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As most cryptocurrency holders are now aware, Coinsquare Ltd. and the Minister of National Revenue have come to an agreement regarding the disclosure of Coinsquare customer account information to the Canada Revenue Agency (CRA). The formal agreement was reached pursuant to a court order released on March 19, 2021, by the Federal Court of Canada. The order gave Coinsquare 15 days to provide the customer information, from the date of receipt of the CRA’s formal requirement under subsection 231.2(1) of the Income Tax Act and subsection 289(1) of the Excise Tax Act.

Coinsquare made the following announcement on March 23, 2021, in response to the court order:

Coinsquare and the CRA have agreed that information relating to 90-95% of our clients will not be disclosed. The affected clients include those who have had accounts valued at CAD$20,000 or more on Dec. 31 in the years 2014 through 2020 and 16,500 of the largest client accounts by trading volume during those periods. The negotiated agreement and court order legally compels us to provide the CRA with limited client information by April 6, 2021.

This Coinsquare decision is a game changer for the CRA on auditing cryptocurrency transactions of Canadian taxpayers.

The CRA’s cryptocurrency task force has developed a detailed cryptocurrency audit questionnaire designed to identify taxpayers’ unreported cryptocurrency transactions. The difficult issue the CRA faces is the anonymous nature of cryptocurrency transactions, which makes it difficult to identify taxpayers for audit. The CRA referred to the issue in its report, Underground economy strategy 2018-2021:

Digital currencies are difficult to trace and their owners are often anonymous, presenting risks for underreporting their value as taxable income.

With the information that Coinsquare must now provide, the CRA will have direct access to a specified number of taxpayers, thus allowing it to audit and potentially reassess those taxpayers if they have unreported cryptocurrency transactions.

Our Canadian tax system is a self-assessing system; it is the responsibility of the taxpayer to report all sources of income. Given this game-changing court decision, it would be prudent for any taxpayer involved with cryptocurrency to review their tax situation to identify potential unreported income. Failing to do so could result in severe penalties, interest and even prosecution.

If a taxpayer discovers they have unreported income, they should consider voluntarily disclosing it to the CRA under the formal Voluntary Disclosures Program (VDP) to avoid potential penalties and possibly to receive interest relief.

Anyone looking at disclosing unreported cryptocurrency transactions under the VDP should seek professional advice to minimize the chance of a denied submission, which could then be subject to a reassessment without any relief. Submissions are required to:

be voluntary;
be complete;
involve the application or potential application of a penalty;
include information that is at least one year past due; and
include payment of the estimated tax owing.

If a submission under the VDP is successful, the CRA will make a determination on the level of relief to be applied.

The VDP was redesigned effective March 1, 2018, splitting the program into two separate relief programs: limited and general. Acceptance under the VDP will provide relief from criminal prosecution, but the relief from penalties and interest will differ between the limited and general programs. The general program will provide relief from penalties and partial relief from interest, subject to a ten-year limitation period. The limited program will only provide relief from gross negligence penalties.

The CRA generally will apply the limited relief program to submissions that suggest an element of intentional conduct regarding the non-compliance. In determining whether the limited program should apply, the CRA will consider five factors:

whether efforts were made to avoid detection through the use of offshore vehicles or other means;
the dollar amounts involved;
the number of years of non-compliance;
the sophistication of the taxpayer; and
whether the disclosure was made after an official CRA statement regarding its intended specific focus of compliance (e.g., the launch of a compliance project or campaign), or following broad-based CRA correspondence (e.g., a letter issued to taxpayers working in a particular sector about a compliance issue).

It is the fifth factor that could be a problem for those Coinsquare customers subject to the court order who wish to voluntarily disclose and be accepted into the general relief program. Of course, one of the main criteria for having a successful voluntary disclosure, regardless of limited or general relief, is that the submission be voluntary. If a Coinsquare customer waits too long and the CRA initiates an audit on that specific customer, then both the limited and general programs will be off the table. Customers should be aware that a submission may be deemed not to be voluntary even if no formal communication by the CRA took place but an investigation was started or the CRA has already received information relating to non-compliance by the taxpayer. In other words, a taxpayer may not even be aware that the CRA has begun acting against them and still might not meet the “voluntary” requirement.

The CRA’s success in gaining access to Coinsquare’s customer information is just the beginning of its battle to find unreported cryptocurrency transactions.

Anyone involved with cryptocurrency should learn the tax rules and ensure they are properly reporting their transactions. Those who find themselves with previously unreported transactions should consider the Voluntary Disclosures Program.

For additional information related to taxation of cryptocurrency transactions, see the following resources:

Unreported cryptocurrency: Is voluntary disclosure the right option?

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