CANADA REVENUE AGENCY TARGETING CRYPTOCURRENCY INVESTORS:
As described in the recent article contained in the National Post the Canada Revenue Agency (“CRA”) is proceeding down the path to assess taxes of cryptocurrency investors.
While it is true that a Canadian taxpayer is required to declare all of his/her worldwide income it is also true that a Canadian taxpayer is entitled to “tax plan”. The taxpayer can arrange his/her financial affairs to minimize tax liability within the law. That is tax avoidance and is allowed. Outright tax evasion is not allowed. The Canada Revenue Agency can lay a charge for tax invasion. In Canada, the basis of a charge of tax evasion is typically either paragraph 239(1)(a) of the Income Tax Act, making a false or deceptive statement in a return, or paragraph 239(1)(d) wilfully, in any manner, evaded or attempted to evade compliance with the Income Tax Act or the payment of tax imposed by the Income Tax Act (similar provisions exist under the Excise Tax Act). The Income Tax Act gives the CRA the option of initiating proceedings either by way of summary conviction or indictment. As a result it is important that you comply with the Income Tax Act.
However, that does not mean that you have to govern your affairs to pay the most tax possible. In fact, you are entitled to plan your affairs to reduce your tax payable providing your methods are within the law. This is tax avoidance. Many people have an intuitive understanding of what constitutes tax evasion. The concept is simple enough to understand – a person who is committing tax evasion is a person who is not paying the full amount of taxes they lawfully owe. In practice, this black and white portrayal is in fact far from accurate. A very grey line exists between the actions rightfully called tax evasion and those actions that constitute ordinary tax planning. That grey line should be recognized as “tax avoidance”. Strictly speaking, tax avoidance is wholly within the letter of the law.
We are at JZ Law have experience in developing tax plans for clients that constitute “tax avoidance” and not “tax evasion”. On most occasions the tax plan needs to be put into place as soon as possible. For example, its most often too late to develop a tax plan after the year has expired. As a result if you want to create a plan to save tax you must do so before December 31 if not earlier.
The fact that the CRA is now setting its sights on cryptocurrency investors should be a worry to you all of us crypto investors. If your crypto investment constitutes income you could pay over 45% tax on your income from the investment. Your crypto investment may also be deemed to be a capital gain, which will results in much lower tax rate (around 25%--just a rule of thumb). See https://www.wealthsimple.com/en-ca/learn/capital-gains-tax-canada for more information on what a capital gain is.
There are many methods to protect a capital gain from taxes. There are very few methods to protect a designation of business income from taxes.
So for the crypto investor the first step is to make sure one’s investment is a capital investment and not business income. The CRA has published a guide as to THEIR VIEW of the treatment of cryptocurrency:
I stress THEIR VIEW as it is will not be the CRA which decides the issue. It will be the Canadian courts that decide the issue.
Having said that our first level tax plan should be to manage your affairs to avoid one’s investment in cryptocurrency or bitcoin being treated as business income. The CRA lists some common signs that your activity may be classified as a business:
· You carry on the activity for commercial reasons
· You undertake activities like a business. This might include preparing a business plan and acquiring capital assets or inventory.
· You promote a product or service
· You have intentions to make a profit (even if you are unlikely to do so in the short term)
In most cases, a business activity needs to involve repetitive actions over time.
The test to determine between a business income designation or a capital gain designation arose in a 1986 Canadian Federal Court case (Happy Valley Farms Ltd. v. Minister of National Revenue (MNR)). The Judge set six considerations to determine whether income was a capital gain or business income:
(1) nature of the asset,
(2) length of ownership,
(3) frequency or the number of similar transactions,
(4) work expended on the asset realized,
(5) circumstances leading to the sale of the asset and
(6) motive in acquiring the asset.
According to the CRA, a single transaction could be considered a business. The classification is determined on a case by case basis. Clearly if you are a day trader you will therefore most likely be considered to carry on a business and will have to pay business income. JZ Law would be happy to meet with you to discuss how best to avoid business income treatment.
Therefore step one, lets make sure we set you up to manage your affairs to avoid your cryptocurrency investments being designated business income.
Once we have you over that hurdle, the next step to find a way to protect your capital gain and avoid tax on the gain. The Income Tax Act (Canada) provides a lifetime capital gains exemptions (“LCGE”) is helpful for small business owners and their family members, allowing them to avoid paying taxes on capital gains income up to a certain amount when they sell shares in a business. LCGE has an exemption limit for small businesses of $883,384 (this amount changes slightly based on inflation). Normally, half of that return would be taxed. But with LCGE you’re allowed to subtract that amount from your profits. Let’s say you sell shares in your small business corporation for $1 million. Normally, you’d be charged taxed on $500,000. But if you use the LCGE you’re allowed to deduct $883,384 for taxable profit which leaves just $116,616. Then you divide that $116,616 in half. You’ll be charged tax on $58,308. The savings are immense.
Again we should plan your affairs to take advantage of this capital gains exemption. And note as well, is individual based. As such, your spouse, your mom, dad, etc. all are entitled to this exemption.
We at JZ Law are concerned that given the spending we have seen by the federal government we may see an elimination or reduction of the capital gains exemption in the future. Therefore we suggest we trigger this ASAP.
Once we use the exemption there are other more complicated means to manage your affairs. If you own capital losses those can be offset against your capital gains. In some instances you can acquire capital losses to protect your gains. This is complicated tax structuring which we are here to help with. But again but using losses to offset against your gain you can avoid the tax.
Do not despair by the fact that finally you have seen your Bitcoin value go up but now you will have the CRA breathing down your neck. Contact JZ Law and we will steer your ship through the Tax Planning and help you decrease your tax obligations.
 This article does not constitute legal, investment or tax advice. It is presented for general information only and is not intended to be relied on personal tax, accounting, or legal advice. The regulations affecting cryptocurrencies are subject to change at any time without notice. Readers should consult their investment and tax advisers regarding their circumstances before proceeding in any manner.