Flash – February 2019 – ASPE

Retractable or Mandatorily Redeemable Shares Issued in a Tax Planning Arrangement

Flash bulletins provide a summary of the most recent news and publications from standard setters on accounting standards for private enterprises (ASPE), not-for-profit organizations and pension plans.

Section 3856, Financial Instruments, currently provides an exception in paragraph 23 that requires retractable preferred shares issued in a tax planning arrangement under specific sections of the Canadian Income Tax Act (ITA) to be presented as equity and measured at par, stated or assigned value.

Following publication of two Exposure Drafts in 2014 and 2017 and various discussions on the comments received, in December 2018, the Accounting Standards Board of Canada (AcSB) published the definitive amendments to Sections 3856 and 3251, Equity, to amend the balance sheet classification of retractable preferred shares issued in a tax planning arrangement. These amendments will result in significant changes in the accounting for these shares.

Accordingly, some of the preferred shares now classified as equity under the previously described liability classification exception will remain classified as equity if they meet certain conditions. However, we expect many preferred shares will be reclassified as liabilities and measured at their redemption amount.

These amendments are relevant to private enterprises that report under Part II of the CPA Canada Handbook – Accounting and apply ASPE.

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Stéphane Lauzon
Partner | CPA, CA, M. Fisc. | Tax

Whether you have bitcoins or another digital currency, in Canada, cryptocurrency is considered to be an asset or property, not currency.

Cryptocurrency is increasingly being used for purchasing goods and services and for speculation or longer-term investment purposes.

Despite the many rumours that cryptocurrency transactions are not taxable, the Canada Revenue Agency (CRA) has been very clear on this matter and there is every reason to believe that it will be actively targeting such transactions in the coming years.

Cryptocurrency taxation according to the CRA

The CRA’s first official pronouncement on bitcoins was on December 23, 2013 and stated that the CRA does not consider digital currency as money issued by a central bank or country, such as the U.S. dollar for example. In the CRA’s opinion, cryptocurrency should be considered property for purposes of the Income Tax Act (ITA).

When goods or services are exchanged for merchandise (cryptocurrency), the value of the goods or services must be included in income. Depending on the nature of the transaction, taxpayers who dispose of cryptocurrency in exchange for goods or services may have to tax themselves on the appreciation in value of the cryptocurrency.

For example, a taxpayer who purchased a bitcoin for $1 and subsequently exchanged it for accounting services valued at $100 will have to self-assess tax on a gain of $99.

Similarly, an individual who transacts cryptocurrency and speculates on its value will have to pay tax depending on the nature of the transaction (i.e., business income or capital gain).

Determining the nature of transactions is important as this will have a direct impact on income taxes. The full amount of a gain on a “business income” type transaction will be taxed, whereas only 50% of the gain on a “capital” type transaction is taxed.

Similar measures apply in the case of a loss. The full amount of a loss on a “business income” type transaction can be applied against any type of income (e.g., employment income). On the other hand, only one half of a “capital” loss may be deducted, and it may only be applied against a capital gain.

Cryptocurrency is an asset

Like the United States, Australia and the Netherlands, the CRA has decided to consider cryptocurrency an asset or property rather than currency. Other countries, like Germany and Singapore have decided to consider it a currency like any other.

The CRA might decide to become more flexible in the future to adapt to new market realities. However, there is no indication that this could happen any time soon.

Why should I tax myself? The CRA won’t know…

The Canadian tax regime is based on the principle of self-assessment. As a tax resident of Canada, you are legally required to determine your amount of tax payable and to file an income tax return.

In our work as cryptocurrency tax specialists, we regularly come across individuals and businesses that don’t believe the CRA could be interested in them and prefer not to self-assess on that income. We believe that the opposite is true since the facts show without a doubt that the CRA is very interested in this new technology.

We strongly recommend that you report your cryptocurrency; otherwise, you could find yourself in the CRA’S crosshairs. Additionally, the CRA can go back as far as possible in the case of a voluntary failure to report income.

Our experts at Raymond Chabot Grant Thornton and Catallaxy are available to answer your questions and help you choose the best options.

This article was written in collaboration with Marc-Antoine Laurin.

22 Feb 2019  |  Written by :

Stéphane Lauzon is a tax expert at Raymond Chabot Grant Thornton. Contact him today!

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Marc Audet, Président et Chef de la direction, AURAY Sourcing

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Adviser alert – February 2019

The Grant Thornton International IFRS team has published Insights into IFRS 16 – Sale and leaseback accounting.

The latest bulletin Insights into IFRS 16 provides guidance on the accounting for sale and leaseback transactions.

IFRS 16 makes significant changes to accounting for sale and leaseback transactions.

A sale and leaseback transaction is a popular way for entities to secure long-term financing from substantial property, plant and equipment assets such as land and buildings.

It is a transaction where an entity (the sellerlessee) transfers an asset to another entity (the buyer-lessor) for consideration and leases that asset back from the buyer-lessor.

As IFRS 16 has withdrawn the concepts of operating leases and finance leases from lessee accounting, the accounting requirements that the seller-lessee must apply to a sale and leaseback transaction are more straightforward.

Download this bulletin which explains the new concepts and provides a simplified example of the requirements.