Law Times

Page 14 September 3, 2018 • Law timeS www.lawtimesnews.com Expect enforcement on crypto-currency BY MICHAEL MCKIERNAN For Law Times I t's only a matter of time be- fore the Canada Revenue Agency embarks on enforce- ment proceedings related to crypto-currencies, according to a Toronto tax lawyer. Robert Winters, a partner at tax law boutique Morris Kepes Winters LLP, says the nature of the agency makes it hard to get a read on its approach to enforce- ment regarding transactions in digital currencies. "In the absence of clients who are subject to actual enforce- ment action or a reported case, it's very difficult to know how closely the CRA is paying atten- tion," he says. "But I know there is political pressure on them to enforce tax laws and stop people using Bitcoin to avoid their tax obligations, and the CRA cer- tainly has the tools to do that. "I think we all expect it to be- come more visible soon, and I'm sure there will be a case in court before long," Winters adds. While Bitcoin is the best known and most used example, a multitude of other peer-to- peer crypto-currencies bypass- ing central banking authorities have emerged in recent years, including Litecoin, Ethereum, Dash and Zcash. The currencies exist as strings of computer code stored on net- works of computers around the world, with anyone allowed to join and every transaction en- crypted and logged. And while many users are sold on the anonymity of cryp- to-currencies, Winters says that belief is mistaken, since it is pos- sible for tax authorities to iden- tify individuals associated with particular transactions via a public ledger. In addition, Win- ters says, most people use third- party exchanges, which collect identifying information about users, to convert digital currency into cash in old-school denomi- nations such as the Canadian or American dollar. Winters says the Income Tax Act and Excise Tax Act each contain powerful "third-party requirements," under which Ca- nadian tax authorities can com- pel any person or business to provide information about third parties, with an authorization from the Federal Court. "Even if there's no connec- tion to Canada, the CRA has a number of tax information ex- change agreements, where treaty partners obtain information for them and turn it over," Winters adds. South of the border, the U.S. Inland Revenue Service recently f lexed its enforcement muscles, when a California judge ordered crypto-currency exchange Coinbase to turn over the de- tails of customers who bought, sold, moved or received at least US$20,000 worth of digital cur- rency in certain years. "We know the IRS has been using these techniques to fight tax evasion, and there's no rea- son to think the CRA isn't, too," Winters says. The CRA also recently strengthened its international information-gathering powers, announcing in July the forma- tion of the J5 — or Joint Chiefs of Global Tax Enforcement — a collaborative operational group formed by tax authorities in Canada, the U.K., the U.S., Aus- tralia and the Netherlands. The threat of crypto-curren- cies featured prominently in a press release announcing the formation of the group, which promises to build "international enforcement capacity by sharing information and intelligence, enhancing operational capabil- ity by piloting new approaches, and conducting joint opera- tions, to bring those who enable and facilitate offshore tax crime to account." Canadian taxpayers are still coming to grips with their crypto-currency tax obligations, according to Kathryn Walker, a lawyer with national tax law boutique Thorsteinssons LLP. "It was interesting that people working in the space weren't re- ally aware," she says. "That said, the people who came to me had some inkling about their obliga- tions." Since 2013, the CRA has characterized crypto-currency as a commodity under the ITA, as opposed to a currency issued by a government, such as Ameri- can dollars. Katy Pitch, a partner in the tax practice at Toronto firm Wil- deboer Dellelce LLP, explains the status to her clients by com- paring Bitcoin assets with other commodities, such as gold. She says how tax is charged on those commodities depends on a number of factors, including the purpose for which they were ac- quired. Professional traders are likely to see profits taxed as income, while hobbyists are more likely to have them taxed according to capital gains treatment. Over time, as crypto-curren- cies have become more main- stream, clients' tax concerns have also switched, says Pitch. "Before, it was all about what it means when you get it and sell it for dollars," she says. "Now, it's about doing stuff with these as- sets besides turning them into cash, whether that's to compen- sate employees, pay utilities or other uses." LT TAX LAW • Introduction: An Overview of Activist Short Selling • What to Expect When Activist Shorts Attack • Strategies for Fighting an Activist Short Attack COURSE HIGHLIGHTS: COURSE LEADERS: WALIED SOLIMAN, CHAIR, NORTON ROSE FULBRIGHT ORESTES PASPARAKIS, PARTNER, NORTON ROSE FULBRIGHT *Discount applies to in-class only REGISTER BEFORE OCTOBER 26 AND SAVE 25%* Toronto & Webinar | November 21 Register online at www.lexpert.ca/legal-programs For questions and group rates, please contact: Toll-Free: 1-877-298-5868 • Direct: 416-609-5868 Fax: 416-609-5841 • • Email: cpd.centre@thomsonreuters.com ACTIVIST SHORT SELLING IN CANADA: KEY TRENDS AND DEFENSIVE STRATEGIES Untitled-1 1 2018-08-29 1:38 PM Robert Winters says the nature of the Canada Revenue Agency makes it hard to discern its approach to enforcement regarding transactions in digital curren- cies. Before, it was all about what it means when you get it and sell it for dollars. Katy Pitch

• Cover