The federal government's 2024 budget announced the introduction of new measures to track cryptocurrency transactions and crackdown on tax evasion related to crypto-asset markets. These measures are known as the Crypto-Asset Reporting Framework (CARF), which were developed by the Organisation for Economic Co-operation and Development (OECD). CARF builds upon the existing Common Reporting Standard (CRS), which was also developed by the OECD and implemented by Canada in 2016. This article sheds light on the changes that CARF will bring and the effect it will have on Canadian taxpayers.
Background: The Common Reporting Standard
CRS was developed to facilitate the exchange of financial account information between tax administrations, such as the Canada Revenue Agency (CRA) and Internal Revenue Service. CRS achieves this through requiring financial institutions to identify and report annually to their local tax authorities certain reportable accounts. Local tax authorities will, in turn, forward the information to the relevant Reportable Jurisdictions with which they have Competent Authority Agreements (CAAs) and accordingly have an obligation to exchange information.
Canada adopted CRS through an amendment to the Income Tax Act (Tax Act) in 2016. Canada's rules for CRS are now contained within sections 270 to 281 of the Tax Act. These sections include the general reporting requirements, due diligence provisions for financial institutions, penalties for failure to comply with the provisions, etc. CRS focuses on traditional financial intermediaries, which crypto assets can circumvent. Thus, the 2024 Federal Budget seeks to bring similar reporting requirements for entities, referred to as crypto-asset service providers, involved in the crypto-asset markets.
The Crypto-Asset Reporting Framework
The crypto-asset markets have significantly expanded since the adoption of CRS in 2016. The lack of interaction with traditional financial intermediaries has prompted concerns that these markets pose a risk for tax evasion. Thus, the federal government has proposed adopting CARF into the Tax Act, which would create new annual reporting requirements on certain entities involved in the crypto-asset markets.
Who is required to report?
The federal budget provides that the reporting requirement will apply to legal entities, such as corporations, and individuals. It also provides that the requirement applies to a Crypto-Asset Service Provider that is resident in Canada, or that carries on business in Canada, and that provide business services effectuating exchange transactions in crypto-assets. Thus, to fall under the reporting requirements an individual or legal entity must be (1) a tax resident in Canada or carrying on business in Canada, and (2) providing business services effectuating exchange transactions in crypto assets.
Canada's cryptocurrency tax system has already established tests for determining tax residence and whether someone is carrying on business in Canada. Presumably, these tests would be similarly used by CARF. For more information on these tests please see our previous articles (here for individual tax residence, and here for corporate tax residence).
For guidance on whether an entity can be considered 'effectuating exchange transactions', we can look at the OECD's publication related to CARF. The OECD defines "effectuating exchange transactions" as including any service through which the customer can receive crypto assets for fiat currencies, or vice versa, or where the customer can exchange crypto assets for other crypto assets. Certain activities such as an investment fund investing in crypto assets are not considered to be effectuating exchange transactions.
CARF, however, excludes central bank digital currencies and specified electronic money products (e.g., digital representations of fiat currencies), which will instead be included in amendments to CRS.
When and what needs to be reported?
According to the budget, Crypto-Asset Service Providers would be required to report to the CRA, for each customer and each crypto-asset, the annual value of:
- exchanges between different crypto assets,
- exchanges between crypto-assets and government-issued "fiat" currencies like the Canadian dollar or British pound, and
- transfers of crypto-assets where crypto-assets are used to purchase goods or services exceeding $50,000 US.
Crypto-Asset Service Providers will be required to obtain and report information on each of their customers. This includes the customer's name, address, date of birth, jurisdiction(s) of residence, and taxpayer identification numbers for each jurisdiction of residence. If a customer is a corporation or other legal entity, then the same information would need to be collected and reported in respect of the individual who exercises control over the entity.
Affects on Canadian Taxpayers
The changes proposed by Budget 2024 would be effective as of 2026. The first reporting and exchanges of information under CARF reporting requirements would take place in 2027. This would directly impact Crypto-Asset Service Providers located in Canada, or which do business in Canada, as they will be required to begin annual reporting to the CRA. Crypto-Asset Service Providers will need to ensure that they are collecting the appropriate information to meet the reporting requirement. Under CRS specific processes are set out for reporting entities to follow described as 'due diligence', which the amendment adding CARF to the Tax Act will likely also provide.
The new reporting system will allow Canadian tax authorities to receive information about transactions involving Canadian tax residents that took place using crypto-asset service providers in other countries. This will affect the purported anonymity that transacting with crypto assets provides. The CRA will be given a significant new tool for discovering instances not only of tax evasion but also failures of taxpayers to meet tax obligations related to their crypto-asset transactions, and T1135 reporting obligations of specified foreign property which includes crypto assets and NFTs.
If the CRA discovers undisclosed income through CARF, then it would likely pursue more than just the taxes that are owed. The taxpayer would be subject to interest on the amounts owing, which the CRA charges at a rate of 5% compounded daily on overdue income taxes and penalties. The taxpayer may also be subject to various penalties such as if he or she knowingly, or under circumstances amounting to gross negligence, made a false statement or omission on a tax return. The penalty for in that situation would be the greater of $100 or 50% of the understated tax related to the false statement or omission. The CRA could also potentially pursue penalties for criminal tax evasion where they believe that the taxpayer is willfully evading or attempting to evade compliance with the Tax Act. Subsection 239(1) of the Tax Act sets the penalty for criminal tax evasion under the Tax Act as a fine between 50% and 200% of the tax amount owing, as well as a prison sentence not exceeding 2 years. Canada's Excise Tax Act set out the same criminal penalty provisions for criminal tax evasion under subsection 327(1).
Pro-Tax tip: Dealing with Possible Tax Non-Compliance
How to handle cryptocurrency assets has been a challenge not just for tax authorities, but also for taxpayers. Understanding the proper tax treatment of crypto-asset transactions whether it is for other crypto-assets or fiat currencies can be a complex process. However, if a taxpayer is non-compliant with Canada's reporting requirements for crypto assets that he or she holds then they may be eligible to use the CRA's Voluntary Disclosures Program. This program allows taxpayers that fail to meet their tax obligations to make a proactive disclosure in exchange for penalty relief (including criminal penalties) and partial interest relief. One of our top Canadian crypto tax lawyers would be able to advise on whether you are non-compliant with any tax obligations related to your crypto-assets, and, if so, whether you would be eligible for the Voluntary Disclosures Program.
Frequently Asked Questions:
Will I be required to report under CARF and CRS?
CARF is a separate and complementary framework to CRS; therefore, some entities will need to report transactions under both frameworks. However, there are measures in place to reduce the burdens of reporting, such as the exclusion of specified electronic money products and central bank digital currencies from the scope of the CARF. The framework of CARF proposed by the OECD also considers circumstances where certain assets would qualify both as a relevant crypto asset under CARF and as a financial asset under CRS, such as shares issued in crypto form. In those circumstances, the reporting entity can make use of an optional provision under CRS to switch-off gross proceeds reporting if such information is reported under the CARF. Thus, transactions involving these assets would only need to be reported on once.
If I have reporting obligations under CARF, then would I be liable for fines if I report the incorrect information on a customer?
The federal budget has not elaborated on the possibility for penalties. However, the amendment to add CARF to the Tax Act will likely have penalties for failure to meet reporting requirements. This would be consistent with the recommendations of the OECD's publication. For an idea of what the penalties may look like we can turn to CRS, which provides a penalty of up to $2,500 for each such failure under subsection 162(7) of the Tax Act for financial institutions fails to certify that an account holder is a reportable person, or they may be subject to a penalty of $25 per day to a maximum of 100 days for non-compliance. However, not all instances will be subject to penalties. The OECD publication proposes the adoption of due diligence requirements that would provide a process for those with reporting obligations to follow. Following the due diligence requirements ought to provide protection Reporting Crypto-Asset Service Provider where they unknowingly report incorrect information. Our Canadian crypto tax lawyers would be the appropriate advisors for whether a taxpayer is meeting their due diligence under CRS and CARF.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.