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Guidance from a Canadian tax lawyer: Tax uncertainties regarding the transfer of cryptocurrency as part of lending transactions

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By: Crypto Tax Lawyer

Published: January 2, 2024

In today's dynamic digital landscape, where digital assets are integral to corporate, commercial, and financial activities, the use of cryptocurrency in various transactions has become commonplace. This includes scenarios where digital assets are used as collateral for loans or are part of crypto lending agreements.

Using crypto as collateral for loans

Some borrowers leverage their substantial digital asset portfolios to secure fiat currency loans. The process of using crypto assets as collateral in secured loan transactions can vary. In some cases, borrowers may need to pledge digital assets by entering into a custodial agreement, where a custodian takes possession and control of the collateral. Depending on the agreement's terms, the Canada Revenue Agency (CRA) might view this as a disposition of assets, potentially leading to business income/losses or capital gains/losses for the borrower.

Custodians under such agreements typically assume legal interest in the collateral. The crucial factor in determining if there was a disposition is whether the custodian also receives beneficial ownership. According to subsection 248(1) of the Income Tax Act, a disposition includes any transfer of property to a trust or beneficiary, unless exceptions apply. If the custodial relationship is akin to a bare trust, with legal title held by the custodian and beneficial ownership by the borrower, there might be no disposition. However, if the agreement changes beneficial ownership, a disposition under the Income Tax Act could occur. Digital assets can also be pledged without a custodial agreement or trust relationship. In such cases, where there's no transfer of beneficial ownership, the pledge might not be considered a taxable disposition. The CRA scrutinizes whether the transfer of digital assets in custodial or non-custodial agreements constitutes a disposition for tax purposes, raising intriguing questions about tax implications.

Lending agreements involving crypto transfers

In a recent CRA roundtable, the scenario of a taxpayer transferring bitcoin to a centralized crypto asset exchange and lending platform in exchange for a variable return under a lending agreement was discussed. The platform, holding the bitcoin in its own name, had the authority to pledge, sell, lend, or otherwise use the bitcoin at its discretion without informing the taxpayer. Since the bitcoin wasn't held in a custodial agreement in trust for the taxpayer as the beneficial owner, the exchange gained the beneficial interest in the deposited bitcoin.

Based on the limited details provided, the CRA suggested that a disposition likely occurred for the purposes of the Income Tax Act. While the CRA didn't cite a specific paragraph of the Act to support this view, it referred generally to the definition of "disposition" under subsection 248(1) of the Income Tax Act. This roundtable discussion may result in unforeseen tax implications for the taxpayer stemming from the bitcoin transfer agreement.

Pro tax tips – Consult with a tax lawyer to determine whether a crypto disposition has occurred

Although the term "disposition" defined under subsection 248(1) of the Income Tax Act introduces more complexity to understanding the tax implications of transferring digital assets, the CRA was able to provide some guidelines to determine whether a crypto disposition has occurred, which involve the events, transactions, or transfers, along with all relevant facts, contractual clauses, and applicable private law. Still, the unintended tax consequences highlighted in these scenarios emphasize the importance of carefully drafting and reviewing the terms of lending agreements and maintaining thorough records in the rapidly changing and unpredictable landscape of digital asset transactions, and it is highly recommended for lenders or borrowers of cryptocurrency to consult with an experienced Canadian crypto lawyer to avoid any unintended tax consequences.


What is a disposition that gave rise to a taxable event?

Under the Income Tax Act, a disposition includes any transfer of beneficial ownership of a property to a trust or beneficiary. If there’s only change of legal title but beneficial ownership such as a bare trust relationship, there might be no disposition.

What is a bare trust relationship?

A bare trust is essentially a principal-agent relationship, which means the beneficiary of a bare trust has complete control over the trustee's action as it relates to the trust property and the trustee has no independent power, discretion, or responsibility over the property. In essence, the bare trustee only holds the legal title of the property instead of the beneficial ownership.


This article provides information of a general nature only. It is only current at the posting date. It is not updated, and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions, you should consult a Canadian tax lawyer.

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