Introduction
On April 16th the Department of Finance released Budget 2024: Fairness for Every Generation (the "Budget"). In addition to the new tax changes such as the controversial capital gains tax, the federal government is also attempting to increase methods available to uncover and punish those who engage in illegal tax activities.
New Enforcement Tools For Avoiding Tax Debts
The Government is proposing to allow the CRA to assess a person who receives property from a party other than the tax debtor for the debtor's tax debt. The CRA would issue this form of assessment in cases where the purpose of the transfer of property is to avoid the imposition of joint and several, or solidary, liability.
The Budget includes plans to hold tax professionals accountable for promoting tax debt avoidance planning using transactions to avoid payment of a tax debt. This proposal is in response to the scrutiny the Canada Revenue Agency (the "CRA") has faced the last few years for failing to catch and prosecute those cheating the tax system. Although the CRA has successfully uncovered and prosecuted smaller cases, Canada still loses between $5.3 and $7.3 billion each year in tax revenues each year from tax avoidance and evasion (according to Canadians for Tax Fairness).
The new tax debt avoidance penalties are proposed to be in the amount of 50% of the tax related to the avoidance transaction, and $100,000 plus the amount of consideration the planner is entitled to receive for planning the abusive arrangement.
Crypto-Asset Reporting Framework
Another tool being added to the toolbox for catching tax cheats is the Crypto-Asset Reporting Framework ("CARF"). This framework which is developed and promoted by the Organisation for Economic Co-Operation and Development (the "OECD") will create new reporting requirements for crypto-asset service providers. The OECD proposal is aimed at reducing the anonymity of crypto-assets, allowing governments around the world to properly attribute income earned from crypto-assets to taxpayers.
Within the Budget, Canada is proposing to require crypto-asset service providers to reveal information about each customer and each crypto-asset. Including crypto exchanges, crypto-asset brokers, and crypto-asset ATM operators. The service providers will be required to collect and provide information a number of transactions, including: crypto-assets exchanged for fiat currency, crypto-assets exchanged for other crypto-assets, and the use of crypto-assets to purchase over $50,000 USD of goods or services.
Canada will also require the crypto-asset service providers to release identifying information to the CRA. Including the customers name, tax identification number, address, date of birth, and jurisdiction. Canada is attempting to implement a form of the CARF framework by 2026, with the exchange of information collected beginning to occur in 2027.
New Enforcement Mechanism For Withholding Information
The CRA is also receiving a new measure to compel cooperation of taxpayers who attempt to withhold information. Currently, many taxpayers who wish to avoid taxes or reassessments from the CRA will delay providing information sought by the CRA for as long as possible. The CRA currently must seek a contempt order from a court, which can be a long and arduous process. The Budget will address this issue by empowering the CRA to issue a "Notice of Non-Compliance" to a taxpayer who has failed to provide information it requested. Those who ignore that notice could face a penalty of $50 for each day of non-compliance, up to a maximum of $25,000. The CRA also receives an extension to the normal reassessment period for the taxation year to which the Notice of Non-Compliance relates. This extension is equal to the length of time by which the Notice of Non-Compliance is outstanding.
If the CRA obtains a compliance order from a court to force a taxpayer to provide information, that taxpayer could face a penalty of 10% of the aggregate tax payable if the tax owing in one taxation year exceeds $50,000. There will be a series of similar penalties which apply to other tax legislation, including: the Underused Housing Tax Act, Select Luxury Items Tax Act, and Excise Tax Act.
Pro Tax Tips – Keep Record Of Your Crypto-Asset Transactions
The new CARF framework will eventually serve to deanonymize the crypto-asset space. It is important to keep accurate records of your dealings in crypto-assets so you can properly report your income on your tax return each year. The new penalties available to the CRA will punish taxpayers who do not provide information on a timely basis. Having complete and accurate records of your crypto-asset dealings will allow you to provide the information requested by the CRA on a timely basis, minimizing the risk of becoming subject to a notice of non-compliance or a compliance order from the court.
If you are facing requests for information from the CRA and you are unsure on how to respond, you should engage with one of our expert CRA tax lawyers. Our expert Canadian tax lawyers can provide legal advice and assist you with fighting unreasonable CRA decisions.
FAQ
Do These Proposed CARF Changes Mean Cryptocurrency Transactions Are No Longer Anonymous?
A major goal of the global implementation of CARF is to create transparency in the crypto-asset space for tax authorities. CARF aims to place requirements on the centralized aspects of the crypto-asset industry to obtain the information required to accurately tax the individuals who purchase, hold, and sell crypto-assets. Only time will tell what level of anonymity will remain after CARF, but these new rules will serve to give the government more information on transactions occurring in Canada and potentially abroad.
How Will These New Penalties Impact The Relationship Between Taxpayers And Tax Planners?
The new penalties aimed at tax planners should only affect those who are engaged in abusive tax debt avoidance. Ordinarily, tax planners should only be recommending transactions which minimize the tax burden of the taxpayer, effectively finding the correct amount owing. These new penalties serve as a deterrent for irresponsible tax planners to promote abusive strategies which go above and beyond minimizing the burden, taking steps to aggressively avoid the debt.
What Is The Significance Of The Notice Of Non-Compliance?
The ability to issue a Notice of Non-Compliance imposes significant consequences for a failure to comply with the CRA's request for information. Since the penalty accumulates on a daily basis the Notice of Non-Compliance discourages taxpayers from advancing challenges to unreasonable requests made by the CRA. If the CRA wrongfully issues you a Notice of Non-Compliance, you should consult one of our expert Canadian tax lawyers on what options would be available to you.
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.
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