CRA Auditors Target Crypto Tax Evasion
In Vancouver, a specialized team from the Canada Revenue Agency (CRA) has been conducting audits into unpaid taxes related to cryptocurrencies, focusing on over 200 cases and claiming to recover more than $100 million in the last three years. The CRA highlights that up to 40 percent of taxpayers using cryptoasset platforms have either failed to file their taxes or are at high risk of non-compliance.
Despite these aggressive audit efforts, the CRA has not laid any criminal charges since 2020. Recent court filings from a Vancouver-based cryptocurrency firm indicate that the agency's attempts to combat tax evasion and illicit financing within the cryptocurrency sector are hindered by limited enforcement resources, especially due to the anonymous nature of cryptocurrency transactions.
A CRA application filed in Federal Court in September has shown the agency's concern regarding the utilization of the anonymous underground economy by taxpayers for tax evasion, which has been exacerbated by the popularity of cryptocurrencies and non-fungible tokens (NFTs). According to a senior CRA official, the agency believes it may be nearly impossible to reliably identify taxpayers involved in the crypto space to ensure they comply with income tax obligations.
The CRA sought a court order to unveil the identities of thousands of clients who use Dapper Labs Inc., a prominent company in the NFT market. Initially, CRA sought information on Dapper’s 18,000 top users, but this figure was later negotiated down to 2,500. This case marks just the second instance in which a court has mandated the unmasking of customers within a Canadian cryptocurrency platform as part of a tax compliance investigation.
An affidavit provided by Predrag Mizdrak, a project leader in the CRA's digital compliance division, asserts that the cryptoasset industry is prevalent within the underground economy. Mizdrak’s statements underscore that the CRA's investigations into crypto platforms suggest significant non-compliance. Past data indicates that around 15 percent of Canadian taxpayers using crypto platforms have not filed their taxes in a timely manner or at all, while 30 percent of those who file are categorized as high-risk for non-compliance.
The rapid rise in the use of cryptoassets during the COVID-19 pandemic has introduced additional challenges for the CRA due to inherent anonymity in the crypto space and the multitude of transactions facilitated by cross-border platforms. The agency reports that it has 35 auditors working on over 230 files related to crypto tax compliance, resulting in significant tax recoveries, including the previously mentioned $100 million in the past three years. To date, five criminal investigations have been opened by the CRA involving digital assets, though no charges have been brought forward yet.
Experts like Jessica Davis, president of Insight Threat Intelligence and an illicit financing specialist, note that the $100 million recovered is significant. However, she expresses surprise at the absence of any criminal charges, considering the long-standing presence of cryptocurrencies. Davis observes that there is still a lack of understanding among the public regarding the taxability of profits from crypto dealings. From her perspective, while Canada’s regulatory framework is progressing well, enforcement remains a challenge. She points out that financial crimes investigations often compete for resources against other law enforcement priorities, which may affect their efficacy.
This year, Canada’s anti-money laundering agency, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), has imposed substantial penalties against several crypto companies for failing to comply with anti-money laundering legislation. In October, FINTRAC issued a historic fine of nearly $177 million against Xeltox Enterprises Ltd. for non-compliance with the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, and it also sanctioned Seychelles-based exchange Peken Global Ltd. over $19.5 million for failing to register.
The Federal Court's granting of the CRA's unnamed persons requirement on Dapper Labs comes nearly five years after a similar requirement was issued to Toronto-based Coinsquare Ltd. The CRA has indicated that it continues to address taxpayer non-compliance revealed through this unnamed persons requirement but cannot provide an estimate on the resulting tax re-assessments yet.
Looking ahead, Finance Minister Francois-Philippe Champagne has announced plans for a new Canadian financial crimes agency aimed at investigating complex cases of money laundering and financial scams, with an established goal to launch by spring 2026. However, the specifics of its mandate and structure remain unclear, leading to a cautious optimism among experts in the field.
