How to Handle CRA Notice of Objection for Cryptocurrency Tax Reassessments (Part iii): Managing CRA Tax Audit Risk and CRA Tax Reassessment Exposure

CRA Tax Audits and Cryptocurrency Transactions Leading to CRA Tax Reassessments

CRA tax audits involving cryptocurrency frequently arise from discrepancies between reported income and third-party information obtained from cryptocurrency exchanges, blockchain analytics, or financial institutions. Auditors focus on transaction frequency, wallet activity, and documentation supporting reported losses. These audits often result in a CRA tax reassessment recharacterizing cryptocurrency gains or denying losses.

Filing a Notice of Objection After a CRA Tax Reassessment Involving Cryptocurrency

A notice of objection is the statutory mechanism for challenging a CRA tax reassessment involving cryptocurrency. It must be filed within prescribed time limits, subject to limited extension-of-time relief. The notice of objection should clearly set out the disputed issues and legal grounds, as it frames the dispute for CRA Appeals and potential Tax Court of Canada litigation.

Burden of Proof in CRA Tax Audits and Cryptocurrency Tax Litigation

In cryptocurrency-related tax disputes, the burden of proof generally rests with the taxpayer. This requires credible evidence to refute the factual assumptions underlying the CRA tax reassessment, including transaction records, exchange data, and explanations regarding trading intent.

Role of a Canadian Tax Litigation Lawyer in CRA Cryptocurrency Disputes

An experienced cryptocurrency tax lawyer can assist taxpayers in navigating CRA tax audits, drafting effective notices of objection, and determining whether resolution through CRA Appeals or litigation before the Tax Court of Canada is appropriate.

Pro Tax Tips for Managing CRA Cryptocurrency Tax Audits and Reassessments

• Maintain complete cryptocurrency transaction records and wallet histories.
• Respond strategically to CRA tax audit information requests
•  File a notice of objection on time to preserve appeal rights.
• Seek advice from a Canadian crypto tax expert early.

Frequently Asked Questions: CRA Cryptocurrency Tax Audits and Notices of Objection

Does interest continue to accrue during a CRA notice of objection or Tax Court of Canada appeal?

Yes. Interest continues to accrue at all times on outstanding tax balances, regardless of whether a notice of objection or appeal is filed.

How does CRA determine whether cryptocurrency activity is business income or capital gains during a CRA tax audit?

CRA reviews factors such as frequency of transactions, intention to profit, and overall commerciality of the activity. Explore the differences between business income and capital gains in another article in our series. 

Are DeFi losses, liquidity pool failures, or staking losses reviewed during CRA tax audits?

Yes. CRA tax audits increasingly examine DeFi activity where losses or deductions are claimed.

How does CRA treat NFT creators differently from NFT traders in a CRA tax reassessment?

NFT creators may be assessed as carrying on a business, while NFT traders are assessed based on trading patterns and intent.

Transition to Tax Court of Canada Cryptocurrency Litigation (Part IV)

Where cryptocurrency disputes are not resolved through the CRA notice of objection process, taxpayers may proceed to the Tax Court of Canada. Part IV of this cryptocurrency tax litigation series addresses litigation strategy, evidentiary requirements, and risk management following CRA tax reassessments involving digital assets.

Disclaimer: This article provides broad information only. It is accurate as of the posting date and has not been updated. It does not constitute legal advice and should not be relied upon as tax advice. Every tax situation is fact-specific and will differ from the examples discussed. If you have specific concerns regarding a CRA tax audit, CRA tax reassessment, notice of objection, or Tax Court of Canada litigation involving cryptocurrency, you should seek advice from an experienced Canadian tax litigation lawyer.