Author: Graham Purse
There have been a number of developments with respect to the taxation of cryptocurrency in Canada. The CRA has recently updated its compliance guidelines and appears to be engaged in increased Bitcoin audit activity.
Compliance
On March 8, 2019, the CRA released updated compliance guides on cryptocurrency. The CRA takes the view that payments made with cryptocurrency (e.g. Bitcoin or other forms of digital currency) can lead to income or capital gains, depending on the nature of the transaction.
The Income Tax Act (Canada) (the “ITA”) already contains rules that can subject cryptocurrency transactions to taxation. These rules include the broad definition of business income contained in section 9 of the ITA, the broad definition of employment income found in section 5 of the ITA, and non-arm’s length transactions for inadequate consideration in section 69 of the ITA. Barter transactions are characterized by reciprocal exchanges of value without the use of legal tender; obviously, the CRA takes the view cryptocurrency transactions come within the intendment of the various provisions the ITA.
The CRA has also opined on other forms of cryptocurrency transactions. In 2013-0514701I7, the Rulings Directorate explained that cryptocurrency can be donated to charity, and that trading or speculating on cryptocurrency would be dealt with for tax purposes in the same fashion as other types of commodities; namely, it could be treated as capital or income, depending upon the characteristics of the taxpayer. There are many court cases that can assist a taxpayer in determining the true nature of profits and losses obtained from cryptocurrency transactions for tax purposes.
Increased Audit Activity
On March 6, 2019, Forbes published an article noting that the CRA is targeting Bitcoin investors with audits. The Forbes article links to a copy of what appears to be a CRA document entitled “In-Depth Cryptocurrency Initial Interview Questionnaire,” which has been posted to Scribd.
The questionnaire is extensive, running 13-pages, and poses many detailed questions related to Bitcoin usage. It appears highly inculpatory: answering the questionnaire would provide the CRA with a full audit roadmap and a number of admissions against interest.
Questions include the following:
- whether the taxpayer trades or mines cryptocurrency;
- whether the taxpayer uses shapeshift exchange;
- where the taxpayer purchased cryptocurrency;
- whether the taxpayer would provide the CRA with trading history;
- whether the taxpayer has ever invested in initial coin offerings (ICOs);
- how much time the taxpayer spends studying the market;
- whether the taxpayer has earned income from a node or masternode;
- the details of power usage and hardware used in bitmining; and
- whether GST is charged on transactions.
As will be obvious, the questionnaire is far reaching, and would have the taxpayer generate evidence against her or his own interest.
While the CRA does have broad powers to request information from a taxpayer in accordance with sections 231.1 to 231.4 of the Income Tax Act, the right is not absolute, and it may be prudent to consult a tax adviser if there is a concern that a CRA request is overly broad.
Indeed, there are limits on the CRA’s ability to obtain information from a taxpayer. For example, in Jarvis, 2002 SCC 73, the Supreme Court of Canada limited CRA audit powers where the audit was actually a criminal investigation. In James Richardson & Sons, [1984] 1 S.C.R. 614, the Supreme Court signaled that audit cannot be used as a “fishing expedition.”
Other court decisions have helped to protect documents that are subject to solicitor-client privilege. And, in R. v. Bruyneel, [1986] 1 C.T.C. 295, an accountant was acquitted for removing the names of parties from an agreement prior to providing it to the CRA.
These prior decisions do not mean that one can simply ignore the CRA’s requests for information. Rather, the focus should be on what limits exist in respect to requests like the CRA’s cryptocurrency questionnaire. Professional advice should be sought if the CRA makes a request for information, such as the cryptocurrency questionnaire. As noted in the above court decisions, there are limits on the information that the CRA can obtain in the audit process, and where material sums are involved, advice should be sought.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.