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CRA Wants Coinsquare to Disclose Confidential Client Info

Introduction – CRA Seeking to Compel Cryptocurrency User Tax Information from Coinsquare

On September 18, 2020, the CRA filed a Federal Court application to have the Toronto-based cryptocurrency trading platform, Coinsquare Ltd., to disclose confidential tax information on its clients’ cryptocurrency trading and holding activities. While the CRA had vowed to ramp up its enforcement since 2018, this is the first time the CRA is going after a cryptocurrency trading platform or cryptocurrency wallet to compel tax-sensitive information of its clients.

Currently, the Federal Court has not rendered a decision on this application by the CRA. As of October 1, 2020, Coinsquare has filed its response to the Federal Court; the Court has made no decision as to whether CRA is permitted to force Coinsquare to disclose its client’s information.

Similar US Case of Compelled Disclosure against Cryptocurrency Platforms

 While CRA’s recent application was a first of its kind in Canada, the IRS has already been carrying out similar practices in the US against US-based cryptocurrency platforms and cryptocurrency wallets.

On November 28, 2017, After a lengthy legal battle between the cryptocurrency exchange platform Coinbase and the IRS, the US district court ordered Coinbase to hand over its user accounts at the exchange that traded sums of $20,000 USD and higher between 2013 and 2015. Much of that legal battle between Coinbase and IRS was over the scope of what Coinbase must disclose to the IRS. Many legal experts consider the outcome of the litigation a victory for US taxpayers and Coinbase as the IRS initially sought to compel disclosure based on a much wider scope.

The Central Issue of CRA’s Case

While the case between CRA and Coinsqure has not been put in front of the court, we do know that CRA is requesting a broad scope of the disclosure. Specifically, the CRA is asking for data on all of Coinsquare’s customers dating back to 2013. CRA would likely rely on section 231.2 of the Income Tax Act, which grants the CRA to compel third parties to disclose documents related to the tax audit, tax collection, and any other tax administration related activities carried out by CRA against Canadian taxpayers.

See also
Bitcoin & Cryptocurrency Canadian Reporting Requirements and Tax Planning Tips

Disclosure Case Law in Favor of the Taxpayer

However, when CRA is seeking a broad scope of disclosure where an indefinite number of taxpayers are affected, the Canadian courts have rejected such broad scope disclosure requests made by the CRA. In Canada (National Revenue) v. Hydro-Québec., the CRA sought to compel Hydro Quebec to disclose information about unnamed taxpayers. The court rejected such broad scope request as a “fishing expedition.”

The judge in the Hydro-Québec case criticized CRA’s information request as compelling information against a group of taxpayers with no limit as to its size, composition or characteristics. Furthermore, CRA was not compelling information during the course of an audit but only wanted to compel this broad scope of information for potential audits. The CRA took itself to be able to obtain judicial authorization for large-scale disclosure of confidential information on the sole basis that it may request information, of any kind as it were, whenever it might decide to conduct a large-scale tax audit.

Disclosure Case Law in Favor of the CRA

However, there have been tax cases decided in favour of the CRA when similar information requests were made, such as Canada v. PayPal Canada Co.

In the Paypal case, CRA made a similar request to compel Paypal to disclose information of any corporations and individuals that had held a business account with PayPal and that had used PayPal’s online payment platform in the course of their commercial activities during the period from 2014 through to autumn 2017. The court upheld CRA request, noting that CRA’s request did involve an ascertainable group despite the large size of the group. Furthermore, CRA’s stated purpose of verifying compliance of each and every one of these unnamed taxpayers was not considered as a “fishing expedition” by Court.

Similarly, in Canada (National Revenue) v. Roofmart Ontario Inc., the Federal Court granted CRA’s request to compel tax information related to customers of an Ontario roofing company, Roofmart. However, unlike the PayPal case, CRA only requested disclosure for Roofmart customers whose annual purchase exceeded a certain threshold. It is worth noting that while CRA won at the Federal Court level, this case is now under appeal.

Given the apparent conflict between the Hydro Quebec case on the one hand and the Paypal and Roofmart cases on the other, the Appeal Court decision for the Roofmart decision could bring a unified ruling on the extend CRA can compel third party disclosure against unnamed taxpayers.

It is also worth noting that CRA’s current disclosure request made against Coinsquare is arguably broader in scope than any of the three cases mentioned above. Besides obtaining information to conduct potential tax audits against Coinsquare’s clients, CRA seems to be using this litigation to push its legal position regarding section 231.2 of the Income Tax Act, namely that CRA has virtually unlimited power to compel third party disclosure of business and accounting records against Canadian taxpayers.

What is Next for Canadian Taxpayers

Regardless of the outcome of CRA’s case against Coinsquare, it is a very clear signal that CRA is ramping up its tax enforcement efforts against Canadian taxpayers who are trading and holding cryptocurrency. It would be wise for Canadian taxpayers with cryptocurrency-related non-compliance to consider the voluntary disclosure program before potential CRA tax audits.

The general eligibility criteria for CRA’s voluntary disclosure program (VDP) is the following:

  • Voluntary: the CRA must have no prior knowledge about the taxpayer’s tax owing.
  • Complete: the taxpayer must disclose tax information on all tax years in which his or her filings were inaccurate.
  • Tax Owing: the taxpayer must owe tax to the CRA due to inaccurate filings.
  • One Year Past Due: the taxpayer can only disclose information for tax years that is at least one year past the filing due date.

If the general eligibility criteria are met, the Canadian taxpayer must demonstrate favorable facts regarding the following four factors in order to take advantage of the penalty relief and interest relief of the general stream of the CRA’s voluntary disclosure program. These factors are:

  • Any efforts made to avoid detection;
  • The dollar amounts involved;
  • The number of years of non-compliance; and
  • The sophistication of the taxpayer

Given the CRA’s plan to ramp up enforcement actions related to cryptocurrency, time is of the essence for non-compliant taxpayers to file their voluntary disclosure without having their voluntary disclosure application dismissed because CRA has acquired knowledge of his or her non-compliance.

Pro tax Tip-Tax Guidance – Due Diligence and Compliance for Cryptocurrency

Our expert Toronto tax lawyers can provide tax guidance on the complex issues regarding your past cryptocurrency tax reporting and whether a voluntary disclosure application can be beneficial for you. We also have extensive experience with tax law characterization of cryptocurrency and can provide tax guidance as to whether transactions constitute capital gains versus business income.  We are going to defend your rights in all dealings with the CRA. All consultations with our students and experienced Canadian tax lawyers will be confidential whether you choose to retain us or not.

 

 

Disclaimer:

"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."

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