Canadian Cryptocurrency Tax Trap: Poor Record-Keeping Will Leave You At The CRA's Mercy: Record-Keeping Requirements For Canadian Cryptocurrency Traders & Investors ' Canadian Tax Guidance From A Canadian Tax Lawyer

• Published date: 17 March 2022
• Subject Matter: Tax, Technology, Income Tax, Fin Tech
• Law Firm: Rotfleisch & Samulovitch P.C.
• Author: Mr David Rotfleisch

Introduction - The CRA Targets Taxpayers Who Keep Poor Records

The Canada Revenue Agency isn't shy about pursuing a tax audit. But the CRA invokes its most aggressive tactics when auditing groups that CRA tax auditors perceive as most likely to retain poor records or lack internal controls-groups such as those who use, trade, and invest in cryptocurrency. Canadian cryptocurrency users are often shocked when they receive the CRA's 13-page tax-audit questionnaire about their transactions involving cryptocurrency such as Bitcoin (BTC), Bitcoin Cash (BHC), Litecoin (LTC), Ethereum (ETH), Chainlink (LINK), Dash, Zcash (ZEC), and Ripple (XRP). In addition, Canada's Income Tax Act requires all Canadian taxpayers-including Canadian cryptocurrency users-to maintain adequate books and records.

This article examines the record-keeping requirements for Canadian cryptocurrency traders and investors. After reviewing the Income Tax Act's record-keeping requirements and the CRA's tax-audit powers, this article identifies the specific records that cryptocurrency users should maintain. It concludes by offering pro tax tips from our top Canadian crypto-tax lawyers for Canadian cryptocurrency traders and investors.

Tax Record-Keeping Requirements: Section 230 of Canada's Income Tax Act

Section 230 of Canada's Income Tax Act effectively requires every Canadian taxpayer to maintain adequate books and records. The record-keeping requirement applies to every person who carries on a business or who is required to pay income tax or collect income tax (or pay or collect any other amount, such as interest, penalties, or vicarious tax liability under section 160 of the Income Tax Act). The books and records must suffice to enable one to determine the amount of income tax payable (or to determine any amount that should have been deducted, withheld, or collected). The taxpayer must keep these records at a residence or place of business in Canada.

Section 230 also imposes a general six-year retention period. That is, a taxpayer must retain books, records, and supporting documents for at least six years after the end of the last tax year to which those documents relate. In practice, this rule means that you must typically retain records for considerably longer than six years. For example, suppose that you purchased various cryptocurrency units in 2016 and sold them in 2022. Your 2016 records concerning the cryptocurrency purchase will relate to the 2022 taxation year in which you made the sale. So, you must retain the 2016 purchase records for at least the six years following 2022-that is...