CRA goes after clients of crypto firm

OTTAWA • The Canada Revenue Agency wants to know the identity of every client of a major Canadian cryptocurrency trading platform as part of its effort to fight tax fraud and the underground economy.

In a September filing to the federal court, Canada's tax agency is asking a judge to force Toronto-based crypto trading platform Coinsquare to hand over information and certain documents about all its clients since the beginning of 2013.

In its filing, the CRA says it needs all the information to ensure that Coinsquare's customers have “complied with their duties and obligations” under Canadian tax laws.

In other words, CRA wants to make sure that the firm's clients have declared all their income, paid their fair share of taxes and haven't used cryptocurrencies to hide assets.

The details contained in the few documents available from the federal court are scarce, but all this likely means that CRA wants to know which Canadians have been trading on Coinsquare's platform, and then compare it to their past tax filings.

If a Canadian trader on Coinsquare has not declared any cryptocurrency revenue or trading to CRA, then the agency may decide to further audit that person or organization, said David Piccolo, a tax lawyer at Tax Chambers.

“CRA could use this information to essentially try to verify or to match certain transactions with what was reported” in Canadians' tax filings, Piccolo said in an interview. “Then CRA does their internal risk assessment (to determine) whether these are worth pursuing in audit.”

Because the case is in federal court, CRA spokesperson Charles Drouin refused to comment on the Coinsquare request specifically.

The agency also refused to say if the decision to seek Coinsquare's client list has anything to do with significant penalties imposed by the OSC on the firm and several of its executives this year.

The regulator imposed $2.2 million in sanctions and costs against the firm for having significantly faked its trading volume, then tried to cover it up all the while firing a whistleblower that flagged the issue internally.

But as a general comment, Drouin says the CRA considers that there is a “high” risk of tax fraud, evasion or any other type of tax crime within cryptocurrency trading.

There is also no doubt for CRA that cryptocurrencies are a growing part of the underground economy.

“Given the pseudo-anonymous nature of cryptocurrencies, the scope of non-compliance with Canadian tax obligations is difficult to measure; however the CRA presumes the opportunity for non-compliance to be high,” the CRA spokesperson said in an email.

According to Piccolo, CRA's move is significant because it's the first known time the agency has actively sought out such an extensive amount of information from clients of a crypto platform.

But he says it will also be a test of the agency's ability to process the likely massive amounts of data that generally accompanies cryptocurrency transactions. If all goes well, he says we can expect more of these kinds of requests from the tax agency.

“What's actually relevant is Coinsquare apparently has about 200,000-plus accounts,” Piccolo explained. “CRA can approach these kind of large-scale projects because they've been increasing their capacity to handle large chunks of information.”

The tax expert also says this kind of request, if successful, can be a strong deterrent to other Canadian traders who think CRA won't ever find out they're engaged in virtual currency trading if they never declare it themselves. Regardless of how Coinsquare responds, the agency's demand needs to be approved by a federal court judge.

Lately, the CRA has been increasingly warning crypto users and traders they would be subjected to much more scrutiny because of virtual currencies' potential to hide revenue, launder money and dodge paying taxes.

In 2018, the CRA established a cryptocurrency unit that conducts audits focused on “risks related to cryptocurrencies as part of a broader Underground Economy Strategy,” the CRA said.

In early 2019, the agency told Journal de Montréal that it was working on 54 criminal investigations related to offshore tax evasion, and that virtual currencies were a growing part of that.

“The phenomenon has begun. Some of our investigations have a cryptocurrency component, like in cases where a person's revenues were put into a cryptocurrency wallet,” the newspaper quotes Stéphane Bonin, then-CRA director of criminal investigations.

In a statement, Coinsquare CEO Stacy Hoisak said they were reviewing the CRA's request and had not decided if they would fight it before the court (though the agency's request would still need to be approved by a federal court judge). “Coinsquare maintains a robust customer verification process, and we understand our customers comply with all applicable Canadian laws relating to their cryptocurrency trading activities,” she said.