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Using your Crypto to buy stuff?

What happens when you use crypto to buy things?!?

In previous articles we discussed several items in relation to the taxation of cryptocurrencies (crypto) in Canada. We established that CRA seeing these as commodities. Revenue Canada may treat cryptocurrency taxable events as capital gains or business income. In this article, we will address what kind of taxable event, if any, occurs when you buy products or services using cryptocurrencies.

Barter Transactions, Crypto, and CRA.

The Revenue Canada website simply states that when you buy something with crypto it is considered a barter transaction. The website then points us to an Interpretation Bulletin which discusses barter transactions.

Let’s looks at this closer at a barter transaction. A barter transaction occurs when two parties agree to exchange [product/services without using “legal tender”. Legal tender being a form of money, or medium of exchange, which hold legal status conferred by government to settle monetary debt.

Great, now what!?!

What does a barter transaction mean in terms of taxation? When you buy something with crypto you are deemed to have disposed of the cryptocurrency at the current Canadian dollar value of that currency.

This means that when you do buy something with crypto, you need to keep track of what the price of that cryptocurrency was at the time and date of that transaction. This number serves as the proceeds of disposition of that underlying asset.

We also factor in any network and/or exchange fees at the time of purchase and record these as outlays and expenses. These outlays are used to reduce the possible gain incurred.

Then you need your ACB for that cryptocurrency to determine what your capital gain or loss may be on that transaction. Your ACB is made up of the price you paid for the cryptocurrency plus and exchange and/or networks fees incurred at the time of the transaction.

To express this in a calculation we would be writing at something like this:

Proceeds of Disposition – ACB – outlays and expenses = capital gain/loss.

 What you need to keep for supporting your barter transactions:

  • Date of transactions
  • the receipts of purchase or transfer of cryptocurrency
  • the value of the cryptocurrency in Canadian dollars at the time of the transaction
  • a description of the transaction and the other party (even if it is just their cryptocurrency address)
  • the exchange records
  • accounting and legal costs

Next steps…

It is important that you discuss your situation with a tax professional to ensure that you are properly reporting and classifying your activities related to cryptocurrencies. Improperly filing your tax return could cost you a significant amount of tax; either upfront, costing you more tax than should have been assessed, or later when CRA reviews your return and reclassifies the income reported.

 

Tune in for the next article in the series where we explore more on the Canadian taxation of cryptocurrencies…

CRA, Cryptocurrencies and Capital Gains

CRA, Cryptocurrencies and Capital Gains

In the first article of this series, we discussed that cryptocurrencies are a “digital representation of value” or a “digital medium of exchange”. We established that Revenue Canada treats your cryptocurrencies differently based on either how you acquired it, or how you are using it or transacting with it. In this article we cover CRA, cryptocurrencies and capital gains.

For the purposes of this article, we will discuss the tax treatment of crypto as a commodity. We’ll cover what CRA expects from you, the taxpayer, and how one should report their transactions on their tax return.

What does “commodity” mean?

Investopedia defines “commodity” as a basic good used in commerce that is interchangeable with other goods of the same type. Investors and traders can buy and sell commodities directly in the spot (cash) market or via derivatives such as futures and options.

Using that definition, we come to understand that Revenue Canada’s position is to treat cryptocurrencies similarly as stocks and other tradeable assets.  But what does that mean in terms of tax? We know that gains and losses are reported on Schedule 3.

How are cryptocurrencies taxed by CRA on Schedule 3?

Under the scheme of cryptocurrencies being treated as capital property we would report our transactions on schedule 3. Here we list our proceed of disposition and adjusted cost basis against those proceeds.

What does that capital gains transaction look like?

Adjusted Cost Basis (ACB) reflects the cost on the date and time where we buy/acquire a cryptocurrency plus any network and/or exchange fees. The proceeds of disposition are self-explanatory. This is the amount in Canadian dollars that is received in exchange for our cryptocurrency. For “outlays and costs” we can also deduct our network fees and exchange fees incurred at the sale of the currency against the proceeds of disposition.

To express this in a calculation we would be looking at something like this:

Proceeds of Disposition – ACB – outlays and expenses = capital gain/loss.

How are Capital Gains Taxed?

Capital gains from the sale of crypto is taxable, but only half of the capital gain is subject to taxation. This provided a significant tax advantage for transactions that qualify for this type of tax treatment.
Should you incur a capital loss, it too is only recognized a half its value. A capital loss can only be used to reduce capital gains. It cannot be used to reduce other sources of income such as wages. Capital losses that are unused in the taxation period can be carried forward or carried back 3 years.

Swapped one crypto for another? It can get tricky with CRA.

Because CRA treats cryptocurrencies as commodities (rather than cash), when the taxpayer exchanges one crypto (say Bitcoin) for a different crypto (say Ethereum), they trigger a taxable event.

What does this look like? The transaction is treated as 2 separate events. First the taxpayer disposes of their BTC (Bitcoin) at the current rate of BTC to CAD and incurs either a capital gain or loss.

Next the taxpayer buys Eth (Ethereum) with the proceeds of the previous disposition. This event would not be taxable but would need to be recorded as the Cost Basis of the new asset ETH would result from this transaction.

These two events would look like this:

  1. Proceeds – ACB (CAD spent for original BTC) = gain or loss
  2. CAD proceeds spent for ETH = ACB of ETH

What we need to keep for supporting your entries on schedule 3:

  • Date of transactions
  • the receipts of purchase or transfer of cryptocurrency
  • the value of the cryptocurrency in Canadian dollars at the time of the transaction
  • the digital wallet records and cryptocurrency addresses
  • a description of the transaction and the other party (even if it is just their cryptocurrency address)
  • the exchange records
  • accounting and legal costs
  • the software costs related to managing your tax affairs.

So, what now?

It is important that you discuss your situation with a tax professional to ensure that you are properly reporting and classifying your activities related to cryptocurrencies. Improperly filing your tax return could cost you a significant amount of tax; either upfront, costing you more tax than should have been assessed, or later when CRA reviews your return and reclassifies the income reported.

 

Tune in for the next article in the series where we explore more on the Canadian taxation of cryptocurrencies…

 

 

Canada Revenue Agency & Cryptocurrencies

CRA and Crypto!

In this brief article we will briefly cover the Canada Revenue Agency and their approach to cryptocurrencies.

What the heck is a cryptocurrency?!?

Let’s start with the basics! A cryptocurrency is a digital currency where transactions are verified, and records maintained by a decentralized computer network using cryptography. It simply is a digital medium of exchange. In these networks there is no central authority that controls the currency; there is no central bank or government.

Although, most governments, including Canada, make it clear that cryptocurrencies are not legal tender or considered “money” for everyday transactions. But we should remember that cryptocurrencies still fulfil the criteria of currency that is:
• a medium of exchange,
• a store of value, as well as
• a unit of account.
Two examples of cryptocurrencies on the market today are Bitcoin and Ethereum. Bitcoin being the first cryptocurrency created in 2008 by Satoshi Nakamoto.

How does Revenue Canada view cryptocurrencies if not as currency?

Simply put, the CRA treats cryptocurrencies as commodities. But the answer is a bit more complex than that! It depends on the circumstance in which it used or acquired. Revenue Canada may treat cryptos as business income or a capital gain. If crypto is used in the context of a business it would be treated as inventory, but if it is used personally, in trading for instance, it would be a capital asset! If you happen to be mining crypto then your mining rewards may be income and an inventory.

There are advantages and disadvantages to each classification of cryptocurrency for tax purposes. For instance, when incurring capital gains, half the gain is taxed at your marginal tax rate. This can spell significant tax savings when properly applied. Canada Revenue Agency does have a brief guide which can help with this topic.

So, what now?

It is important that you discuss your situation with a tax professional to ensure that you are properly reporting and classifying your activities related to cryptocurrencies. Improperly filing your tax return could cost you a significant amount of tax; either upfront, costing you more tax than should have been assessed, or later when CRA reviews your return and reclassifies the income reported.

Tune in for the next article in the series where we explore more on the Canadian taxation of cryptocurrencies…

New draft 1040 form released by the IRS

New Draft form 1040 Released by the IRS…

When filing your 2020 1040 Individual Income Tax Return a “new” question will likely be on page one of this form. The Internal Revenue Service (IRS) has released a new draft of Form 1040, U.S. Individual Income Tax Return.

The question is “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”. This question previously figured on Schedule 1 of the 1040. This meant that if a taxpayer did not otherwise need to complete Schedule 1, they were not required to answer the question. With this new draft form 1040 there will be no way to avoid this question for all U.S. 1040 filers.

IRS 2020 draft 1040

As Chandan Lodha, co-founder of crypto tax software company CoinTracker, stated: “The implication for users is pretty clear—if you want to stay out of the IRS’ crosshairs, make sure you are staying compliant with the cryptocurrency tax rules.”

Virtual Currency, Cryptocurrency, What?!?

To be clear virtual currencies is used interchangeably with cryptocurrencies by the Internal Revenue Service. These include currencies such as Bitcoin, Litecoin, and Ethereum to name a few.

Bitcoin (BTC) was created by Satoshi Nakamoto. Bitcoin is botht he cryptocurrency AND the technology behind it. Since the inception of this technology in 2008 the number of available cryptocurrencies has ballooned. Today there are roughly 5,000 different cryptocurrency options. Bitcoin continues to dominate the crypto space. BTC is now being referred to as “better” than digital gold; many people and publicly traded companies now using Bitcoin as a store of value.

Back to the US tax return…

Code section 61 of the Internal Revenue Code states that “gross income means all income from whatever source derived”. This of course, unless there is a specific exclusion or exemption provided under the law. Virtual currencies do not benefit from an exclusion or exemption. As such ALL transactions that create a taxable event must individually be reported on your 1040. The new front page of the draft from 1040 should serve as a good reminder.

What are “taxable events” when it comes to cryptocurrencies?

A taxable or reportable event occurs when (this is an abbreviated list):

  1. you sell your cryptocurrency for FIAT (or exchange it for a service or physical product)
  2. you exchange one virtual currency for another; for example trading Bitcoin for Litecoin
    1. in this scenario BTC is in essence sold to acquire Litecoin
  3. Airdrops are taxable events. This occurs when a crypto-project distributes tokens/coins to wallets without one paying for them. See the recent Uniswap airdrop.

It is becoming increasingly important to understand that it is no longer possible to avoid disclosing your involvement with virtual/crypto currencies. The virtual currency question being moved  front and centre on page 1 of the IRS’ new draft form 1040 puts everyone on alert to be mindful to report all your income.

Looking for a Crypto Taxation expert? Why not come see us, contact us today?

CRA Extends 2019 Filing Deadline

The Canada Revenue Agency announced today that it is extending the filing deadline to June 1, 2020. “For individuals (other than trusts), the return filing due date will be deferred until June 1, 2020.” The Canada Revenue Agency are also extending the deadline to pay your balance due without interest and penalties to August 31, 2020. “The Canada Revenue Agency will allow all taxpayers to defer, until after August 31, 2020, the payment of any income tax amounts that become owing on or after today and before September 2020.

But, be aware that if you expect to receive benefits under the GST credit or the Canada Child Benefit you should not delay the filing of your return to ensure your entitlements for the 2020-21 benefit year are not interrupted. As you may know your July benefits are based on the prior year filing information. If you you file your return on time your payments will not be interrupted.

At Gautron Management Services Inc. we look forward to serving you during this evolving situation. We have made every effort to create a virtual preparation environment should you should to stay home. Please contact the office if you have questions or concerns.

Regarding Covid19

To our valued clients,

We are living in interesting times. I wanted to personally reach out to you to let you know that Gautron Management Services Inc. (GMS) is taking COVID-19 seriously and has put measures in place to ensure continuity for you our valued clients.

Over these last weeks, we have been responding to the ever-changing landscape, making adjustments and plans to keep you and our community both safe and connected. While these actions may seem “alarmist,” we believe GMS must do its part to minimize the number of interactions that cause the opportunity for COVID-19 to spread. If no GMS clients or staff get sick and COVID-19 goes away, you may wonder what all the fuss was about. Yet public health experts remind us that if this fizzles out because of our efforts, then we’ve done it right.

Keeping in-mind guidance from public health experts, I would like to assure you that GMS is doing what it can to keep you safe.

Ghost Tax Return Preparer?!? What the?!?

What the heck is a “ghost tax return preparer”?!?

Are tax returns preparers being recruited from the great beyond!!!

I assure you no poltergeists are involved!

Did you know that the IRS mandates that a PAID tax return preparer sign ALL the U.S. tax returns they prepare?!? Furthermore, that paid preparer’s name and address must also be on the tax return.

Featured below the 2019 Form 1040 for your reference. Notice how the “paid prerarer’s” information and signature are right below your signature! They are assigned their very own special “Paid Preparer Use Only” section on the return!!

U.S. tax return form 1040

So what is a Ghost Preparer?

A “Ghost” preparer is someone who neither provides their signature and information on the U.S. tax return.

This leads me to a few questions:

  1. If you did a good job on the return, why would you not want to sign your work?!?
    Artists sign their paintings, lawyers sign their motions, authors sign their books, legislators sign their bills, and so on. In addition, I like that I sign all the U.S. returns I prepare; for me it means I stand by my work.
  2. And from a business standpoint… How does not signing your own work (when required to do so) lead to client trust and confidence?

At Gautron Management Services Inc.

  • We are tax professionals who take pride in our work.
  • We sign each and every U.S. Tax Return we prepare. In fact, the vast majority of cases it is signed before we even deliver it to our clients!
  • Furthermore, We value education and make sure to far exceed the minimum annual required number of Continuing Education credits. The more we know, the better we can serve the needs of our clientele.
  • By the way, we strive to provide excellent customer service as well.

The embedded article dives a bit deeper into the topic of ghost preparers.

 

 

Why make RRSP contributions?

RRSP Contributions; What’s in it for You?

RRSP contributions are an important part of everyone’s financial plan. RRSPs carry some very advantageous benefits.

What is an RRSP.

A Registered Retirement Savings Plan, or RRSP, is a retirement savings plan created by the Canadian government to encourage taxpayers to save for their future. The idea being that your contributions are deducted from your current income, and then taxed once withdrawn (preferably when you retire and your income is lower).

Your RRSP contributions are tax deductible.

Whatever you put in your RRSP for a tax year is deducted from your taxable income for that year. This is assuming you have the room to do so! That deduction typically generates a tax refund!

The first 60-day rule.

You have the first 60-days of the next year to make contributions that will/can apply to the prior tax year’s return. For 2020 that date is March 2.

RRSP Contribution Room.

Earned income is used to determine the following year’s allowed contribution amount. You generate room using 18% of your earned income. The maximum for 2019 was $26,500.

Tax-Free Earnings.

Your earnings within the RRSP plan are tax deferred. This means you will pay tax on the RRSP plan earnings once you withdraw from the plan.

Loans from RRSPs.

You could take a loan out on your RRSP plan to buy a home or for post-secondary education.

Home Buyers’ Plan (HBP)

The HBP is designed to help you to withdraw up to $35,000 from your RRSP tax-free to pay for a home (subject to certain conditions). You will have to repay this loan by making RRSP contributions. The repayment period is over 15 years.

Lifelong Learning Plan (LLP)

The LLP was designed to help Canadians pay for their post-secondary education. This provision allows you to withdraw up to $20,000 (or $10,000 per calendar year) from your RRSP tax-free subject to certain conditions. For this benefit you also have to repay this loan by making RRSP contributions. The repayment period is over 10 years.

As you can see there are several benefits to making RRSP contributions both immediate and in the future. It is important to start this savings plan early to avail yourself from the tax-free earnings within the plan.

Check Out Our New Logo!

Check Out Our New Logo!

At Gautron Management Services Inc. we’ve been serving the taxpayer since the early 90’s. We may have operated under various names over the years, but we always strive to provide a great customer experience.

After after almost thirty (30) years, we’ve finally decided to commission a new logo.

Why a goat in the new logo?!?

Besides the fact that baby goats are super cute?

via GIPHY

The use of the goat is also a play on the pronunciation of Gautron; as in “Gaut” or goat! We thought we’d add a little personality and humour to an industry which is traditionally not all that exciting!

Tax season is coming quickly.

Revenue Canada is scheduled to complete its major systems upgrade near the end of February (Feb. 24). Once complete they will open their Efile systems for normal tax return processing.

A quick reminder

You have until March 2 to contribute to your RRSP and be able to apply this to your 2019 tax return. Check you Canada Revenue Agency Notice of Assessment for 2018 prior to contributing to make sure you don’t exceed your maximum contribution room. The tax, penalties and interest associated with over contributions are onerous.

Your Individual Return T1 filing deadline is April 30. That deadline is extended to June 15 where either the taxpayer or their spouse have earned income from a self-employed business at any time during the calendar year.

One little trick

We share with our clients about medical expenses. If you consistently buy your prescriptions at the same pharmacy you can request a print out of all your purchases for the year. This simplifies the sorting of totalling relating to these expenses.

 

We look forward to serving you again this year or for the first time this year. Be sure to bring us your documents as soon as you can to avoid the end of season rush.

U.S. and Cdn tax return preparation

Need to know items before filing your 2019 Canadian tax return.

The following are few of the items you should be aware of when it comes time to file your Canadian tax return.

The RRSP contribution deadline

2020 is a leap year. This year’s RRSP contribution deadline is March 2. You should make sure to double check your 2018 Notice of Assessment for your current RRSP maximum contribution limit.
It is important to be mindful of this maximum amount. This is because there are a significant tax rates (1% per month that remains over contributed) imposed on over-contributions.

The filing deadline

This year that deadline falls on April 30th. As such, most taxpayers must file and pay their taxes owing before this date to avoid late filing penalties and interest.
Furthermore, those who are self-employed (and their spouses) have until June 15th to file their tax returns. If you owe taxes interest is charged as of April 30th, but the late-filing penalty is waived up to June 15th.

Revenue Canada’s e-filing system

The federal agency closed its system for updating. The E-file system is scheduled to open for 2019 Tax Returns on February 24, 2020. This is not a big issue considering the filing deadline for T4 slips is March 2. In addition, you’ll likely have to wait for T5 and T3 slips from various financial institutions before filing as well.

Important charges for the 2019 tax return:

    1. Climate Action Incentive (CIA); Manitoba is increasing the amount of incentive being paid out to its residents. Incidentally, for 2019’s tax return Albertan are also be eligible for the CAI just as Saskatchewan, Ontario and Manitoba residents continue to be eligible.
      This is a per household credit. Meaning only one person per family household can claim this credit.
    2. Larger Withdrawal limits for the RRSP Home Buyer’s Plan. The tax-free withdrawal of RRSP vested funds for the purchase of a home has been increased. As a result, the maximum withdrawal is now raised to $35,000 (up from 25,000) for amount taken after March 19, 2019.
      Any withdrawn amount must be paid back over a 15-year period. Furthermore, should you miss a repayment for a particular tax year, then the required repayment amount will be added into your taxable income for that year.
    3. Medically prescribed Cannabis qualifies for the medical expense tax credit

The above items are by far an exhaustive list of new provisions, or items that may impact your specific return. Contact you tax professional for more information.