Principal Issues: Whether the CRA would consider taking a position that the situs of cryptocurrencies follows the tax residency of the holder for Canadian reporting purposes.
Position: No position adopted.
Reasons: Issue currently under review by the CRA.
FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, 7 OCTOBER 2021
2021 APFF CONFERENCE
11. Cryptocurrency location and source
Virtual currency, or cryptocurrency, is a blockchain-based digital asset that can be used to purchase or sell goods or services.
In Technical Interpretation 2014-0561061E5 (footnote 1), the CRA clarifies the treatment of cryptocurrencies with respect to the concept of specified foreign property as defined in section 233.3.
The CRA is of the view that cryptocurrencies are funds or intangible property and are specified foreign property of a person or partnership that should be disclosed on the taxpayer’s Form T1135 (footnote 2), if the cryptocurrency in question is situated, deposited or held outside of Canada. However, Form T1135 not only requires identifying the foreign assets and reporting them, but also indicating the country in which they are situate.
However, it is impossible to precisely locate cryptocurrencies that are only the result of mathematical formulas, whose records are contained on servers that can be in several different places in the world and even be moved and copied to a USB stick that can also be in another place. It could also be argued that passwords can be stored by users and holders of cryptocurrencies and thus will follow the location of the physical person. The procedures for storing public and private data may also vary depending on the cryptocurrency.
On the U.K. side, the HMRC’s guidance states that for as long as a person is resident in the U.K., the exchange tokens they hold as beneficial owner will be located in the U.K. In other words, from the HMRC’s perspective, the situs of the cryptocurrencies will follow the holder’s residence for all tax purposes.
The U.S. has chosen a different path addressing the issue from a compliance perspective. On December 31, 2020, the IRS issued a statement indicating that it intends to add virtual currency accounts to the reportable accounts under the FBAR rules, which are the foreign bank accounts of a U.S. taxpayer.
Question to the CRA
To the end of simplicity, could CRA adopt a principle like that of the U.K. and treat the situs of cryptocurrencies as following that of the holder’s residence?
CRA Response
The question of where a cryptocurrency is located, deposited or held within the meaning of section 233.3 is currently under review by the CRA.
Sophie Larochelle
438-342-6801
October 7, 2021
2021-089602
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 CANADA REVENUE AGENCY, Technical Interpretation 2014-0561061E5, April 16, 2015.
2 CANADA REVENUE AGENCY, Form T1135, "Foreign Income Verification Statement".