Your Guide to the New Crypto-Asset Reporting Framework (CARF) and Tax in Canada

In an effort to increase transparency and curb tax evasion in the cryptocurrency market, the Canadian government has adopted the Crypto-Asset Reporting Framework (CARF). This initiative, announced in the 2024 Canadian federal budget, requires annual reporting of cryptocurrency transactions and customer information by crypto-asset service providers, starting in 2027. The CARF is part of a global initiative spearheaded by the Organization for Economic Cooperation and Development (OECD) to regulate the burgeoning crypto-asset market. This guide provides a comprehensive overview of the CARF, its implications for crypto traders and crypto-asset service providers, and how to ensure compliance with Canadian cryptocurrency taxation laws.

Key Highlights of the CARF

Mandatory Annual Reporting

Beginning in 2026, all Canadian crypto service providers, including exchanges, brokers, and ATM operators, as well as those that carry on business in Canada, must record detailed information about their customers and their crypto transactions, and report them to the Canada Revenue Agency (CRA) in 2027. This includes:

• Exchanges between different crypto assets
• Transactions between crypto and fiat currencies
• Significant purchases using crypto assets

This reporting requirement aims to provide the CRA with a clear picture of crypto activities within Canada, thereby enhancing regulatory oversight and tax compliance.

Customer Information Collection

Service providers will be required to collect and report comprehensive information about their customers. This data includes:

• Names
• Addresses
• Dates of birth
• Jurisdictions of residence
• Taxpayer identification numbers

By mandating the collection of this information, the CARF seeks to eliminate the anonymity often associated with crypto transactions, ensure that all taxable activities are properly reported, and facilitate crypto tax audits.

Global Cooperation

The CARF is part of a broader global initiative involving 47 countries committed to incorporating this framework into their domestic laws so that information exchanges can begin by 2027. This international collaboration highlights the need for a unified approach to combating tax evasion and enhancing regulatory oversight in the crypto market.

How the CARF Will be Implemented into the Income Tax Act

Background

The exchange of tax-related information between countries plays a vital role in tackling international offshore tax evasion. The Common Reporting Standard (CRS), also established by the OECD, serves as the global protocol for the automatic exchange of financial data for tax purposes. In Canada, the CRS has been incorporated into the Income Tax Act, requiring financial institutions to report information on financial accounts held by non-residents to the CRA. This data is then shared with foreign tax authorities, and the CRA, in turn, receives information on accounts held abroad by Canadian residents.

However, since the CRS was first implemented, the financial landscape has shifted, particularly with the rise of crypto-assets like stablecoins, crypto-based derivatives, and non-fungible tokens (NFTs). These digital assets can be transferred or stored without relying on banks and other traditional financial institutions, and thus, they currently fall outside the CRS’s reporting requirements.

Updating the CRS

To address these changes, Canada’s Federal Budget 2024 proposes updates to the CRS to align it with the new CARF, as recommended by the OECD. These updates would expand the CRS to cover electronic money products and central bank digital currencies that it does not already include.

The aim is to ensure smooth coordination between the CRS and the CARF, preventing redundant reporting across these frameworks. The amendments also introduce stricter due diligence processes for financial institutions, requiring additional reporting on financial accounts and account holders.

In addition to these updates, Canada’s Federal Budget 2024 introduces two other significant changes to the CRS based on recommendations from the Global Forum on Transparency and Exchange of Information for Tax Purposes:

1. Labour-Sponsored Venture Capital Corporations (LSVCCs) would be removed from the list of non-reporting financial institutions under the CRS. This change would allow non-registered accounts held in LSVCCs to be classified as excluded accounts, provided that annual contributions remain below US$50,000. This means they would essentially be treated the same as other excluded accounts like RRSPs and would be exempt from the due diligence and reporting requirements.
2. The CRS’s anti-avoidance clause would be amended so that it applies whenever it can reasonably be considered that an individual or entity engages in any practice or arrangement intended to evade their CRS obligations.

Implications for Crypto Traders and Service Providers

For Crypto Traders

With the implementation of the CARF, all required crypto transactions will be reported to the CRA. This makes it essential for traders to:

• Accurately report their crypto activities
• Properly classify their transactions as either capital gains or business income
• Maintain detailed records of all transactions

Failing to comply with these requirements could result in penalties and increased scrutiny from the CRA.

For Service Providers

Crypto exchanges, brokers, and other crypto-asset service providers must establish robust systems to collect and report the required information. Compliance with the CARF will involve:

• Updating customer information collection processes
• Implementing secure data storage solutions
• Ensuring timely and accurate reporting to the CRA

Non-compliance with these new regulations could lead to severe penalties and potentially disrupt a trader’s or investor’s crypto operations within Canada.

How to Ensure Compliance with the CARF

Steps for Crypto Traders

1. Understand Reporting Obligations: Familiarize yourself with the types of transactions that must be reported, the information required by the CRA, and the consequences of Bitcoin mining and other crypto activities.
2. Maintain Accurate Records: Keep detailed records of all crypto transactions, including dates, amounts, and the nature of each transaction.
3. Classify Transactions Correctly: Ensure that transactions are correctly classified as either capital gains or business income.
4. Seek Professional Advice: Consult with a tax Canadian crypto tax lawyer to ensure that you are meeting all legal reporting requirements.

Steps for Crypto-Asset Service Providers

1. Review Reporting Requirements: Understand the specific reporting obligations under the CARF and the information that must be collected from customers.
2. Update Information Collection Processes: Ensure that your systems for collecting customer information are compliant with the CARF requirements.
3. Implement Secure Data Storage: Protect customer information by using secure data storage solutions that comply with data protection regulations.
4. Develop Reporting Systems: Create or update systems for accurately reporting customer information and transactions to the CRA.
5. Provide Customer Support: Educate your customers about the new reporting requirements and offer support to help them comply.

Reporting & Paying Tax on Cryptocurrency Transactions in Canada

There are two potential tax treatments of crypto assets in Canada. They are either reported and taxed as business income or as capital goods.

How you report your cryptocurrency mining income on a Canadian tax return—and which tax rules apply to your crypto gains—depends largely on whether you’re classified as a hobbyist miner engaged in a personal activity or as a commercial entity mining cryptocurrency as part of your business.

Crypto Mining as a Hobby and its Canadian Tax Implications

For those engaged in crypto mining as a hobby, you’re not required to report mined coins or crypto earned from transaction fees on your tax return until you dispose of them. Dispositions include actions such as spending, trading, selling, or even gifting the cryptocurrency. In these cases, the cryptocurrency is treated as capital property, and you’ll be subject to capital gains tax on the fair market value of the crypto in Canadian dollars as of the day it’s disposed of.

However, if you mine cryptocurrency as a hobby, it’s important to recognize that the CRA may interpret your activities as business-related, even if they’re not full-time or ongoing. The CRA has noted that even a single cryptocurrency transaction could be classified as business income if it is deemed “an adventure or concern in the nature of trade.” Therefore, the classification of your activities is determined on a case-by-case basis.

When assessing whether crypto mining constitutes a business activity, the CRA typically considers several factors, including the scale and frequency of your mining, consistency of revenue, and the intent behind your activities. Additional aspects, such as whether you advertise your mining services, may also influence the CRA’s determination of whether you’re operating a business.

Crypto Tax Reporting for Canadian Businesses

If your crypto activities are classified as commercial in nature, further distinctions are made to determine which tax rules apply to your crypto assets, depending on the specific nature of your crypto activities. For instance, if your business involves trading cryptocurrency that you mine, the mined crypto is treated as inventory, and the proceeds are considered business income. This income is taxed based on the fair market value of the cryptocurrency on the day it’s disposed of.

On the other hand, if your business revolves around mining cryptocurrency by validating blockchain transactions, you might be seen as providing a service to users. In this scenario, you would still report mined crypto as business income, but the income would be recorded in Canadian dollars on the day it’s received. This approach may result in higher initial tax payments, but it can help you avoid double taxation when the cryptocurrency is eventually disposed of.

About Taxpage

Taxpage is a leading tax advisory law firm dedicated to helping individuals and businesses navigate complex Canadian and international tax laws and regulations. Our team of experienced income tax lawyers provides comprehensive tax solutions, including tax planning, tax audit consultation and representation, and CRA appeals. With the introduction of the CARF, we are committed to keeping you informed about the latest developments and ensuring that you remain compliant with new regulatory requirements.

For more information, please visit our website or contact our office.