Karsten Wenzlaff, Advisor
August 26th, 2025
Karsten Wenzlaff is a Crowdfunding and Fintech Expert from Germany. He is Secretary-General of Digit[...]
Category Archives: Regtech, Compliance, Governance
Compliant Marketing: How to Avoid SEC Fines
Compliance | Sep 11, 2024
Image: Freepik/rawpixel.com
Fintech Insights for Navigating the SEC Marketing Rule
The Marketing Rule was created in December 2020 and now the Securities and Exchange Commission (SEC) is ramping up enforcement. The SEC just fined nine investment advisors a total of $1.24 million for using deceptive advertising and omitting key disclosures when relying on third-party ratings and client endorsements. The marketing rule is the biggest modification in decades and is intended to improve investment advisor advertising standards and ensure that investors get fair, accurate, and transparent information. Fintech companies, especially those offering financial services, need to understand and follow these new regulations to avoid regulatory fines.
Why the SEC Marketing Rule Matters
The SEC 2020 Marketing Rule (430 page PDF) is regarded as one of the biggest modifications in many years. The previous solicitation and advertisement laws had not been touched since the 1960s/70s, so updates were long overdue given the introduction (and importance) of social media, digital marketing, and other forms of online communication including texting. The rule incorporates principles-based standards, which are more adaptable and suitable to the quickly changing marketing environment of today where firms use performance advertising, third-party ratings, and testimonials (to name a few techniques).
Important Provisions
- The Marketing Rule broadens the definition of advertising to include both direct and indirect communications that promote investment services. This covers both conventional and digital communication techniques, such as social media postings and brochures and newsletters.
- Advisors must provide performance data in a fair and balanced way. Using false information about timelines, selecting just the best outcomes, and omitting to mention risks are in violation of the rule. To comply with requirements, businesses must report performance over regular time periods in a way that allows investors to make informed decisions.
See: Can AI Truly Replace Human Financial Advisors?
- Testimonials and endorsements can be used but with restrictions. Disclosures must make it clear if there are any conflicts of interest and whether the testimonial provider was paid for their services. To avoid misleading potential investors, transparency is crucial.
- If an adviser uses a third-party rating in its marketing materials, clear disclosures about the rating process, the rating provider's name, and financial arrangements must be provided. This is to ensure that third-party ratings are trustworthy and not influenced by incentives.
- Firms must keep all records of advertising and communications with clients including conversations online (i.e., email, text etc), so the SEC can audit firms' effectively.
Examples of Good Marketing Practices
1 - Truthful and evidence-based claim: An adviser clearly shows performance outcomes across standardized periods (e.g., 1, 5, and 10 years) and discloses any associated risks, such as market volatility or potential losses. The performance data is supported by records that can be verified by the SEC, if required.
- The adviser avoids cherry-picking performance outcomes, allowing investors to make educated decisions based on fair, transparent, and balanced facts.
2 - Clear use of testimonials: A client testimonial is used with full disclosure that the individual is a current client who was rewarded for their recommendation. The commercial also emphasizes possible conflicts of interest and the fact that previous performance does not guarantee future results.
See: How to Use Influencer Partnerships to Boost Your Business’s Social Media Marketing
- The adviser is transparent about being paid for the work and and conflicts, which complies with the need to properly disclose important facts.
3 - Accurate 3rd party ratings: An adviser provides a third-party rating from a reputable agency and provides a detailed note that includes the assessment methodology, duration of the review and whether or not the advisor was paid for it.
- The advisor ensures that investors can fully understand the contest and trustworthiness of the rating, which is in line with the SEC's need for openness and transparency.
Examples of Bad Marketing Practices
1 - Misleading or false performance claim: An adviser promotes "top-performing" funds for a three-month period without disclosing that the success was due to an temporary anomaly in the market and that the long term performance were much lower.
- The adviser deceived prospective investors by cherry-picking performance and failing to present a fair and balanced image, so failing on transparency too.
2 - Improper use of testimonials: An advisor gives an amazing client endorsement that implies the advisor's services guarantee profits. They also don't disclose that they were paid for the endorsement.
- Failure to disclose compensation, risks, and potential conflicts of interest is misleading and in violation of the SEC's marketing rule.
See: SEC Adopts New Climate Disclosure Rules, Excluding Scope 3
3 - Inaccurate third-party ratings: An advisor advertises a third-party rating but does not disclose the rating criteria or mention that the business was compensated for services.
- Misleading and lack of transparency. Did not disclose the rating process and may mislead them about this advisor's credibility.
Best Practices for SEC Compliant Marketing
- Be Transparent. Always state any payments, and make sure your advertisements do not mislead or omit important information.
- Be Fair and Balanced. Present both the risks and possible rewards of your services.
- Continuous Monitoring. Update your compliance processes on a regular basis, and include any new SEC guidelines or clarifications.
Closing Thought
With the SEC concentrating on marketing compliance, fintech businesses should assess their marketing strategy to ensure transparency, accuracy, and fairness.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Why Meaningful Consent Is Key for Fintechs Post-Facebook Ruling
Data Privacy | Sep 10, 2024
Image: Freepik/rawpixel.com
What fintechs can learn from Facebook’s privacy breach
Yesterday, Philippe Dufresne, the Privacy Commissioner of Canada, issued a statement welcoming the Federal Court of Appeal's ruling in Canada's Privacy Commissioner vs Facebook (Meta). The court found that Facebook violated Canadian privacy laws by failing to secure meaningful consent from users and not adequately safeguarding their personal information.
See: 2023 Data Privacy in North America – Year in Review
This lawsuit was triggered because Facebook enabled the app "thisisyourdigitallife" (TYDL) between November 2013 and December 2015 to access not just user data but also data from users' friends without their permission, which was ultimately sold to Cambridge Analytica for political profiling - 50 million profiles in total. While the case centers on social media, it offers critical lessons for fintechs that handle sensitive financial data, as consumer protection and data privacy regulations tighten.
Top 3 Takeaways for Fintechs
1. Prioritize Meaningful Consent
Facebook failed to obtain clear and meaningful permission. The companies privacy regulations failed to ensure user's (and their friends) understood how their data would be used. Transparency is top priority for fintechs. They need to make sure users clearly understand what they are agreeing to when they share their personal and financial information.
- Keep privacy rules simple and uncomplicated. Eliminate 'legalese' that might confuse users.
- Make sure that consent is explicit (they know exactly how their data will be used) especially when sharing financial information. Users must also be able to cancel consent so it must be retractable.
- Notify users regularly of any changes to the data usage policy, and update consent when new services or partners are introduced.
2. Implement Robust Data Safeguards
Strong security measures are required by law and essential for financial technology companies, as financial data is extremely sensitive. The court determined that Facebook had not sufficiently protected user data, especially when sharing it with other programs.
See: Privacy and Crypto Shaken as Telegram’s CEO Arrested
- Vet third-party suppliers' privacy policies and make sure they will follow your data protection rules as part of your comprehensive due diligence process before exchanging data with them.
- Implement automated and manual checks to ensure that third parties are consistently adhering to the agreed upon data security standards.
- Use layered/robust security methods, such as multi-factor authentication, encryption, and other measures that prevent data breaches and safeguard reputation.
3. Accountability for Third-Party Data Use
The lawsuit exposed Facebook's failure to sufficiently oversee third-party apps that use its platform (like TYDL), which sold the inappropriately obtained data to Cambridge Analytica (the scandal).
- Conduct regular privacy and security audits to make sure all third-party providers handling user data are meeting compliance standards.
- Use explicit and enforceable data protection terms in contracts with third parties. Be sure to include consequences for non-compliance.
- Give users clear information about how their data will be shared with third parties, and allow them to limit or remove access.
Why It Matters
By learning from Facebook’s mistakes, fintechs can stay ahead of tightening regulations, protect their customers, and foster trust in a competitive quickly changing environment.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Regulatory Updates for Crypto Asset Trading Platforms
CTP Regulatory Update | Sep 9, 2024
Insights from the OSC Registrant Report 2023-24 for Crypto Asset Trading Platforms (CTPs)
As noted in OSC Staff Notice 33-756 (published July 26, 2024) and new guidelines from the Canadian Securities Administrators (CSA) and Canadian Investment Regulatory Organization (CIRO), Crypto Asset Trading Platforms (CTPs) are subject to tightening restrictions. The fundamental compliance standards for CTPs are outlined in the 2023–24 OSC report, however to maintain long term compliance its important for CTPs to meet the regulatory expectations for platforms registered as Investment Dealers and to pursue CIRO membership. McCarthy has written a very helpful summary of the staff notice to draw from.
1. Registration and Compliance Obligations
On August 6, 2024, the CSA announced that they intend to no longer offer the time-limited Restricted Dealer registration for CTPs (to be discontinued). Platforms that have not already registered or entered into a pre-registration undertaking (PRU) must now apply for Investment Dealer registration and CIRO membership. Current Restricted Dealers or PRU-holders must diligently work towards full Investment Dealer registration within a two-year window. Tip: Regular internal audits are advised to ensure that compliance frameworks are documented and in line with regulations.
2. Asset Custody and Delivery Requirements
The report emphasizes the importance of immediate asset delivery to clients to avoid triggering regulatory infractions. The OSC describes rapid delivery of cryptocurrency assets as a platform giving the user complete ownership, control, and possession without requiring them to rely on the platform or any of its affiliates going forward. Platforms that provide wallet features or payment services that exchange cryptocurrency for fiat money may not adhere to this requirement if they maintain control over users or put them at unnecessary danger. While determining whether a transaction complies with the immediate delivery criterion, variables like asset control and time are critical to manage.
See: Resurgence of Cryptoassets in Canada’s Investment Landscape
Tip: Develop an effective asset transfer procedure immediately, and notify users of the status of their assets.
3. Client-Focused Reforms and Marketing Compliance
CTPs must adhere to Client-Focused Reforms (CFRs), which include Know Your Client (KYC) and Know Your Product (KYP) requirements. The OSC expressed concerns about CTPs using the OSC's logo improperly, making deceptive marketing claims, and running 'gambling style' incentives that promote quick trading. These actions could lead to further responsibilities including suitability evaluations. The OSC urges CTPs to avoid utilizing regulator logos and to make sure all marketing are truthful and well supported. CTPs should also stay away from promotions that encourage excessive trading and obtain permission before utilizing the identities of other registrants in marketing materials. Tip: Review all client processes and marketing efforts to ensure they meet the latest regulatory standards.
4. Conflict of Interest Management
The OSC found many instances in which Crypto Asset Trading Platforms (CTPs) failed to properly identify, disclose, and manage material conflicts of interest, including partnerships with crypto issuers, staff trading activity, referral agreements, and crypto asset transaction fees. To avoid these risks, the OSC suggests that CTPs adopt policies to resolve conflicts in the best interests of their clients, keep proper records, provide employee training, and ensure that conflicts are clearly and timely disclosed to clients.
See: OSC: 2023 Canadian Crypto Survey Insights
Tip: Update your conflict of interest policy regularly and ensure clear communication with clients regarding potential conflicts.
5. Cybersecurity and Business Continuity
Given the OSC's focus on cybersecurity, CTPs are required to ensure strong client data protection and business continuity strategies to manage any operational interruptions. Tip: To protect operations against unanticipated disruptions, prioritize cybersecurity measures and develop a thorough business continuity strategy.
Outlook
As detailed in the 77 page PDF OSC Staff Notice 33-756 and new guidelines from the CSA and CIRO, the regulatory landscape for CTPs is still changing quickly. In order to maintain compliance, platforms must switch to Investment Dealer registration and CIRO participation, as highlighted by the end of the Restricted Dealer regime. Crucial regulatory guidance on asset custody, marketing compliance, managing conflicts of interest, and cybersecurity must be addressed by CTPs to comply with regulations.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Australia Announces 10 Voluntary Responsible AI Guardrails
Responsible AI | Sep 5, 2024
Image: Unsplash/Matt Chen
Australia has launched a set of 10 voluntary AI guardrails to help organizations deploy AI systems safely and responsibly
Australia's department of industry, science and resources has recently published ten guardrails providing a realistic framework for controlling AI risks, and to ensure transparency and responsibility while meeting global standards such as ISO/IEC 42001:2023.
10 AI Guardrails
The ten guardrails address critical areas of AI deployment, including governance, risk management, transparency, and stakeholder involvement. They highlight the importance of both organizational responsibility and technology controls for risk management. Organizations that embrace these practices can better position themselves to meet future regulatory expectations, boost AI maturity, and establish confidence with users and stakeholders.
1. Accountability and Governance
Organizations must build governance mechanisms and hold executives accountable for AI.
See: Responsible AI in Finance: CFTC’s New Framework
This includes assigning accountable persons, creating AI strategy, and incorporating governance into organizational structures. The guardrail emphasizes that accountability cannot be delegated, which means that leaders must own the outcomes of AI implementation and guarantee they meet compliance criteria.
2. Risk Management
A robust risk management strategy is required to discover, analyze, and mitigate the possible negative effects of AI systems. This guardrail emphasizes the significance of constantly evaluating risks based on how the AI technology is utilized. The methodology must be consistent with the organization's overall risk tolerance and handle emerging issues as the AI system evolves.
3. Data Protection
Data governance, such as privacy and cybersecurity, is critical for securing AI systems.
See: Report: Responsible AI Insights and Tips for Investors
This safeguard requires companies to adjust their existing data management processes to address AI's specific risks, such as data quality, provenance, and cybersecurity vulnerabilities. Personal or sensitive data utilized in AI training models must be handled with extreme caution.
4. Testing and Monitoring
AI models must be thoroughly tested before to deployment and continuously monitored to assure performance and reduce unforeseen outcomes. The guardrail emphasizes the importance of explicit acceptance criteria, adversarial testing, and continuing evaluation to detect changes in system behaviour.
5. Human Oversight
Human control over AI systems is paramount to avoid unforeseen outcomes. This guardrail requires substantial monitoring throughout the AI system's lifespan, with a clear assignment of responsibilities to ensure that human intervention is available at important points.
6. Transparency to Users
Transparency is key to establishing confidence with end users.
See: Is AI Going to Change Fintech Security?
This safeguard encourages companies to report when AI is used in decision-making or content creation. The objective is for people to understand when they are dealing with AI, which may be achieved by labelling or watermarking AI-generated information.
7. Challenge Mechanisms
Stakeholders affected by AI systems must be able to challenge outcomes or results. Organizations should provide methods for humans to challenge findings, ensuring fairness and offering opportunities for review or correction of AI-driven decisions.
8. Supply Chain Transparency
This guardrail stresses the need for transparency throughout the entire AI supply chain. Organizations must work with other organizations participating in AI development and deployment to exchange critical information regarding data, models, and hazards, assuring collaborative risk management.
9. Record Keeping
Organizations must keep detailed documentation of their AI systems, including system inventories, test results, and compliance records. This ensures that companies can demonstrate compliance with the guardrails and serves as a foundation for future audits or regulatory inspections.
See: Generative AI and Major Human Rights Fintech Risks
10. Stakeholder Engagement
It is essential to regularly engage stakeholders in order to spot any biases and to enforce fairness. This guardrail emphasizes the value of diversity and calls on companies to actively interact with underrepresented groups in order to reduce any unforeseen effects that AI systems may have on communities who are already at risk.
Conclusion
Australia's voluntary AI guardrails provide an organized, well-defined set of guardrails for the responsible and safe development and application of AI. These 10 guardrails proactively reduce risks and boost public trust in AI systems, laying the groundwork for ethical AI innovation.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Guide: Lifetime Capital Gains and Entrepreneur’s Incentive
Taxes | Sep 4, 2024
Image: Pixabay/flyfin
How Canadian Entrepreneurs Can Maximize Tax Savings with the LCGE and New Tax Incentive
On August 12, 2024, Finance Canada proposed changes to the Income Tax Act that included the Canadian Entrepreneurs' Incentive (CEI). This new incentive seeks to lower the taxable component of capital gains to help some entrepreneurs mitigate the tax burden of up to $2 million in qualifying capital gains during their lifetime. As of 2025, Canadian entrepreneurs will have the opportunity to benefit from CEI alongside the Lifetime Capital Gains Exemption (LCGE). Together, LCGE and CEI can reduce taxable gains by up to $3.25 million (lifetime) when you sell your qualifying business.
How CEI Works (Phased in over 5 years)
- The Incentive lowers the eligible capital gains inclusion rate to one-third (33.33%), so only one-third of the capital gains will be included in taxable income, rather than the standard two-thirds (66.66%), up to a lifetime cap of $2 million in eligible capital gains. This means that over an entrepreneur's lifetime, they can benefit from the reduced inclusion rate on up to $2 million in capital gains.
- To qualify for CEI, the capital gains must come from the sale of a qualified small business corporation shares or qualifying properties.
- The Incentive must be used according to the phased in limits, and any unused incentive amounts cannot be carried forward.
- The full benefit of CEI will be available by 2029, which includes up to $2 million in eligible capital gains.
See: Do employees pay less taxes by exercising stock options pre-IPO?
The Incentive will be phased in over a five-year period, starting in 2025.
- 2025 - Year 1: Entrepreneurs can apply the Incentive to reduce their taxable income by up to $133,333 on eligible capital gains of $400,000.
- 2026 - Year 2: Entrepreneurs can apply the Incentive to reduce their taxable income by up to $266,666 on eligible capital gains of $800,000.
- 2027 - Year 3: Entrepreneurs can apply the Incentive to reduce their taxable income by up to $400,000 on eligible capital gains of $1,200,000.
- 2028 - Year 4: Entrepreneurs can apply the Incentive to reduce their taxable income by up to $533,333 on eligible capital gains of $1,600,000.
- 2029 - Year 5: The total CEI deduction limit will reach the lifetime maximum of up to $666,667, fully covering of up to $2,00,000 in eligible capital gains.
Entrepreneurs can efficiently minimize their taxable income over time by strategically timing the sale of their firms to take advantage of tax benefits provided by CEI.
Note that the Lifetime Capital Gains Exemption (LCGE) is different than CEI and allows entrepreneurs to exempt capital gains up to $1.25 million (effective June 2024) from being taxed when they sell their qualifying business or property. Once the LCGE is applied, CEI is used to further reduce taxable income. Entrepreneurs need to understand how both LCGE and CEI work together and who qualifies. Let's look at a detailed example below.
Image: Freepik/garetsvisual
Example: How Linda Would Benefit from the LCGE and CEI
Assume Linda founded a software firm three years ago and intends to sell her shares in 2025 for a $2 million profit. She would have to pay taxes on approximately $1.29 million of her earnings, if no deductions were taken. However, Linda may lower her taxable income to $325,000 if she takes advantage of both the LCGE and CEI. She would do this by deducting $133,333 from CEI and $833,333 from LCGE, leaving her with significantly less taxable income and a smaller tax payment.
See: New Tax Breaks or Trouble? Share Your Voice Until Sep 11
Let's break it down...
1. Understanding Capital Gains and Taxable Income
- Capital Gains - A capital gain is the profit you get when you sell an asset for more money than you originally paid for it. For instance, the $2 million is seen as a capital gain if Linda sells her shares for a $2 million profit and she originally put in sweat equity.
- Taxable Portion - Not all of this gain is taxed. The capital gains inclusion rate determines how much of your capital gains are taxed by the Canadian government.
2. Capital Gains Inclusion Rate
- Prior to June 25, 2024, the old inclusion rate of 1/2, or 50%, only $1 million of Linda's $2 million in capital gains would be subject to taxes.
- After June 25, 2024, the new capital gains tax inclusion rate is 2/3 (or about 66.67%). So now, if Linda has $2 million in capital gains, $1.33 million will be taxable.
3. Calculating Linda's Taxable Income WITHOUT DEDUCTIONS
If Linda does not claim any deductions like the LCGE or CEI:
- On the first $250,000, the inclusion capital gains tax rate of 1/2 is applied, so the taxable income from this portion is $250,000 × 1/2 = $125,000.
- On the remaining $1,750,000, the inclusion rate of 2/3 is applied, so the taxable income from this portion is $1,750,000 × 2/3 = $1,166,667.
- That makes the Total Taxable Income $125,000 (from first portion) + $1,166,667 (from second portion) = $1,291,667. So, without any deductions, Linda's taxable income would be about $1.29 million.
4. Applying the LCGE (Lifetime Capital Gains Exemption)
The LCGE allows Linda to exclude up to $1.25 million (lifetime limit) from her taxable income at the new inclusion rate. So by applying the LCGE, Linda can reduce her taxable income by $1.25 million × 2/3 = $833,333.
See: Canada’s Rising Tax Burden and Fintech Opportunities
5. Applying the Incentive Deduction
Applying CEI further reduces the taxable income. The maximum deduction under CEI in 2025 is $133,333, based on a capital gain of $400,000 at the new inclusion rate. So by applying CEI, Linda can further reduce her taxable income by $400,000 × 2/3 × 1/2 = $133,333.
6. Final Taxable Income Calculation
So now subtract the deductions from Linda's initial taxable income from the sale of her shares.
- Initial Taxable Income: $1,291,667.
- Subtract LCGE Deduction: $1,291,667 - $833,333 = $458,334.
- Subtract Incentive Deduction: $458,334 - $133,333 = $325,001 (rounded to $325,000).
RECAP Bringing it all together AFTER DEDUCTIONS
- Without any deductions, Lindas's taxable income from the $2 million capital gain is $1,291,667.
- Applying the LCGE reduces her taxable income from the sale by $833,333.
- Applying CEI further reduces her taxable income from the sale by $133,333.
- Her final taxable income after all deductions is $325,000.
* Takeaway* by applying the LCGE and CEI tax benefits, Linda owes much less tax and gets to keep much more of the capital gains she generated from the sale of her qualifying business shares.
See: Public Market Challenges and Equity Crowdfunding Capital
Eligibility for CEI and LCGE are similar but not the same. Both apply to capital gains from the sale of qualified small enterprises, although they differ in many ways and have extra criteria - see below.
Image: Freepik/aleksandarlittlewolf
Who Qualifies for LCGE?
- The LCGE applies to capital gains obtained from the sale of "Qualified Small Business Corporation (QSBC) Shares" or qualified farm/fishing assets.
- A Qualified Small Business Corporation (QSBC) has to satisfy the following criteria:
- The company is a Canadian-controlled private corporation (CCPC).
- At the time of sale, at least 90% of the company's assets are employed to run an operating business, largely in Canada.
- More than half of the company's assets must have been used in an active business in Canada within the 24 months before the sale.
- During the 24 months preceding the transaction, the shares must have been owned only by the taxpayer or a connected person.
- The LCGE exempts up to $1.25 million lifetime limit (starting June 2024) of capital gains from taxation.
- Certain businesses are excluded, including consulting businesses, professional practices (e.g., lawyers, accountants), financial services firms, and real estate rental businesses.
Who Qualifies for CEI?
- Like the LCGE, CEI applies to capital gains on the sale of QSBC Shares or other qualifying small company properties.
- The same general QSBC criteria apply: the corporation must be a CCPC and use a significant majority of its assets in active business activities conducted principally in Canada.
- The CEI also requires that the LCGE be maxed out before the entrepreneur may use the CEI. After the LCGE has been fully utilized, the CEI serves as an additional deduction.
See: Who Will Canada’s New 3% Digital Services Tax Impact?
- The entrepreneur must own at least 5% of the corporation's shares for a continuous period of 24 months before to the sale and have been actively engaged in the business for at least three years.
- The CEI has a lifetime maximum of $2 million in qualifying capital gains that can qualify for the lower capital gains inclusion rate.
- The same exclusions apply as for the LCGE (consulting, financial services, real estate rental firms, and some professional professions). However CEI also has special anti-avoidance procedures in place to discourage taxpayers from restructuring companies to falsely qualify for CEI deductions.
Key Differences Between LCGE and CEI Eligibility
- The CEI adds additional conditions, such as the entrepreneur must have been actively involved in the firm for at least three years previous to the sale, to the LCGE's requirement that the company be a QSBC. For the LCGE, this prerequisite is not as clearly stated.
- A ceiling is placed on the yearly amount of capital gains that can be eligible for the lower inclusion rate during the five-year phase-in of the CEI (2025–2029). Conversely, LCGE is not phased in.
- CEI is used to offset further taxable capital gains only after the lifetime LCGE cap has been used. The LCGE is applied first. It is not possible to utilize the CEI without the LCGE.
Potential for Unintended Consequences
While planning strategically to maximize the tax savings by applying LCGE and CEI can be highly effective, it may lead to unintended consequences, so here's a list of potential pitfalls to avoid:
1. Adverse Impact of Business Decisions
- In order to qualify for the LCGE and the Incentive, entrepreneurs may be enticed to change their business models or operations. This might result in decisions that prioritize tax benefits over the long-term sustainability and growth of the company. For example, a consulting firm may try to diversify into qualifying activities putting strain on their core business.
See: How Carbon Pricing Impacts Fintech and Investment Strategies
- Further, businesses would be negatively impacted if they structured their business to take advantage of LCGE and CEI but then policy changes occurred that altered the program's benefits, qualifications or timing that was misaligned with the restructuring efforts.
2. Increased Tax Complexity and Compliance Costs
- Due to more complicated tax planning and unique requirements of these tax incentive programs, it may be necessary for entrepreneurs to hire attorneys and tax experts on a more frequent basis, which would increase expenses.
- Given the complexities of the eligibility requirements of LCGE and CEI, it could lead to an increase in strategic planning errors and non-compliance leading to fines, exclusion from benefits or audits.
3. Impact on Timing of Business Exit
- LCGE and CEI benefits may skew the timing of when entrepreneurs decide to sell their companies. They may for example postpone selling their shares to qualify for a tax benefit but at the same time miss investment opportunities in new ventures as a result.
See: Expert Tips For Managing Small Business Finances
- Additionally, as we've seen with the quick implementation of LCGE, many qualifying investors with multiple properties rushed to sell their assets to avoid paying extra taxes. This pressured timing of when to exit a business may result in less favourable conditions or incentivized selling when share prices and valuations may not be ideal.
- Strategic planning of multiple businesses can become even more complex.
4. Misalignment with Investors
- Investors may be looking for speedy exits or other company strategies that do not comply with CEI requirements, causing a conflict of interest between optimizing shareholder value from tax advantages and investor demands.
Remember, CEI is currently a proposal and draft regulations have been published for comment
Provide your feedback and share your voice before Sep 11, 2024 (it's not too late)
Conclusion
Although the LCGE and the (proposed) Canadian Entrepreneurs' Incentive provide substantial tax benefits, business owners must carefully weigh the possible unintended implications of strategic planning in order to optimize these advantages. It's important to consult with tax specialists and legal counsel.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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BoC Conducts Mock PSP Registration Ahead of Nov 1, 2024
Payments Regulation | Aug 28, 2024
Image: Freepik/Drazen Zigic
Preparing for PSP Registration on November 1 under the Retail Payment Activities Act (RPAA)
Under the Retail Payment Activities Act (RPAA), PSPs will be subject to Bank of Canada supervision to ensure the security and dependability of their services.
- With the November 1, 2024 registration window approaching, PSPs should be getting ready to comply with the Bank of Canada’s requirements.
- PSPs are expected to have submitted their registration applications no later than November 15, 2024. It takes time so you need to be prepared.
Feedback From the Registration Pilot
On April 9, 2024, the Bank of Canada carried out a registration pilot with 54 voluntary PSPs to help evaluate the PSP Connect online portal and application procedure prior to the official registration process. There was a diverse range of companies participating in the pilot including cross-border payments, digital wallets, BNPL and others who submitted mock registration forms and provided feedback about the application process and the online portal and accompanying materials.
Overall, the PSP Connect site was described as intuitive and user-friendly by pilot participants, however a few recommendations were made:
- Simplify the account creation process
- Simplify the application form as much as possible
- Clarify the terminology and concepts used online and in the documents (for consistency and understanding)
See: Guide: PSP Registration with Bank of Canada (RPAA)
There were also some technical difficulties that appeared in the feedback re: browser compatibility and mobile responsiveness. Compared to mobile platforms, users had fewer problems using browsers Microsoft Edge or Google Chrome on desktop computers. Lastly, worth noting that the application is comprehensive and takes a lot of time to complete.
Otherwise, technical staff are working to streamline the process and improve the data exchange process.
* Important BoC Webinar* on October 3, 2024 - Getting Ready to Register
On Oct 3, the BoC will give PSPs a detailed rundown of the registration procedure, and PSPs will get a chance to ask questions about the process, PSP Connect Platform and tools/services. For PSPs looking for a positive registration experience, you don't want to miss this webinar!
Register for the BoC webinar --> here
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Kraken’s Legal Battle with the SEC Continues
Regulation | Aug 26, 2024
Image: AI Freepik
Kraken's Request to Dismiss SEC Case Denied, Judge Allows Case to Go To Court
Judge William Orrick recently dismissed Kraken's request to have the case dismissed, allowing the SEC's lawsuit against the company to proceed. The SEC claims that by allowing the trading of tokens like Cardano (ADA) and Solana (SOL) that the SEC in fact deems as securities, Kraken has been operating as an unregistered securities exchange. This case is prominent and could impact the future laws governing crypto in the US, especially given that Kraken is one of the largest centralized digital asset exchanges in the world.
Key Takeaways
1. The SEC's Authority and the Howey Test
According to the judge, the SEC has made credible claims that some crypto transactions made possible by Kraken would meet the criteria for "investment contracts" under the Howey Test and be regarded as securities. Although the court has not yet made a decision, it made clear that Kraken's operations may be subject to SEC regulatory monitoring and warrants more investigation as to whether or not operations qualify as securities trading.
See: SEC Files Lawsuit and Accuses Kraken of Commingling
Also of interest, the court stated that an 'investment contract' does not require a formal agreement under the Howey Test. Conversely, it's focused more on the wider context of the transaction such as the investor's 'reasonable expectations' and how the deal was presented.
3. No Major Questions Doctrine
Legal counsel for Payward Inc., the parent company of Kraken Exchange, had submitted a motion that the case triggered a "major questions doctrine," which restricts the power of regulatory bodies to make significant judgments in the absence of the approval of congress. However, the judge dismissed this claim stating that crypto's impact on the economy would have to be much larger than it currently is (think large enough to affect the financial stability of the economy) to apply this rule.
4. Implications and Reactions
The decision to proceed to court is consistent with prior SEC measures taken against Coinbase and Binance, indicating that the SEC will keep advocating for further regulation of the crypto sector. The SEC's efforts to regulate digital assets may be strengthened even more by the court's decision to allow the case to proceed, particularly if it is shown that Kraken broke any securities laws.
See: Kraken’s Strategy for Canadian Market Growth
Marco Santori, Kraken's Chief Legal Officer, stated that Kraken doesn't think the tokens that are exchanged on its platform qualify as securities. He emphasized that Kraken intends to contest the Howey Test requirements in court, and the SEC will have to demonstrate that each transaction satisfies them.
Closing Outlook
Following the ruling, market reactions have been mixed.If the court sides with the SEC, it will lead to stricter requirements for all cryptocurrency exchanges.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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