Each year I help over 500 clients file their Canadian and US tax returns as well as plan for both their Canadian and US investment accounts. I also regularly help new US clients plan for their move to Canada.
On September 18, 2020, the CRA applied to Federal Court in an attempt to obtain client’s confidential tax information from Coinsquare Ltd., a Toronto-based cryptocurrency trading platform. Included in the application was a request to view trading and holding information. This filing is one of a series of significant moves by the CRA following its promise to put new emphasis on enforcement focused on several digital trends, including the rise in prominence of such cryptocurrencies as Bitcoin, Ethereum, XRP, and Tether. Specifically, the CRA is asking for data on all Coinsquare’s clients extending back to 2013, most likely for reasons pertaining to tax audits, collections, and other tax administration details.
CRA attempts to secure similar broad scope release of client information with mixed results in the past. In 2017, the CRA successfully obtained the names of all persons that held corporate accounts with PayPal Canada. A year later, the Court rejected a request to obtain access to information about a majority of the business customers of Hydro-Québec (HQ) for a 24-month period. The Court declared the latter case “a fishing expedition” and concluded that the decision was necessary to avoid an unjustified invasion of privacy of a large number of Quebec residents. A third similar case involving Roofmart Ontario Inc. was initially ruled in favor of the CRA but is now working its way through the Appeal Court.
A Page from the IRS Playbook
In several ways, the CRA is following the strategy of its U.S. counterpart. The IRS has been active in this arena for some time. In November 2017, the U.S District Court ordered Coinbase to release user accounts that traded sums above US$20,000 any time in the period between 2013 and 2015. Although the IRS did secure access to this information, most legal analysts saw the case as a victory for taxpayers and the cryptocurrency exchange platform since the original request was to release a much broader scope of information.
What this means for Canadian Taxpayers
Regardless of the Coinsquare and Roofmart cases’ final decisions, the message is clear: Canadian taxpayers trading and holding cryptocurrency have been put on notice.
One way to avoid unnecessary and unwanted attention as well as a potential audit is to consider the Voluntary Disclosures Program (VDP). According to the CRA, the VDP gives taxpayers “a second chance to correct a tax return [they had] previously filed or to file a return that [they] should have filed.” If the VDP application is accepted, the taxpayer would be responsible “to pay the taxes owing, plus interest in part or in full. However, [they] would be eligible for relief from prosecution and, in some cases, from penalties that [they] would otherwise be required to pay.” The CRA goes on to clarify:
“As the majority of Canadians file and pay their taxes in full and on time, it is important that the relief provided under the VDP be fair and not reward individuals or corporations looking for a way to avoid paying their fair share of taxes. To ensure fairness for Canadians, applications for relief from taxpayers who intentionally avoided their tax obligations will not get the same relief as those who want to correct an unintentional error. The CRA will also restrict participation in the VDP if it has already received information on a taxpayer’s (or a related taxpayer’s) potential involvement in tax non-compliance; for example, a leak of offshore financial information, or other information that names the taxpayer.”
As of March 1, 2018, the CRA offered 2 tracks for VDP applicants to choose from:
- A General Program for taxpayers who want to correct unintentional errors. Under this track, a taxpayer will not be charged penalties or referred for criminal prosecution. The CRA might also see to grant partial tax relief for the years preceding the 3 most recent years of returns that must be filed (generally in the range of a 50 percent reduction).
- A Limited Program for taxpayers “who intentionally avoided their tax obligations.” If an application is accepted under this track, the taxpayer will not be referred for criminal prosecution related to the information disclosed and will not be charged gross negligence penalties. However, they will be charged other penalties as applicable.
The CRA weighs several factors before determining if an application is accepted into the Limited Program track. These include:
- Did the taxpayer make efforts to avoid detection through the use of offshore tax havens or other means (see our previous blog discussing the CRA crackdown on tax havens)
- The dollar figure disclosed in the application
- The number of years of non-compliance
- The sophistication of the taxpayer
- If the taxpayer is disclosing in reaction to an official CRA statement or broad-based correspondence about a compliance issue.
For now, watch this blog for updates on this issue and the critical cases as new information appears.