CRA targeting millions in unpaid crypto taxes, investigating hundreds

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OTTAWA — The Canada Revenue Agency is chasing down $54 million in in what one lawyer describes as a “drop in the bucket” in suspected unpaid taxes tied to cryptocurrencies. The tax agency is also investigating hundreds of crypto investors as it slowly begins cracking down on digital currencies.

In an interview Monday, Sahil Behal, a director general of CRA’s compliance branch, said the agency has roughly 400 ongoing audits or examinations related to crypto assets.

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That’s on top of the $54 million the agency says it reassessed in suspected unpaid taxes related to undeclared cryptocurrency transactions in the fiscal year 2023-2024, Behal said.

But one veteran tax lawyer and cryptocurrency specialist says that the agency’s efforts are just a “drop in the bucket” and the agency needs to do significantly more education about what cryptocurrency owners’ and traders’ tax obligations are.

“Fifty-four million, that’s pocket change,” said David Rotfleisch, managing partner of Toronto firm Rotfleisch and Samulovitch. “I’ve had multiple clients with multimillion dollar (crypto) issues … and I’m just one tax lawyer. That’s a small number.”

“Up until last year, maybe a bit before that, CRA had almost nothing on crypto at all. Crypto was a commodity, that’s it. They didn’t tell you how it’s taxed, that it needs to be taxed, you need to report it … zero guidance from CRA, and that played into it,” he added. “How are you supposed to know it’s taxable?”

Behal says the agency knows there is a lot more work when it comes to public awareness about tax obligations regarding the emerging world of cryptocurrencies such as Bitcoin or Ethereum.

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Due to a “high level of ambiguity” surrounding crypto assets in Canada, the CRA commissioned a poll last year that found one-third of respondents did not have a firm grasp of their tax responsibilities.

Cryptocurrency users who were tested on their knowledge of tax regulations scored barely over 50 per cent on average, the pollster also found. Over one in 10 respondents even believed cashing out cryptocurrencies into government-issued currency was exempt from taxation.

That’s why the 400 ongoing audits and examinations include 125 “intent to audit” letters CRA is in the process of sending out to Canadians it believes did not report income obtained through cryptocurrency trading on Canada’s largest crypto exchange Coinsquare.

Behal said the letters give the targeted taxpayers 45 days to contact the agency to declare any missing cryptocurrency-related income. If they do so voluntarily, CRA will waive any penalties or interest payments due. But if they don’t respond within 45 days, the agency may launch a “full scope audit.”

“It’s one of these approaches we’re taking, recognizing that there’s a lot happening in this sector. Canadians may be unaware of their tax obligations (and) to be able to better address the risk and support Canadians as well,” Behal said.

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Speaking to the small amount of reassessments last fiscal year related to undeclared cryptocurrency income ($54 million), Behal said it is evolving at a “rapid pace” and that it will change its compliance measures as the level of risk for non-compliance changes.

But he also admitted that CRA doesn’t have “dedicated numbers in terms of what the level of non-compliance in this sector may be.”

Speaking to the Senate finance committee last week, CRA’s assistant commissioner for compliance, Cathy Hawara, said the letters were being sent to individuals the agency believed had unreported income after receiving a trove of transaction data from Coinsquare through a legal request called an Unnamed Persons Requirement (UPR).

In 2021, National Post reported that the Federal Court ordered Toronto-based Coinsquare to provide the tax agency with information about all its clients who had deposited or at any point held a total of at least $20,000 in an account since Jan. 1, 2013.

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Coinsquare also had to provide CRA with the number of transactions and total earnings between 2014 and 2016 for its 16,500 top active users.

“We’re leveraging data that we obtained from an UPR in relation to a particular crypto exchange and we’re starting to contact Canadian individuals who we believe engaged in transaction and didn’t report the income on their returns to encourage them to do so, all the way to leveraging our audit capacity … in the highest risk cases,” Hawara told senators.

Behal said the Coinsquare UPR gave the agency “really good information” that it was able to compare to existing taxpayer declarations to spot any discrepancies. He also said the agency was considering issuing additional UPRs to other cryptocurrency exchanges until the government implements the Crypto-Asset Reporting Framework in 2027.

That will compel crypto exchanges and service providers in Canada to report a trove of annual data about crypto asset transactions to the CRA.

“UPRs are litigious in nature. We do want to be in a space where we can obtain more structured data directly from reliable sources, and the crypto asset reporting framework will get us there,” Behal said.

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