by Jason RosenImplied Undertakings in the Tax Court of Canada
An undertaking is a legally binding promise to do or provide something, or to refrain from doing something or providing something. Undertakings can exist in different forms depending on the context. For example, the seller in a real estate transaction may agree to an undertaking to produce certain documents related to the property. Alternatively, in criminal cases, bail is a form of undertaking where the accused is released under the promise to appear in court when required. For this article, we will be discussing undertakings in the context of Tax Court proceedings and appeals.
Examination for Discovery
Examination for Discovery is an official court proceeding where each party may examine the opposing side under oath. The process can take the form of Oral Discovery, where parties are examined in person; or it can take the form of Written Discovery, where parties are examined through written requests. Discovery facilitates the exchange of information before trial, thus ensuring the litigation process remains fair and efficient.
What is the Implied Undertaking Rule?
The Implied Undertaking Rule limits each party’s right to use the information obtained through the Examination for Discovery process, with some exceptions. The rule prohibits each party from using information obtained through discovery for any other purpose or in any other context other than the specific proceeding. The rule is critical to ensure fairness in the litigation process by protecting the privacy interests of the litigants, and in turn, encourage a complete and truthful Discovery process.
The Implied Undertaking Rule is set out in Juman v. Doucette (2008 SCC 8). The rule has a broad scope: it applies to all documentary and oral information obtained during discovery. Parties are not allowed to use the information except for that litigation, with certain exceptions.
However, according to Juman, a court may exercise its discretion to relieve a party from an undertaking under certain conditions. The Court decide whether, on a balance of probabilities, the public interest in permitting the disclosure outweighs the privacy interests of the party and the goal of promoting efficiency in the court system.
In the context of Tax proceedings, one important factor to consider when balancing public and private interests is whether the parties and issues are similar to another action. In Juman, the Supreme Court of Canada found that there is virtually no prejudice to the discovered party, and leave will generally be granted where the discovery material in one action is sought to be used in another action with similar parties and similar issues.
What are the Consequences of Breaching the Implied Undertaking Rule?
The consequences of breaching an implied undertaking can vary depending on the context. These consequences can range from a stay of proceedings, substantial costs awards, or contempt proceedings. However, in other cases, it may not result in a remedy at all.
Fio Corporation v. The Queen (2014 TCC 58) is an example of a particular costly consequence of breaching the Implied Undertaking Rule. In this case, the Taxpayer brought a motion to direct the Minister of National Revenue (the “MNR”) and the Attorney General of Canada (the “AGC”) to pay $100,000 as “punishment for her/their contempt of [the Tax Court of Canada]” and costs on a full indemnity basis for breach of the Implied Undertaking Rule.
In Fio, the Taxpayer filed a Notice of Appeal to the Tax Court of Canada in response to a reassessment by the MNR and provided the MNR with the Notice of Appeal along with several supporting documents. The Taxpayer made it clear in a letter to the MNR that the supporting documents were provided to minimize time and costs and to reach a settlement. However, the MNR reassessed the Taxpayer using the supporting documents for tax years beyond the scope of the original appeal.
The Tax Court of Canada held that an implied undertaking exists the moment a taxpayer provides discovery documents to the MNR and AGC. This implied undertaking prohibits the MNR and AGC from using the documents for purposes outside of the appeal. Furthermore, the court found the use of the material without leave constitutes an abuse of process, which was also deliberate.
In the end, the Court awarded substantial costs of $25,000 to the appellant against the MNR for breach of the implied undertaking rule. Furthermore, the Court ordered the documents not to be used by the MNR for additional reassessments.
Due to the nature and scope of the implied undertaking rule and the potential remedies available for a breach, litigants should be mindful of how they handle discovery documents and the potential implications from the implied undertaking rule.
If you are having trouble with an appeal to the Tax Court of Canada, contact us today to schedule an appointment with our team of experts at Rosen Kirshen Tax Law.
**Disclaimer
This article provides information of a general nature only. 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.
by Jason RosenTax Court of Canada – The Book of Documents
What is a List of Documents?
Before we can dive into the book of documents, we must briefly discuss the list of documents (“LOD”), which is a mandatory litigation step pursuant to the Tax Court of Canada Rules (General Procedure) – specially rule 81. The LOD is a list of all documents that a party has in their power, possession or control that they plan on relying on at the inevitable hearing.
This list is generally organized chronological order starting with the earliest dated documents and ending with the documents most closely dated to the day the list of documents is made. The Parties must provide this list to the other side well in advance of trial so that the opposition can have adequate time to inspect the documents and prepare their examination questions on discovery.
The Parties submit a joint request for a litigation timetable which would include the date that the LOD must be exchanged by and filed with the Court.
What is a Book of Documents?
The book of documents (“BOD”) as it is known, relates to the discovery stage of a Tax Court matter (or any court matter for that reason). While this is not a formal step in the dispute resolution process, it is common practice to exchange the BOD at least thirty (30) days prior to the examinations for discovery (whether in writing or orally). The BOD contains all the relevant documentation that a side will be using to help prove their case or will be using to help demolish arguments made by the other party. Any documents that are going to be referred to at the hearing must be included in the previously mentioned LOD, produced in the BOD or by way of undertaking following the examinations for discovery.
Each party must prepare four copies of the BOD ahead of trial. One copy for yourself to keep, one copy for the judge, one copy for the opposing counsel, and the last copy will stay in the witness box to assist them in answering the questions asked by counsel.
What is a Joint Book of Documents?
A joint book of documents (“JBOD”) is highly advisable for parties who have the ability to be civil with one another, as a JBOD can help save your client or yourself (if self-represented) a sizeable amount of money. A JBOD involves both parties to a dispute agreeing on which documents should be produced within the book, and which documents are unnecessary and therefore do not need to be included. The parties submit one joint book, rather than each party submitting their own book of documents. All the previously mentioned rules for the LOD and BOD still apply when the book is made jointly. Overall, this is a fantastic method to save money when practically possible by the cooperation of both parties and is greatly appreciated by the Court (and the environment).
Overall, the requirements relating to the list of documents and book of documents may seem simple but are quite complex. Failure to properly file and serve the list of documents and/or produce the book of documents can have a detrimental impact on the potential success of your Tax Court of Canada case (or any level court case for that matter). If you have any questions or need any assistance, please feel free to call us toll free at 877-921-8423 or email us at info@rktaxlaw.com.
**Disclaimer
This article provides information of a general nature only. 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 this article. If you have specific legal questions you should consult a lawyer.
Related Articles:
by Jason RosenCryptocurrency and the OECD
The Organization for Economic Co-Operation and Development (the “OECD”) recently released its long-awaited report on global regulatory frameworks for the taxation of cryptocurrencies. In it, they outline current and emerging issues with the global taxation of virtual currencies and offer guidance on policy development for its tax treatment and associated reporting standards.
Tax policy remains a hot topic in the cryptocurrency space, especially with the approximate market capitalization of these currencies hitting an all time high at USD 390 billion as of October 2020. As such, the OECD’s report is a welcome reminder to governments of the importance of maintaining consistent, coherent, and transparent tax policies. In Canada, cryptocurrencies are treated similar to commodities for taxation purposes. This means that income from cryptocurrency transactions may be classified as business income or capital gains depending on the level of activity with the cryptocurrency.
Cryptocurrency Recommendations
The OECD’s new report cover three main areas:
- Key definitions and concepts in cryptocurrency such as blockchain and crypto assets.
- Emerging issues related to the taxation of cryptocurrencies such as the rise of stablecoins, central bank digital currencies (CBDCs), evolution of consensus mechanisms in blockchain technology, and development of decentralised finance.
- Policy recommendations developed from a comparative review of 50 jurisdictions’ tax policies as they relate to cryptocurrencies.
One key recommendation from the report is that policy makers should consider the tax consequences of cryptocurrency across different stages of its lifecycle, from mining to disposal. Currently, countries around the world tax the various life cycles of owning cryptocurrency differently, which causes difficulty when tracking (and taxing) transfers of the currency over different jurisdictions. For example, the Internal Revenue Service in the United States of America treats the rewards developed from a mining transaction as ordinary income whereas Australia’s tax office treats this activity as a capital gain, if the mining operation is not a business. These areas of non-alignment create a tension when it comes to enforcing a jurisdiction’s regulatory framework, especially as it relates to existing tax treaties and residency requirements.
Other important recommendations from the report include encouraging policy makers to outline the rationale behind the taxation of certain events or definitions of taxable assets. These rationales can ensure consistency when interpreting the law in the fast-changing cryptocurrency space. Likewise, the OECD recommends that consideration be given to individuals who are occasional or small traders who do not pursue the activity in a business capacity. Simplified rules for these types of individuals could improve compliance and ensure clarity.
When designing all these new policies, especially as they relate to emerging technology such as CBDCs and stablecoins, the OECD emphasizes that policy makers ensure that the tax treatment of cryptocurrency be in line with the tax treatment and policy objectives of other non-virtual assets.
Countries are expected to review the OECD’s guidelines as a first step in its policy-making process. It is yet to be seen how Canada will incorporate these new guidelines into its tax policies.
If you have ever been involved with mining of cryptocurrencies or cryptocurrency transactions in general and are being audited by the CRA or have questions, contact our office today. Expert tax law advice can help ensure that you are meeting your reporting requirements. Additionally if you believe you have not properly disclosed this income on your tax returns in the past, the Voluntary Disclosures Program may be available to correct your past errors or omissions. Call us today, we are here to help!
**Disclaimer
This article provides information of a general nature only. 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.
by Jason RosenWhat is a CRA Net Worth Audit?
Has your CRA auditor informed you that your audit will be a Net Worth Audit? Are you wondering what that means? We previously wrote about Net Worth Audits and Assessments which you can find here. This blog provides more information about net worth audits, what they are, why they occur, and what can be done to fight them.
Net Worth Audit
Generally, a standard audit consists of reviewing a taxpayer’s accounting records (i.e., bank statements) as well as other related records. However, in cases where the CRA finds the taxpayer’s records insufficient, the CRA may initiate a Net Worth Audit. Once initiated, the CRA will consider a multitude of factors to arrive at a taxpayer’s taxable income. This can include a review of bank records, assets, and liabilities, along with accounting records. In a way, the CRA is assuming the taxpayer’s unreported income when utilizing a Net Worth Audit. The CRA justifies this type of audit when they claim there is any indication of irregularity or insufficiency in the financial affairs and records of the taxpayer.
The auditor may even increase taxable income if they feel that a taxpayer’s respective tax returns do not support his or her lifestyle (also referred to as a CRA lifestyle audit). This can result in a financial gift from a parent turning into taxable income, or even unidentified bank deposits being termed income. The overall goal of a CRA Net Worth Audit is to increase a taxpayer’s taxable income. If the taxpayer’s books and records are in poor shape, it will be much easier for them to do so.
When will CRA use the Net Worth Audit Method?
The CRA refers to a Net Worth Audit as an indirect verification of income. The CRA may rely on the Net Worth Method, if:
- Your books and records are inadequate and indicate potential errors;
- You mix personal and business income into one bank account. For instance, one account may be used for both personal and business transactions;
- The income you reported does not support your lifestyle;
- If the business you are in is in an industry where tax evasion is common; and/or
- If comparable businesses report higher income then your business.
These are all factors that the CRA may rely on to initiate a Net Worth Audit.
How do you challenge a Net Worth Audit Tax Assessment?
CRA auditors have immense discretion. Additionally, there is a reverse onus in tax law, meaning that it is on the taxpayer to prove his or her income (as the Canadian tax systems is a self-reporting system). In practice, auditors are allowed to assume facts that a taxpayer must then rebut.
A taxpayer can successfully challenge a net worth assessment by preparing detailed responses and explanations to each assumption of the auditor. The taxpayer’s goal is to demolish the auditor’s assumptions. This is normally done with explanations and documentation rebutting each assumption.
If your audit has been concluded, you may continue to fight the assessment by filing a Notice of Objection and/or appealing to the Tax Court of Canada. The best method to dispute the Net Worth Audit is have your books and records reconstructed to show the difference between the CRA auditor’s accounting and factual assumptions. Providing detailed and accurate records of your finances is key.
At Rosen Kirshen Tax Law, we have represented several clients during and after a Net Worth Audit. If a taxpayer wants to appeal a Net Worth Audit tax assessment, we can file a Notice of Objection, challenging the assessment before a CRA Appeals Officer. If you are going through a CRA Net Worth Audit, or have had one completed that you disagre with, and you need assistance, contact us today! We are here to help!
**Disclaimer
This article provides information of a general nature only. 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.
by Jason RosenMark Laurin and My Private Circle
Previously, we wrote about Mark Laurin, CPA, and his involvement with the Edge Software, Edge of Command, Highshare, SecureShare, Advanced Cloud Solutions Inc. (“Edge”) investment. Our earlier blog posts can be found here and here. This blog post seeks to highlight Mr. Mark Laurin’s new business venture, My Private Circle (“MPC”).
Edge Franchise Dispute
In summary, Edge was marketed to investors as a cloud-based software business that would be offered to small businesses domestically and abroad. Investors had the opportunity to invest in Edge thus providing themselves with franchise(s) from the business. By investing in Edge, investors expended their personal funds by paying an up-front cost and all of whom executed promissory notes for significant funds. These up-front costs and promissory note amounts varied depending on which year an individual invested, and in which form of the business they invested in for that respective year. Upon paying the up-front expenses and executing the promissory notes, the investors obtained certain rights and requirements.
Based on the above, investors claimed corresponding capital cost allowance (“CCA”) deductions on their tax returns along with other expenses including marketing expenses, publicity expenses, interest expenses, among others, depending on the investment year.
Unfortunately, based on the structure of the transactions and the tax treatment of the deductions claimed, the CRA alleged that Edge was a tax shelter, that the proper forms should have been filed, and that all of the deductions claimed by the investors associated with Edge were improper.
As a result, all of the deductions claimed by the investors on each of their tax returns were disallowed in their entirety. The CRA assessed gross negligence penalties on the amounts disallowed and opened tax years that were statute-barred due to the alleged misrepresentations. Due to these situations, our firm has been representing 20+ Edge franchisees through the CRA Audit Division and CRA Appeals Division process, most of whom now find themselves before the Tax Court of Canada. Due to our experience that the CRA Appeals Division is not able to be impartial or independent in group audits like the CRA’s audit of the Edge investments, we have fast tracked our clients to the Tax Court of Canada to have their matters heard before an independent and impartial third-party reviewer. Unfortunately, those Edge franchisees who are not represented by us remain at the CRA Appeals Division awaiting Appeals Officers to be assigned. In our experience with these situations, it could take up to two (2) years for the same.
Our memorandum detailing the highlights of the dispute process for the Edge franchise can be found here.
My Private Circle
Sometime in 2016, several Edge franchisees received a letter from the Surete du Quebec – Criminal Investigation Branch stating that an on-going fraud and police investigation has been launched in regards to the Edge of Command and Edge Highshare Franchises.
The letter further stated that since the 11th of March 2016, bank accounts used to deposit, directly or indirectly, cheques from franchisees have been frozen by court orders. This was supposedly to protect franchisees from depositing further funds into a fraud scheme managed by Mark Laurin and associates.
Following this investigation, it has come to our attention that Mark Laurin has commenced a similar business venture under the name My Private Circle.
Among other services, MPC alleges to offer the following:
- Send & Receive Secured E-mail and SMS;
- Secure File Exchange & Encrypted Cloud Storage;
- Full Management Control;
- Secure Chat, Voice & Video Calls;
- Delivery/ Read Status & Message Destruction;
- Choice of Server location;
- Private Server Licensing;
- Real-Time Translation; and
- Account Authentication by E-mail.
If this product offering seems familiar for some readers, that is because the Edge investment also focused on offering integrated monitoring, data management and backup & recovery solutions for the small business market. Indeed, MPC’s website under the tab “All Features” states that the following:
“MPC is a Secure Global Communications Hub for business and professionals to easily and efficiently collaborate with colleagues and clients.”
Importantly, you will notice that MPC’s home webpage has their address as the following:
1060 Guelph Street,
Lower South Unit,
Kitchener ON N2B 2E3
This is the same address listed on the SecureShare homepage website. Furthermore, Mark Laurin is the director for both corporations and the MPC transmission slips note to courier all documents to Advanced Cloud Solutions Inc.
Similarities Found in Edge and MPC Disclosure Documents
In their disclosure documents, MPC claims that their product portfolio “seamlessly integrates” file/photo transfers, voice/video/test messaging as well as other functions revolving protection of privacy.
Furthermore, it claims that “flexibility is the key to MPC Product Portfolio in terms of product and price.” It goes on to list the different product offerings including MPC personal account, MPC – personalized (small business edition) and MPC – personalised (Enterprise Edition).
This language is strikingly similar to the statements found in the Edge Disclosure Agreement. In particular, the Edge disclosure document also states that “Edge Solutions seamlessly integrate productivity monitoring, digital backup and recovery, advanced file management functionality and other functions. It also states that “flexibility is key to the EDGE advantage in terms of product and price” and then proceeds to list the various product offerings of Edge.
In other words, the MPC disclosure statement replaced the Edge “storage” functions and offerings with the supposed MPC “security” functions and kept the other language the same.
That said, arguably the most salient similarity between the MPC and Edge disclosure statements can be found in the “Earnings and Operating Cost Projections for the Franchise”. Rather than providing any actual historical data or sales figures, both disclosure statements proceed to state the following:
One question you are probably asking yourself is, “How much money can I expect to earn as a Franchisee? There are many variables and factors that make it impossible to answer that question with any certainty.
Without making any specific projections or forward looking information, the Franchisor expects that recruiting Partners and Resellers within the Franchisor’s Territory will significantly increase potential sales. Furthermore, the Franchisor recommends the hiring of an experienced, professional manager to oversee the commercialization of the (MPC Product Portfolio or Edge Solution).
Potential Audit
Based on the above, and the government’s pursuits thus far, if you are a franchisee or investor of MPC, there is a high probability that your tax returns will be audited by the CRA in the future for the years in which you claimed deductions related to your investment with MPC.
Indeed, the costs relating to becoming a franchisee of the MPC business remain the same as Edge. In particular, franchisees are expected to paying for initial franchise fees, license fees and marketing costs all of which they claim can be deducted.
While we cannot say for certain, it is likely that the CRA will take issue with the deductions and will deny the same while imposing gross negligence penalties on the investors, as they did with Edge.
If you invested in MPC or Edge, or are being audited by the CRA, call us today for more information about how we can help.
**Disclaimer
This article provides information of a general nature only. 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.
by Jason RosenGST/HST and Crypto Currency Rules
If you use cryptocurrencies to pay for goods and services, then that is considered a barter transaction. What that means, is that the value received for a sale of goods or services in exchange for crypto assets should be the fair market value of that crypto asset.
Therefore for GST/HST purposes, if a taxable product or service is sold for cryptocurrency as payments, the value of the cryptocurrency on which the GST/HST is to be assessed is the fair market value of the cryptocurrency at the time of transaction.
GST/HST Rules – Crypto Currency
Generally, GST/HST is levied such that, while the recipient of a taxable supply is liable to pay the tax, the party that makes a taxable supply must collect the tax and remit it to the CRA. While its administrative policy is to pursue the supplier, the CRA has the right to assess the recipient directly.
Presently, and until further clarification of the law, the CRA’s general position regarding the GST/HST treatment of the use of cyptoassets/currency as payment is that vendors accepting crypto for payment are at minimal risk, but that purchasers paying with crypto are at risk of incurring potential GST/HST liability (CRA documents no. 2013-0514707I7, December 23, 2013).
Crypto Currency and Financial Instruments
So, if a taxpayer “supplies” crypto by using it as a method of payment, it is still uncertain as to whether that taxpayer be required to collect and remit GST/HST. The best argument for the position that the supplying taxpayer will be not be required to collect and remit is that crypto is “money” for the purposes of the Excise Tax Act (“ETA”). This means that, if supplies of crypto are considered supplies of money, they are therefore supplies of financial services, which are exempt from GST/HST. Furthermore, the ETA definition of “money” is broad and not limited to financial instruments issued by governments, which offers even greater potential for the definition of crypto for GST/HST purposes to fall within this scope.
A secondary argument for the position that the supplying taxpayer will be not be required to collect and remit is that crypto is that crypto suppliers are usually small suppliers (i.e., less than $30,000 of supplies to both crypto and normal goods and services). Crypto suppliers who are considered small suppliers would therefore not be engaged in a commercial activity.
Lastly, if the recipient of the crypto is a non-resident, then, generally, GST/HST would not be required to be collected and remitted.
Crypto Currency, GST/HST and Canadian Tax Policy
In essence, Canada is taking a reactionary approach as they are seeing individuals and particularly institutions opening up more to the idea of transacting with cryptocurrencies. Naturally, the increase in flow of money (through crypto) creates a tremendous amount of opportunities for tax avoidance and evasion.
The CRA issued a statement in June 2019 which solidifies their stance on crypto regulation. The government formally expressed its commitment to ensuring cryptocurrency is taxed in accordance with the law.
“Canadians should know that the Canada Revenue Agency is very active in pursuing cases of non-compliance, in order to make sure that the tax system is fair for everyone.”
If you have questions about the whether GST/HST applies to your crypto currency transactions, call us today! We are here to help!
**Disclaimer
This article provides information of a general nature only. 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 this article. If you have specific legal questions you should consult a lawyer.
by Jason RosenThe Taxation of Cryptocurrency
For the past decade, the rise of Bitcoin and other cryptocurrencies has taken Canadians by storm. However, through the lens of legal policy making, cryptocurrencies are still considered a relatively new phenomenon. That said, Canadian policy makers have recently taken a stronger stance in the regulation and monitoring of crypto purchases. This blog post seeks to summarize the general rules surrounding crypto currencies as well as the main changes Canadians should be aware of.
What are Crypto Currencies?
Generally, the Canada Revenue Agency (“CRA”) considers crypto currencies to be a taxable form of commodity equivalent to stocks and investments. It follows that any gains or losses arising from a taxpayer’s purchase and subsequent disposition of Crypto will be subject to tax.
Irrespective of whether the disposition is from crypto to fiat or coin to coin, the disposition constitutes a taxable event.
Capital Gains vs. Business Income?
Typically, the sale of cryptocurrencies would be categorized as a capital gain and result in only 50% of the gross capital gain being taxable. On the same “token”, this means that only 50% of any losses derived from the sale of crypto currencies would be considered a taxable capital loss. Furthermore, capital losses are “quarantined”, in that it can only be applied to offset capital gains and not other sources of income (such as from business nor employment).
However, in some circumstances, the CRA may determine that this trading activity constitutes income on account of business. When this happens, the proceeds of disposition arising from the transaction is captured in full (100%) and taxed accordingly. This usually occurs when the CRA determines that the taxpayer is actively trading crypto currencies or is in the business of speculating price changes of crypto currencies.
Other factors the CRA considers when determining if the taxpayer’s profit in selling crypto is capital or business income includes but not limited to:
- The intention of the Taxpayer;
- The length of time the crypto currency is held;
- The frequency in which the taxpayer buys/sells crypto currencies; and
- The taxpayer’s knowledge and expertise .
It is important to note that each case is very fact-dependent on the taxpayer, their trading activity and other material circumstances.
How do I Calculate my Gains and Losses?
Taxpayers must also be very attentive of the constantly changing adjusting cost base (“ACB”) of their crypto currencies. In short, ACB is the measure of what the taxpayer paid to receive the coins. Naturally, the ACB is subject to change then if the taxpayer purchases and sells their coins throughout the year at different prices.
The following example clarifies this concept. Suppose the following transactions occurred:
- Taxpayer purchased 1 coin of X for $100 on January 1st;
- Taxpayer purchased an additional 1 coin of X for $200 on May 1st;
- Taxpayer sold 1.5 coins of X for $300 on June 1st; and
- Taxpayer purchased an additional 1 coin of X for $400 on August 1st.
In this example, the Taxpayer’s ACB after transaction 1 would be $100. However, after transaction 2, the taxpayer’s ACB for coin X would increase to $150. As a result, the taxpayer’s proceeds from the disposition in transaction 3 would be $150 ($300 – $150). After transaction 4, the taxpayer’s ACB of coin X would rise to $275. This example assumes there are not transaction fees for each purchase and sale.
Taxpayer’s should also be aware that the ACB of each type of coin should be calculated and monitored. For instance, the cost basis of Bitcoin, Ethereum, Litecoin and others must be calculated separately and adjusted after each corresponding transaction. Intuitively, this is akin to calculating the ACB for different stocks. The ACB of a taxpayer’s Apple shares should not be affected by a subsequent purchase or sale of RBC shares or any other stock except Apple.
If you have questions about the taxation of crypto currencies, call us today! We are here to help!
**Disclaimer
This article provides information of a general nature only. 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 this article. If you have specific legal questions you should consult a lawyer.
by Jason RosenCoinsquare and the CRA
On March 19, 2021, the Honourable Justice Pamel ordered CoinSquare, a major Canadian cryptocurrency exchange to provide a list of all Customer accounts, both active and inactive, either alone or jointly held with any other person(s) or business(es).
Customers are defined as the following:
- Accounts with a value of $20,000 CAD or more from December 31, 2014 to December 31, 2020;
- Customers who have cumulative deposits of $20,000 CAD or more since the account opening; and
- The 16,500 largest Customer accounts by trading volume in CAD dollars between 2014 and 2020, and if not already included, the 16,500 largest Customer accounts by number of trades between 2014 and 2020.
Additionally, the order also required CoinSquare to disclose the following:
- A detailed listing of all cryptocurrency and fiat currency transfers identifying the source and destination of all Customer’s deposits and withdrawals.
- A detailed listing of all trading activity of its Customers, including over the counter (OTC) or off-exchange trades and information indicating over-the-counter (OTC) or off-exchange trades and information indicating the trading pair, buy/sell order, date, time, amount, price per unit, fees, transaction identifier, which can include a list of all known cryptocurrency addresses that were, or may have been, used during the Period of its Customers, either alone or jointly with any other person(s) or business(es).
What Does this New Order Mean & How am I Affected?
In short, this new order means that Canadian policy makers are clamping down on taxpayers who are failing to properly report their assets, capital gains or income via crypto currencies. In effect, this will impact both taxpayers who both fail to report their crypto currencies intentionally or by accident. Many crypto trading platforms actively encourage their users to monitor and report their gains from crypto currencies. The CRA has broad powers to investigate and request information from both trading platforms such as CoinSquare as well as individual taxpayers.
If a taxpayer did not disclose their assets or gains from crypto currencies properly, they may still have a chance to come clean via the Voluntary Disclosure Program (“VDP”). You can read about our earliest post on the VDP here and here. Under the Canada Revenue Agency’s Voluntary Disclosure program, taxpayers can come forward to disclose past non-compliance, whether that be non-filing, over-claimed expenses, offshore reporting, or any of an almost limitless number of errors and omissions on Canadian taxes.
60 Day Order
CoinSquare has 60 days from receiving the March 19, 2021 order to comply and disclose the above-mentioned information. This will surely impact many taxpayers as the order means that CoinSquare will disclose information on approximately 5% to 10% of CoinSquare’s 400,000 customers to the CRA. More importantly, this may be a sign for further things to come as the CRA and Canadian policy makers actively seek to clamp down on non-compliance.
If you are having trouble navigating through the complex laws surrounding crypto currencies or need advice, contact a professional at Rosen Kirshen Tax Law today! We’re here to help!
**Disclaimer
This article provides information of a general nature only. 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 this article. If you have specific legal questions you should consult a lawyer.
Additional Resources
by Jason RosenT1135 Discretionary Penalties
Over the past decade, the Tax Court of Canada (TCC) has gradually carved a role for itself to decide whether to penalize Canadians who fail to file their Foreign Income Verification Statement (T1135 form) on time. A T1135 form must be filled out by any Canadian who, at any time during the year, owns foreign property valued at more than $100,000.00 CAD. Failure to file a T1135 form normally results in a strict penalty being levied against the taxpayer. A “strict” penalty is practically automatic; the circumstances that resulted in the late filing are not examined by the CRA when they’re applied.
T1135 Penalties and the Tax Court of Canada
The courts have gradually decided that there are circumstances where the strict T1135 penalty should not be applied. In Douglas v HMQ, 2012 TCC 73, the TCC accepted the Appellant’s argument that the penalty imposed under subsection 162(7) of the Income Tax Act should be waived for the late-filing of a T1135 form.
In that case, the Appellant knowingly filed his T1 income tax return along with his T1135 nine months late. He assumed that his failure to file on time would not attract a penalty as he did not owe any taxes for the year. However, the Minister imposed the maximum penalty of $2,500.00 for the late-filed T1135.
The TCC noted that the facts of that case justified such application to waive the T1135 penalty. The Court found that the Appellant acted reasonably in believing that there would be no penalty since no taxes were owing. Notwithstanding that subsection 162(7) imposes a strict penalty, the TCC held that it would be unfair to penalize the Appellant in these circumstances.
This decision suggests that a taxpayer may have recourse through the TCC for late-filed T1135 penalties when the taxpayer has exercised “all reasonable measures” to comply with the Income Tax Act.
In Fiset v R, 2017 TCC 63 (Informal Procedure), the Tax Court confirmed the judgement of the Court in Douglas. In that case, the Minister’s counsel (the CRA) decided to agree to cancel the penalties over the course of the proceedings. Justice Fournier stated that had the agreement not been reached, he would have done so himself. Justice Fournier explained:
“It is important to recognize that the Minister of National Revenue (or his delegate) has the discretion to waive any penalty or interest imposed under the Act (subsection 220(3.1)). This is a fairness provision. In my opinion, to insist that the appellant suffer the consequences of an honest mistake would neither benefit the public administration nor enhance confidence in the CRA.” (paragraph 10)
In other words, it is not the Act’s purpose to punish an individual who makes a reasonable mistake in good faith, nor would it generate greater confidence in the CRA. The fact that a Justice of the Tax Court of Canada is considering these appeals demonstrates that these matters are within their purview. Their impact on decisions from the Appeals Division of the CRA are less certain as Appeals Officers are not bound by Informal Procedure decisions.
T1135 Penalties and the Federal Court
In Biswal v Canada, 2017 FC 529, the Federal Court was not able to accept the Appellant’s use of Douglas because it found that it does not have similar jurisdiction of the Tax Court of Canada. This, in essence, confirms that matters of cancelling penalties can be within the jurisdiction of the Tax Court of Canada. The Federal Court judge even encouraged the Appellant to file an appeal to the Tax Court, to access the remedy that she sought.
T1135 Penalties and the Voluntary Disclosure Program
In Leclerc v R, 2010 TCC 99, the Court concluded that Canadians could not be expected to know that T1135 late filing penalties would only be waived by the CRA if they formally applied under its Voluntary Disclosure Program, since these information forms do not involve fraud or non-disclosure of income. The Court’s point in Leclerc was taken further in Moore v the Queen, 2019 TCC 141, where the Court criticized the Tax Guide available to taxpayers, and found that it is unreasonable to punish ordinary Canadians with penalties for honest mistakes.
The Court in Moore cited Leclerc, stating at paragraph 17, “Justice Favreau’s comments are also relevant to, and highlight, the fact that Mr. Moore may have voluntarily disclosed to CRA his late filing, but was unaware that would have had to be done under CRA’s formal voluntary Disclosure Program if he wanted to avoid coming to Court”. He proceeded to cancel the penalties imposed on the Appellant.
If you are considering a voluntary disclosure, please give us a call.
T1135 Discretionary Penalties
The evolving case law underscores the more active role that the Tax Court of Canada is taking in providing oversight for the CRA’s more severe penalties and procedures. The Court is chiefly interested in whether the taxpayer exercised due diligence in trying to meet their obligation to file a T1135. While the Court admits that relief should be granted sparingly, it also seems quite willing to consider the remedy in a broad range of circumstances.
However, the Court’s newfound discretion has only been confirmed in judgements rendered under the Informal Procedure. It has not yet been heard in a proceeding under the General Procedure.
The distinction between these two Tax Court procedures is crucial. While officers in the CRA’s internal appeal process can consider judgements rendered through the Informal Procedure, they are only bound by ones rendered in the General Procedure. Until T1135 penalty cases are heard under the General Procedure, these new developments are less likely to have an impact on decisions made by officers in the CRA’s internal appeal process. This unfortunately means that Canadian taxpayers who are unfairly subject to T1135 penalties cannot benefit from the CRA’s internal appeal process; they will have to undergo a costly appeal to the Tax Court or pin their hopes on a taxpayer relief request.
If you have any questions about Form T1135, “Foreign Income Verification Statement”, or you are late filing it, or simply don’t know whether you need to file it or not, call us today! We can help!
**Disclaimer
This article provides information of a general nature only. 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 this article. If you have specific legal questions you should consult a lawyer.
by Jason RosenHow Real Estate Agents can Incorporate a Company
On October 1, 2020, the Real Estate and Broker’s Act includes regulations which permit the use of Personal Real Estate Corporations (PRECs).
Based on the regulations, PRECs must have the following attributes:
- They must be incorporated under the Ontario Business Corporations Act;
- They must have one controlling shareholder who owns all equity and voting shares;
- The sole shareholder must be president, sole director and sole officer of the corporation;
- The shareholder must be a registered broker;
- Any non-equity (non-voting) shares must be owned directly or indirectly by family;
- No agreement restricting the authority of directors to supervise the affairs of the corporation can exist; and
- There must be an agreement governing the relationship between the broker (yourself), the PREC, and the brokerage. This agreement should also include clauses that prevent the PREC from hindering the provision of services of the broker on behalf of the brokerage.
After incorporating a PREC, for it to remain valid the agent must remain an associate of the brokerage and must have all remuneration flow through the PREC. There can be no advertising done by the PREC for provision of real estate services that are not supplied by the brokerage. Lastly, the broker is responsible for evaluating the legitimacy of a PREC before making payment to it.
Ownership Requirements in a PREC
The legislation requires that all the equity shares of the corporation be legally and beneficially owned, directly or indirectly, by the controlling shareholder. It is possible for a holding corporation to own equity shares of a PREC, legal advice should be sought to confirm the best structure for you.
It also states that all the non-equity shares must be owned directly or indirectly by a family member. A family member is a spouse, child, parent, or a trust for a minor child. Whether shares will be held directly or indirectly by the controlling shareholder or a family member is a business decision to be made by the registrant setting up the PREC. Of course, legal advice should be sought to ensure compliance with the law.
Tax Benefits for Real Estate Agents who Incorporate
The passing of Trust in Real Estate Services Act carries significant tax benefits for real estate agents who decide to incorporate. As real estate agents are sole proprietors, their businesses have been subject to the same marginal tax rates as the personal incomes of Ontarians. However, as a PREC, real estate agents will be able to enjoy the much lower Ontario small business tax rate, and potentially the Canadian Controlled Private Corporations tax rate. The incorporation route promises huge tax savings for real estate agents.
Reporting Requirements for Real Estate Corporations
Of course, with incorporation comes new challenges. Requirements for filing and record keeping for corporations are far more onerous than for individuals. There are also indirect taxes like employer health tax, WSIB, taxes for payroll and GST/HST on commissions that can add expenses. In essence, while the power to incorporate would give real estate agents far more power to file their income strategically and enjoy small business tax rates, it also requires a far more complicated tax filing process with more costly obligations.
If you are a real estate agent and would like to discuss the implications of incorporating your business in the near future, contact our firm for a free consultation. We are here to help!
**Disclaimer
This article provides information of a general nature only. 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 this article. If you have specific legal questions you should consult a lawyer.