Canada Federal Budget includes CARF & CRS Tax Measures

Canadian Budget includes Key Tax Measures

On 16 April 2024, Deputy Prime Minister and Federal Finance Minister, Chrystia Freeland, tabled the Canadian Federal Budget 2024-2025. The budget contains key tax measure announcements on the implementation of the Crypto-Asset Reporting Framework (CARF) and Common Reporting Standard (CRS) amendments. The CARF and CRS measures would apply beginning in 2026, such that the first reporting under the new/expanded rules would be due in 2027.

The 2024-2025 budget also proposed several new measures to the information gathering provisions in the Income Tax Act (ITA), that will further extend the Canada Revenue Agency (CRA)’s audit powers. This may affect future CRS offsite and onsite FATCA and CRS audits.

Canada Budget Proposes to Implement CARF

The Canadian 2024-2025 Federal Budget proposed to implement and enforce the Organisation for Economic Co-operation and Development (OECD)’s Crypto-Asset Reporting Framework (CARF), under Canadian law. Beginning 2026, the proposed measure would impose new due diligence obligations and an annual reporting requirement in the ITA on entities and individuals referred to as Crypto-Asset Service Providers (CASP).

A Crypto-Asset Service Provider, is a person that;

• Is a Canadian resident or carries on business in Canada, and

• Provides business services effectuating exchange transactions in crypto-assets

• It is expected that this would include crypto exchanges, crypto-asset brokers and dealers, and operators of crypto-asset ATMs.

The implementation of CARF would require an enhanced reporting form that will be sent to the CRA detailing crypto-asset transactions of residents, as well as non-residents. CASPs would be required to report to the CRA personal identifying information for each of their resident and non-resident customers who are natural persons, including;

• Name
• Address
• Date of birth
• Jurisdiction of residence
• Taxpayer identification number

If a customer is a corporation or other legal entity, the same information would need to be collected and reported for each of the natural persons who exercise control over the entity. There does not appear to be a limit on the types of legal entities that are required to report their controlling persons in the same manner as in the CRS self-certification collection. For example, there are no exceptions for active non-financial entities, pension funds and registered charities. Moreover, no mention is made of an exception in the CARF for reporting on controlling persons of a legal entity customer that is an “Active Entity.

In addition, CASPs would have to report to CRA, in respect of each customer and in respect of each crypto asset, the annual value of:

• Exchanges between the crypto-asset and fiat currencies;
• Exchanges for other crypto-asset; and
• Transfers of the crypto-asset

As the implementation of the CARF will require significant funding, the budget suggested allocating CA$51.6 million to the CRA over 5 years starting from 2024-25. Further, an annual budget of CA$7.3 million has been allocated to sustain the ongoing administration and operational costs.

This measure will apply to the 2026 and subsequent calendar years. This would allow the first reporting and exchange of information under the CARF to take place in 2027 with respect to the 2026 calendar year.

Canada Budget Proposes to Implement CRS Amendments

The Canadian 2024-2025 Federal Budget also proposed several changes to the existing rules in Part XIX of the ITA, which implements the CRS under Canadian law. These CRS amendments that have been endorsed by the OECD, in connection with the CARF, include the following:

• Broaden the scope of the types of “financial assets” to which the CRS applies to include specified electronic money products and central bank digital currencies.

• Amend the CRS to ensure effective coordination between the CRS and the CARF, which includes not requiring duplicative reporting under the two regimes.

• Add to the types of information that must be reported in respect of financial accounts and account holders.

• Strengthen the due diligence requirements applicable to reporting financial institutions,

• Amend the CRS rules as they apply to labour-sponsored venture capital corporations (LSVCCs).

• “Clarify” that an anti-abuse rule in the CRS rules applies when an individual or any entity enters an arrangement or engages in a practice that can be considered having a primary purpose to avoid a reporting obligation.

This measure will apply to the 2026 and subsequent calendar years. This would allow the reporting and exchange of information under the CRS Amendments to take place in 2027 with respect to the 2026 calendar year.

Recent FATCA and CRS Audits

The Canadian 2024-2025 Federal Budget also proposed several amendments in respect to the CRA’s audit powers, under section 231.1 of the ITA, and successive investments in audit and enforcement activities.These proposed amendments are intended to enhance the efficiency and effectiveness of tax audits and facilitate the collection of tax revenues more timely.

The CRA have recently performed both off-site (desk reviews) and on-site audits of certain Canadian Financial Institutions (FIs) for the purposes of Part XVIII (FATCA) and Part XIX (CRS) of the ITA. Off-site audits generally involve FI’s providing a copy of their FATCA and CRS policies and procedures, which are then examined by the CRA.

The CRA will then decide on a shortlist of FIs to select for onsite audits. Onsite audits typically include the CRA examination of the FI’s written policies and procedures, data in the books and records, reviewing missing self-certifications, and conducting sample testing. The FIs selected for onsite audits commonly have the following compliance issues;

• Consequential number of accounts that are missing taxpayer identification numbers (TINs);
• The account holder’s (or in the case of entity accounts, the controlling person’s) date of birth is missing or inaccurately recorded;
• Inconsistent filings with the CRA’s expectations for the FI
  • for instance, whether the volume of reportable accounts is appropriate for the size of the particular FI
• Atypical year-over-year changes (such as a considerably larger number of reportable accounts for a particular year when compared to the FI’s returns from prior years); and
• Whether any error notices have been received from the United States Internal Revenue Service and the extent to which these errors are resolved.

How can TAINA Help Canadian Financial Institutions?

In lieu of the recent 2024-2025 budget announcements, CRA FATCA and CRS audits and reporting deadline fast approaching, Canadian FIs should be looking to address any potential gaps in the collection and validation of W-Forms, FATCA, and Self-certifications forms for both the onboarding of new accounts and ongoing monitoring of changes on existing accounts.

Having automated systems that can maintain compliance across jurisdictions, be adaptable to changes, and are easy to update is key to robust compliance. We are monitoring and adopting our customer journey to seamlessly integrate with digital asset platforms and requesting/validating necessary customer information to meet the Digital Asset Information Reporting and CARF compliance requirements.

TAINA’s fully automated FATCA and CRS Validation Platform can help Canadian financial institutions, crypto and digital asset companies lighten their compliance burden and prove their FATCA, and CRS and CARF compliance whilst improving efficiency, reducing cost, mitigating risk, and improving their overall customer and investor experience. Our advanced software provides a streamlined process for solicitation, processing, and maintenance of tax forms and provides for withholding and information reporting data for your operational processes, ensuring you have good year-end data that will result in clean reporting to tax authorities.

Ready to navigate the changing tax landscape,  proposed CARF requirements and CRS Amendments with confidence, we would love to talk to you more about our award-winning FATCA and CRS Validation platform. Reach out for a demo or more information on how TAINA can empower your compliance journey!