Canada: Canada Revenue Agency Increases Efforts To Uncover Unreported Cryptocurrency & Offshore Income – A Canadian Tax Lawyer’s Analysis

Last Updated: October 2 2018

In July 2018, the Canada Revenue Agency ("CRA") announced its progress in exposing those who evade tax by using offshore entities or cryptocurrencies such as Bitcoin, Litecoin, Ethereum, Dash, Zcash, and Ripple. In particular, the CRA declared advances in country-by-country reporting and international cooperation aimed at fighting international tax crime and money laundering.

Country-By-Country Reporting

On July 10, 2018, Canada's Minister of National Revenue, the Honourable Diane Lebouthillier, pronounced that Canada had successfully initiated its first round of country-by-country reports. This project sees Canada and 68 other nations exchanging information on the revenue, profit, tax, and accumulated earnings of large multinational enterprises. As a result of country-by-country reporting, the Canada Revenue Agency has automatic access to information allowing the CRA to risk assess large multinationals and target its efforts accordingly.

The Organisation for Economic Cooperation and Development (OECD) recommended country-by-country reporting as a measure that would equip governments with the tools needed to ensure that profits are taxed where the economic activities generating those profits are carried out.

Multinational enterprises, due to their international reach, may attempt to artificially shift profits from high-tax countries to low-tax countries. For example, the group may shift profits away from high-tax countries by transferring intellectual-property rights to an affiliate in a low-tax country. Other group members would then pay royalty fees to the affiliate holding the intellectual property. The royalty payments are deductible for the payors residing in high-tax jurisdictions; the royalty income is nominally taxed for the recipient residing in the low-tax jurisdiction.

In response, many countries have enacted domestic tax legislation designed to ensure that members of a multinational enterprise deal with one another on an arm's length basis. Canada, for instance, enacted the transfer-pricing legislation found in section 247 of the Income Tax Act (Canada). The OECD's recommendation of country-by-country reporting reinforces a country's domestic transfer-pricing legislation by enhancing transparency for tax administrations, providing them with the information required to conduct transfer-pricing risk assessments of multinational enterprises. To that end, Canada and over 50 other countries have signed various bilateral and multilateral agreements in the name of transparency and information sharing between tax authorities.

Canada's country-by-country reporting rules are in section 233.8 of the Income Tax Act. Basically, these rules require a Canadian resident entity of a multinational enterprise to file a form RC4649 if the Canadian entity is the group's ultimate parent. (A non-parent Canadian entity may still need to file a form RC4649 if, for instance, the group's parent entity is in a jurisdiction that hasn't agreed to country-by-country reporting. Also, the requirement to file an RC4649 doesn't apply if the group's consolidated revenue was less than €750 million in the preceding fiscal year.) The form RC4649 lists, for each jurisdiction in which it operates, the multinational group's revenue, pre-tax profit, tax paid and accrued, number of employees, stated capital, tangible assets, retained earnings, and business activities.

The CRA will then automatically share the information contained in the form RC4649 with the tax authorities of cooperating countries in which an entity of the multinational group operates.

In short, Canada's progress in country-by-country reporting evidences the broadening international cooperation geared toward combating tax-base erosion and aggressive tax planning.

The Joint Chiefs of Global Tax Enforcement (J5): International Cooperation to Address Tax Evasion and Money Laundering

On July 3, 2018, the CRA launched a joint international effort aimed at investigating cryptocurrency-related tax evasion and money laundering, which may involve users of Bitcoin, Dodgecoin, Litecoin, Monero, Ethereum, Namecoin, Bytecoin, or Ripple. The Joint Chiefs of Global Tax Enforcement (J5) consists of: the CRA, the Australian Criminal Intelligence Commission (ACIC) and Australian Taxation Office (ATO), the Dutch Fiscal Information and Investigation Service (FIOD), Her Majesty's Revenue & Customs (HMRC) (UK), and Internal Revenue Service Criminal Investigation (IRS-CI) (US).

The group formed in response to a request from the OECD that countries increase measures against the enablers of tax crime. The J5's mandate includes information sharing and joint investigations in an effort to combat the threat of cryptocurrencies on tax administration. In particular, the project aims to uncover unreported income and assets stemming from holdings in Nxt, Monero, Ether, Peercoin, Swiftcoin, Tether, or other cryptocurrencies.

Commenting on the need for a group with the J5's mandate, the CRA's Director General, Johanne Charbonneau alluded to the technological advancement and professional assistance that may be assisting tax evaders:

The formation of the J5 demonstrates the serious commitment of governments around the globe in enhancing international cooperation in fighting serious international tax and financial crimes, money laundering, and cybercrime through the use of cryptocurrencies. The J5 complements the important international work of the OECD through operational collaboration. Our collective efforts and experience will be shared to jointly identify and address the increasingly sophisticated and global schemes and the professional enablers that facilitate such schemes.

And Don Fort, Chief of IRS-CI, observed the need for transparency among tax authorities and law enforcement when combating tax evaders, who previously benefitted from non-cooperation among different regimes:

We cannot continue to operate in the same ways we have in the past, siloing our information from the rest of the world while organized criminals and tax cheats manipulate the system and exploit vulnerabilities for their personal gain. The J5 aims to break down those walls, build upon individual best practices, and become an operational group that is forward-thinking and can pressurize the global criminal community in ways we could not achieve on our own.

The group's formation has unsurprisingly caused a stir among users of MazaCoin, Vertcoin, Stellar, Waves, BitConnect, Bitcoin Cash, and other cryptocurrencies. Some believe that the J5's creation will bring with it increased efforts by tax authorities to gain insight on cryptocurrency transactions. We might, for instance, see different tax authorities simultaneously and strategically requesting account information from providers of cryptocurrency wallets. In early 2018, the United States Internal Revenue Service (IRS) successfully compelled the digital-wallet provider, Coinbase, to surrender the account information of over 14,000 users who dealt in Bitcoin. Some believe that, with the J5's creation, we may see requests for digital-wallet providers to release information simultaneously to the tax authorities of Canada, the United States, Australia, the Netherlands, and the United Kingdom.

The development of the J5 should alert users of Ethereum Classic, Titcoin, Decred, Petro, NEM, MazaCoin, and other cryptocurrencies about the need to educate themselves on the tax-compliance requirements in their jurisdiction. Indeed, some cryptocurrency users erroneously believe that they need not worry about tax liability until they cash out into fiat (conventional currency). This is false. Discuss your cryptocurrency transactions with one of our expert Canadian tax lawyers.

Tax Tips

The Canadian parent entity of a multinational group must file a completed form RC4649 if the group's consolidated revenue from the preceding fiscal year equals or exceeds €750 million. A non-parent Canadian entity may still need to file a form RC4649 in certain cases.

Section 247 of the Income Tax Act allows the CRA to reassess a transaction between a Canadian resident and a related non-resident if the transaction's terms and conditions differ from what arm's length parties would have done. If you plan on dealing with a related non-resident, consult with an experienced Canadian tax lawyer for tax-planning advice.

Growing international cooperation and resource sharing may mean the end of the past anonymity offered through the use of Bitcoin, Auroracoin, Dash, Synereo AMP, PotCoin, Nxt, Gridcoin, Feathercoin, and other cryptocurrencies. A confidential and privileged consultation with one of our expert Canadian tax lawyers can provide you with both advice on remedying past non-compliance a voluntary disclosure program (VDP) application for relief of tax penalties and avoidance of criminal tax prosecution and guidance on ensuring future tax compliance.

The information is thought to be current to date of posting. Income tax law changes frequently and content may no longer reflect the current state of the law. This document is not intended to create an attorney-client relationship. You should not act or rely on any information in this document without first seeking legal advice. This material is intended for general information purposes only and does not constitute legal advice. If you have any specific questions on any legal matter, you should consult a professional legal services provider.

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