States, the United Kingdom, Australia, and the Netherlands.
One of the main goals of this Joint Chiefs of Global Tax Enforcement agreement is to carry out tax information sharing and joint investigations between countries to discover cryptocurrency tax non-compliance. Over the past two years, the tax agencies from these five countries had conducted large-scale data exchange related to cryptocurrency on all aspects related to cryptocurrency investment. The scope of this information sharing includes offshore account information, information from digital wallet companies that were compelled through criminal investigation, and information about cryptocurrency promoters.
What is Next for Canadian Taxpayers
The inclusion of the cryptocurrency question by the IRS means the CRA may will step up its cryptocurrency-related enforcement actions in the near future and will consider the inclusion of similar questions on Canadian tax returns.
Furthermore, the additional cryptocurrency tax information collected by the IRS can be shared with the CRA through the Joint Chiefs of Global Tax Enforcement framework. Due to the highly international nature of cryptocurrency, information collected from U.S. taxpayers could give rise to clues for the CRA to tax audits against Canadian cryptocurrency holders and taxpayers.
As stated above, the CRA could follow suit and require mandatory cryptocurrency disclosures from individual taxpayers, cryptocurrency promoters, and Canadian-based cryptocurrency platforms. This could give rise to an additional mechanism for CRA to conduct tax audits for potential cryptocurrency non-compliance.
Voluntary disclosure if a Canadian Taxpayer is out of Compliance for Cryptocurrency
Given the likelihood of increased enforcement activities for Canadian cryptocurrency holders in the near future, it is prudent for Canadian taxpayers to do their tax due diligence on their past and current cryptocurrency holdings and trading activities. Canadian taxpayers who have not been compliant with the Income Tax Act for their cryptocurrency activities may take advantage of the voluntary disclosure program.
CRA Auditing Luxembourg Bank Account Holders
Posted: Wednesday, March 25th, 2015
CRA, the Canadian tax department, has started to audit holders of unreported offshore bank accounts in Luxembourg. They have the ability to charge Canadians who have not reported offshore income or assets with tax evasion. Any holder of unreported foreign assets or income should consider making a voluntary disclosure with the assistance of a Canadian tax lawyer in order to avoid prosecution and penalties.
The general eligibility criteria for CRA’s voluntary disclosure program (VDP) are the following:
- Voluntary: the CRA must have no knowledge about the taxpayer’s unreported income.
- Complete: the taxpayer must disclose tax information on all tax years in which the filings were inaccurate.
- Tax Owing: the taxpayer must owe tax to the CRA due to inaccurate filings.
- One Year Past Due: the taxpayer can only disclose information for tax years that is at least one year past filing due date.
If the general eligibility criteria are met, the taxpayer must demonstrate favorable facts regarding the following four factors in order to take advantage of the penalty and interest relief of the general stream of the CRA’s voluntary disclosure program. These factors are:
- Any efforts made to avoid detection;
- The dollar amounts involved;
- The number of years of non-compliance; and
- The sophistication of the taxpayer
Given the ever-increasing information sharing and enforcement actions related to cryptocurrency, time is of the essence for non-compliant taxpayers to file their voluntary disclosure without having their voluntary disclosure application dismissed because CRA has acquired knowledge of his or her non-compliance.
Pro Tax Tip – Due Diligence and Compliance for Cryptocurrency
Our expert Toronto tax lawyers can advise you on the complex issues regarding your past cryptocurrency tax reporting, if it should be reported on income account or as a capital gain and whether a voluntary disclosure application can be beneficial for you. We are going to defend your rights in all dealings with the CRA. All consultations with our tax law students and Canadian tax lawyers will be privileged and confidential.