Turning a Sudbury Crypto Reassessment From Business Back to Capital

The situation

Fernanda worked as a factory technician in Sudbury, and a few years earlier had incorporated a small numbered company to hold some savings and, eventually, to try her hand at cryptocurrency. Her spouse Kiran, a bookkeeper by trade, kept the corporation's books current and organized — invoices filed, bank statements reconciled, a clean set of records that most small business owners would envy. The corporation bought and sold a handful of major cryptocurrencies over two tax years, mostly holding positions for weeks or months at a time, occasionally longer. Nothing about the activity was frantic. Fernanda checked prices in the evenings after her shift and made trades when she had a conviction about where a coin was headed, not on a fixed schedule and not as a full-time occupation.

When the corporation filed its returns for those two years, the trading gains — about $95,000 combined — were reported as capital gains. Under Canadian tax rules, only half of a capital gain is included in taxable income, so the corporation reported roughly $47,500 as taxable. The rest of the year's business was ordinary: some rental income from a small property and interest on a savings account. Everything filed cleanly, and Fernanda and Kiran assumed the file was closed.

What the reassessment said

About eighteen months later, a letter arrived from the Canada Revenue Agency opening an audit of the corporation's crypto activity across both years. Several months after that, the audit concluded with a reassessment that treated the entire $95,000 in trading gains as business income rather than capital gains. The distinction matters enormously: business income is fully taxable, with no 50% exclusion, so the reassessment added the other $47,500 back into the corporation's taxable income for those years. Combined with the resulting increase in tax, interest for the period the money had gone unpaid, and a penalty CRA applied for what it characterized as a significant understatement of income, the amount in dispute came to roughly $32,000.

The CRA auditor's reasoning rested on what tax practitioners often call the badges of trade — a set of factors courts and CRA use to distinguish someone investing for long-term gain from someone effectively running a trading business. The factors include the frequency and number of transactions, how long positions were held, whether the taxpayer had specialized knowledge of the asset, whether the activity was financed with borrowed money, and how much time and attention the taxpayer devoted to it. The auditor's report leaned heavily on transaction count — the corporation had made dozens of trades across the two years — and treated that volume alone as decisive, without giving much weight to the other factors that pointed the other way.

Fernanda and Kiran were left with a letter demanding $32,000 they did not believe they owed, on activity that had never felt like running a business. They came to Treadstone Law to have the reassessment reviewed and, if it held up, to understand their options.

What we did

1. Pulled the full trading history and rebuilt the pattern transaction by transaction. Kiran's records made this straightforward — every trade, its date, and the holding period before it was closed out. The picture that emerged did not match the auditor's summary. Many of the "dozens of trades" the audit report cited were partial buys and sells building or trimming a single position over weeks, not the rapid in-and-out pattern typical of day trading. Average holding periods across the two years ran well over a month, and several positions were held for most of a year.
2. Assessed each badge of trade on its own facts rather than accepting the auditor's shorthand. Fernanda had no specialized background in trading or finance — she worked full-time as a factory technician and had no formal training related to markets. The corporation used its own capital throughout; nothing was financed with borrowed money, which auditors often treat as a strong indicator of a trading business. Fernanda spent evenings, not full working days, on the activity, and there was no advertising, no client base, and no structure resembling a business selling a trading service. Transaction count, taken alone, was the weakest of the badges to support CRA's position, and the strongest badges pointed toward investment rather than trade.
3. Prepared and filed a Notice of Objection. A Notice of Objection is the formal way a taxpayer disputes a CRA reassessment; it goes to CRA's Appeals Division, a group separate from the auditors who issued the reassessment, and it had to be filed within the strict deadline that runs from the date of the reassessment. The objection set out the corrected transaction history, the badges-of-trade analysis, and a request that the reassessment be vacated and the original capital gains treatment restored.
4. Corresponded with the Appeals officer to walk through the record. Rather than simply relying on the written objection, our team responded to the Appeals officer's follow-up questions promptly and provided the underlying trading records in the format requested, which kept the file moving instead of stalling in a queue. This kind of responsiveness often shortens how long an objection takes to resolve, since delay on the taxpayer's side is one of the most common reasons files sit for a year or more.
5. Addressed the penalty directly. Separate from the characterization dispute, the penalty for understating income depends on whether the understatement was made knowingly or carelessly. Given that the original filing position was a defensible reading of settled facts — not an aggressive or careless one — our team argued the penalty had no basis regardless of how the capital-versus-business question was ultimately resolved.

The outcome

Several months after the objection was filed, the Appeals officer issued a decision vacating the reassessment in full. The trading gains were confirmed as capital gains, the $47,500 in additional taxable income CRA had added was removed, the tax and interest tied to it were reversed, and the penalty was cancelled along with it. The corporation's original filing position — the one Kiran had prepared and Fernanda had signed off on years earlier — was upheld essentially as filed.

The result did not turn on a technicality or a sympathetic story. It turned on the fact that the original records were thorough and the trading pattern, properly documented, genuinely looked like investing rather than a business. CRA auditors see a much higher volume of clearly aggressive day-trading files than they see quiet, patient positions held for months, and a reassessment built mostly around raw transaction count does not always survive a full review of the other badges of trade. Having the complete, organized record from day one — rather than trying to reconstruct it after the fact — was what let the objection be built quickly and answered without the file dragging on.

Fernanda and Kiran kept the corporation's crypto activity going afterward, with one change: Kiran now keeps a running log of the reasoning behind each trade, not just the transaction date and amount, in case the pattern is ever questioned again.

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