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A veteran tax lawyer and cryptocurrency expert says the agency needs to educate significantly more about what the tax obligations of cryptocurrency owners and traders are

Published on May 6, 2024 • Last updated 24 minutes ago • 4 minute read

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Sahil Behal, director general of the compliance department at the Canada Revenue Agency, says the agency knows there is a lot more work to do when it comes to raising public awareness about tax obligations related to the emerging world of cryptocurrencies like Bitcoin or Ethereum. Photo by Sean Kilpatrick/The Canadian Press

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OTTAWA — The Canada Revenue Agency is chasing $54 million in what one lawyer describes as a “drop in the ocean” in suspected unpaid taxes tied to cryptocurrencies. The tax agency is also investigating hundreds of crypto investors as it slowly begins to crack down on digital currencies.

In an interview on Monday, Sahil Behal, director general of the CRA’s compliance branch, said the agency has about 400 ongoing audits or examinations related to crypto assets.

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This is in addition to the $54 million the agency says it reassessed in suspected unpaid taxes related to unreported cryptocurrency transactions in the 2023-2024 fiscal year, Behal said.

But a veteran tax lawyer and cryptocurrency expert says the agency’s efforts are just a “drop in the ocean” and that the agency needs to educate significantly more about what the tax obligations of cryptocurrency owners and traders are.

“Fifty-four million, that’s chump change,” said David Rotfleisch, managing partner of the Toronto firm Rotfleisch and Samulovitch. “I’ve had several clients with multi-million dollar (cryptocurrency) issues… and I’m just a tax lawyer. That’s a small number.”

“Until last year, maybe a little before that, the CRA had almost nothing on cryptography. Crypto was a commodity, that’s it. They didn’t say how it’s taxed, that it needs to be taxed, you need to report it… no guidance from the CRA, and that contributed to that,” he added. “How will you know it’s taxable?”

Behal says the agency knows there is a lot more work to do when it comes to raising public awareness about tax obligations in relation to the emerging world of cryptocurrencies like Bitcoin or Ethereum.

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Due to a “high level of ambiguity” surrounding crypto assets in Canada, the CRA commissioned a survey last year that revealed that a third of respondents did not have a firm understanding of their tax responsibilities.

Cryptocurrency users who were tested on their knowledge of tax regulations achieved an average score of just over 50%, the researcher found. More than one in 10 respondents believed that withdrawing cryptocurrencies in government-issued currency was tax-exempt.

That’s why the 400 ongoing audits and examinations include 125 “intent to audit” letters that the CRA is sending to Canadians it believes have not reported income earned through cryptocurrency trading on Canada’s largest cryptocurrency exchange, Coinsquare. .

Behal said the letters give targeted taxpayers 45 days to contact the agency and declare any lost cryptocurrency-related income. If they do so voluntarily, the CRA will waive any penalties or interest payments due. But if they don’t respond within 45 days, the agency could launch a “full-scope audit.”

“It’s one of those approaches we’re taking, recognizing that there’s a lot going on in this sector. Canadians may not be aware of their tax obligations (and) being able to better manage risk and also support Canadians,” Behal said.

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Speaking about the small amount of reassessments in the last fiscal year related to undeclared cryptocurrency income ($54 million), Behal said it is evolving at a “rapid pace” and will change its compliance measures as the level of risk increases. of non-compliance change.

But he also admitted that the CRA does not have “dedicated numbers on what the level of non-compliance could be in this sector”.

Speaking to the Senate Finance Committee last week, CRA Assistant Compliance Commissioner Cathy Hawara said the letters were being sent to individuals the agency believed had undeclared income after receiving a trove of transaction data from Coinsquare for through a legal request called the Unnamed Persons Requirement. (UPR).

In 2021, National Mail reported that the Federal Court ordered Toronto-based Coinsquare to provide the tax agency with information about all of its customers who have deposited or at any time held a total of at least $20,000 in an account since January 1, 2013.

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Coinsquare also had to provide the CRA with the number of transactions and total earnings between 2014 and 2020 for its top 16,500 active users.

“We are leveraging the data we obtained from a UPR regarding a specific cryptocurrency exchange and are beginning to contact Canadian individuals who we believe are involved in transactions and have not reported income on their returns to encourage them to do so , even leveraging our audit capacity… in cases of greater risk”, Hawara told the senators.

Behal said Coinsquare UPR gave the agency “really good information” that it was able to compare with existing taxpayer returns to spot any discrepancies. He also said the agency is considering issuing additional UPRs to other cryptocurrency exchanges until the government implements the Crypto Asset Reporting Framework in 2027.

This will oblige cryptocurrency exchanges and service providers in Canada to report a series of annual data on crypto asset transactions to the CRA.

“The UPRs are litigious in nature. We want to be in a space where we can get more structured data directly from trusted sources, and the crypto asset reporting framework will get us there,” said Behal.

National Post

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