Principal Issues: Whether there is an update on the study related to the CRA analysing the situs of cryptocurrencies for Canadian reporting purposes.
Position: No position adopted yet.
Reasons: Issue currently under active review by the CRA.
FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, 7 OCTOBER 2022
2022 APFF CONFERENCE
1. T1135 and cryptocurrency situs
Section 233.3 of the Income Tax Act (footnote 1) requires a "specified Canadian entity" to report its "specified foreign property" on Form T1135 (footnote 2). This requirement generally arises for a taxation year where the total cost of specified foreign property exceeds $100,000 at any time in that taxation year. "Specified foreign property" includes (among other things) "funds or intangible property or, for civil law purposes, intangible property situated, deposited or held outside Canada".
In technical interpretation 2014-0561061E5 (footnote 3), CRA took the position that cryptocurrencies constitute funds or intangible property, and must be disclosed on the taxpayer's Form T1135 to the extent that they are situated, deposited, or held outside Canada and are not used or held exclusively in the course of carrying on an active business.
At the Financial Strategies and Instruments Roundtable of the APFF 2021 Conference (footnote 4), the CRA was asked about the situs of cryptocurrencies. The CRA responded that the question of where a cryptocurrency is located, deposited or held within the meaning of section 233.3 was under review.
Question
Can the CRA clarify the status of its study on this issue and whether there have been any developments in this area?
CRA Response
Given the decentralized nature of cryptocurrency, the question of where a cryptocurrency is located, deposited or held within the meaning of section 233.3 is complex. This issue is still under active consideration by the CRA.
In conducting its review, the CRA must consider the purpose of Form T1135, which is to promote compliance and tax fairness, and to assist the CRA in obtaining information on certain types of assets held by Canadian residents outside of Canada that would otherwise be difficult to obtain. Given the quasi-anonymity of crypto-assets, including crypto-currencies and tokens, their intangible nature, and the fact that they can be traded anywhere in the world without the intervention of traditional financial intermediaries and without any central administrator having full visibility over transactions made or crypto-assets held, crypto-assets, by their very nature, are more difficult to track than traditional assets. Consequently, they carry a material risk of tax evasion or non-compliance, regardless of their situs. The CRA believes that, in general, reporting of crypto-assets would facilitate tax compliance in this growing sector. The CRA is currently considering several options, including changes to certain forms, schedules and guides that would increase disclosure for this type of asset and promote tax compliance.
In parallel, work is underway at the Organisation for Economic Co-operation and Development ("OECD") to develop the Crypto-Asset Reporting Framework ("CARF"), a new global tax transparency framework that will include requirements for reporting to tax administrations and procedures for exchanging information relating to taxpayers' transactions with crypto-asset service providers. A public consultation process on the CARF was launched on March 22, 2022 and closed on April 29, 2022. A report on CARF is expected in October 2022. Further information is available on the OECD website.
The CRA is also aware that crypto-assets are a relatively recent innovation that is evolving very quickly and may create a degree of uncertainty for taxpayers regarding their tax obligations in this area. In this regard, the Guide for Cryptocurrency Users and Tax Professionals, which is available on the CRA's website, provides general guidelines explaining to Canadian taxpayers their tax obligations with respect to cryptocurrency (footnote 5). In particular, taxpayers who trade in crypto-assets are required to keep proper financial records of all their activities, including records relating to the acquisition or disposition of crypto-assets (footnote 6). Subsection 230(1) specifically requires taxpayers to keep records and books of account containing information that will be used to determine taxes payable under the Income Tax Act. Pursuant to paragraph 231.1(1)(a), a taxpayer's books and records may also be inspected, audited or examined by an authorized person of the CRA. As the Canadian tax system is based on the principle of self-assessment, the CRA expects taxpayers to properly report their transactions and meet their tax obligations related to cryptocurrencies and other crypto-assets. The CRA is currently conducting audit activities related to crypto-assets, including audits of individuals who acquired and disposed of crypto-assets as well as crypto-asset businesses involved in the development, mining, staking or trading of crypto-assets.
Sophie Larochelle
October 7, 2022
2022-093624
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 R.S.C. 1985, c. 1 (5th Supp.) ("I.T.A.")
2 Canada Revenue Agency, Form T1135, "Foreign Income Verification Statement".
3 Canada Revenue Agency, Technical Interpretation 2014-0561061E5, April 16, 2015.
4 Canada Revenue Agency, Technical Interpretation 2021-0896021C6, October 7, 2021.
5 For more details, visit the CRA website to view the virtual currency Guide for cryptocurrency users and tax professionals (online: https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/digital-currency/cryptocurrency-guide.html).
6 Canada Revenue Agency (online: https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2022/keeping-records-cryptocurrency-transaction.html), "Keeping records of your cryptocurrency transaction", March 2, 2022.