Crypto as Specified Foreign Property


Crypto as Specified Foreign Property

Part 2 of the Smartblock Law "Crypto-Tax Primer" Blog Series

Crypto-Tax part 2.jpg

Chetan Phull · Feb 23, 2018



The CRA has stated that Bitcoin can be “specified foreign property”, whether held personally or by a partnership, when “it is situated, deposited or held outside of Canada and not used or held exclusively in the course of carrying on an active business”. (See CRA Doc No. 2014-0561061E5, "Specified Foreign Property" [April 16, 2015] [“2015 CRA letter”]; Income Tax Act, s.233.3(1) “specified foreign property”).

The practical consequence is that cryptocurrency existing as “specified foreign property” must be claimed via Form T1135 if the adjusted cost base is $100,000 or more (see Income Tax Act, ss.233.3(1) “reporting entity”, 248(1) “cost amount” (b); CRA, “Questions and answers about Form T1135” [Feb 23, 2016]).

However, considering cryptocurrency to be “specified foreign property” in every case is problematic, because of how cryptocurrency is located in fact, held, and accessed.

Here's why.

Cryptocurrency is in fact located both domestically and internationally

Cryptocurrency exists as a set of transactions among addresses on a ledger distributed all over the world.

No address or ledger entry exists in any one place, and these items exist in Canada just as much as they exist outside of Canada.

The beneficial right to cryptocurrency is pursuant to domestic law

Consider the scenario of a given crypto-exchange/wallet platform that:

  1. is incorporated domestically with all directors being residents of Canada;

  2. stores user data domestically; AND

  3. holds cryptocurrency in trust for its users, for example because it exclusively holds the private keys to crypto-addresses assigned by the platform to each user. (This point is discussed in more detail in Part 3: Crypto-Exchange/Wallet Tax Issues.)

This scenario contemplates a trust under domestic trust law, where the trustee is a Canadian controlled private corporation that stores data domestically.

In such a case, the trust itself is likely a Canadian resident (see Fundy Settlement v. Canada, [2012] 1 SCR 520).

The rights of domestic users, as beneficiaries to the trust, are likewise grounded in Canadian law. 

The means to access cryptocurrency can be physically moved to a domestic location

When cryptocurrency is held in cold storage, i.e. with private keys held in an off-line environment like a hardware wallet, it is arguable that the cryptocurrency functionally exists only where its means of access exists.

On this view, a hardware wallet transported across borders would change the functional location of cryptocurrency. A hardware wallet could, for example, functionally situate cryptocurrency exclusively within Canada.

Moreover, the private/public key pair could be the derivative product of a BrainWallet. Consider the example of an individual who:

  1. resides between Canada and the U.S.;

  2. holds cryptocurrency associated with an address that has been used for over one year; and

  3. uses a memorized phrase (or a "mnemonic seed") to access the keys to his address through a BrainWallet.

In this case, the information required to access the cryptocurrency is in the taxpayer's mind. It may therefore be appropriate to tie the location of the cryptocurrency to the taxpayer's residence for tax purposes.

We acknowledge that this "functional location" analysis may present enforcement difficulties in certain situations, including the following:

  1. where cryptocurrency flows frequently between multiple addresses owned by the same taxpayer, and those addresses are located in various different countries (according to the "functional location" analysis described in this section); or

  2. the particular cryptocurrency exists on a blockchain with a non-transparent ledger that obfuscates the flow-path of funds.

Our thoughts

Any draft crypto-tax legislation which adopts the tax principles of specified foreign property should be carefully reviewed by Parliament.

We call upon the Federal Government to consider our above observations, further to the Standing Senate Committee’s Recommendations #6 and #7 (see Standing Senate Committee on Banking, Trade and Commerce, “Digital Currency: You Can’t Flip This Coin!” [June 2015] at 16-17).


The copyright and disclaimer contained in the footer of the Smartblock Law Professional Corporation website applies to this article.