Israel Approved a Draft Bill to Exempt Foreign Residents from Crypto Taxes While Canada Tightens Its Crypto Tax Regulations
Published: July 25, 2023
Israel proposed new bill to reduce crypto taxes on foreign residents
Israel's parliament has approved the initial reading of a draft bill proposing an exemption for foreign residents from cryptocurrency taxes, a significant move to attract foreign investment in digital assets. The bill, which received unanimous support from all ruling coalition parties on June 5, 2023, excludes expatriates from paying taxes on capital gains from the sale of cryptocurrencies. The bill, introduced by Knesset member Dan Ilouz, aligns crypto bonuses with stock options, reducing the current 50% tax rate to 25%, delighting numerous crypto investors. The primary aim of the bill, as stated in the explanatory note, is to position Israel as an attractive destination for crypto investment and foster growth in the crypto sector.
The bill proposes not to treat crypto as a security in Israel
This bill aims to broaden the country's regulatory oversight on cryptocurrencies and showcases Israel's embrace and endorsement of digital assets. Moreover, this move aligns the Israel Finance Minister's stance with the UK Prime Minister and European lawmakers, all showing support for cryptocurrency. However, the bill proposes that digital currency should not be considered a "security," a departure from the earlier draft that caused concerns within various industries in the country.
Canada tightens its tax regulations on crypto
Global Crypto Regulations Around the world, countries are contemplating cryptocurrency regulations, with many drafting or close to implementing relevant bills. Europe is expected to apply its draft by 2024, and in the US, Republicans are working on a similar draft nearing presentation.
Canada, on the other hand, decided to tighten its regulations on cryptocurrency. Following the announcement of a deadline by Canadian securities regulators in February 2023, unregistered cryptocurrency trading companies in Canada were given a 30-day window to commit to a pre-registration undertaking. These new regulations, inspired by the recent increase in U.S. regulatory measures, mandate companies to segregate customer asset classes and prohibit them from offering margin or leverage to users.
The journey towards tighter regulations began in 2019 when Canadian regulators initially proposed a comprehensive framework for cryptocurrency platforms. A subsequent notice in 2021 from securities regulators and the Investment Industry Regulatory Organization of Canada provided further clarity on how securities law applies to these businesses. As a result of the new requirements, some companies (such as Binance) have decided to exit the Canadian market, while others have started the registration process.
How is crypto taxed in Canada
In contrast to the new Israeli proposals, trading cryptocurrencies and cryptocurrency tax in Canada is governed by the same tax laws that apply to shares or commodities such as gold. In some cases, when you make gains from selling Bitcoin and Altcoins, these gains are treated as capital gains and subject to taxation. However, if your activities suggest that you are conducting a business through cryptocurrency trading, the gains realized are fully taxable as business income, with combined federal and provincial tax rates in excess of 50% in some provinces. Canadian tax law distinguishes between income from capital and income from business or property, and this determination depends on the specific facts of your situation and typically requires a detailed tax analysis by an experienced Canadian crypto lawyer.
Regarding foreign reporting requirements, Canadian taxpayers must file Form T1135 with the Canada Revenue Agency (CRA) if they own specified foreign property with a total value exceeding $100,000. In a technical interpretation from April 2015, the CRA stated that Bitcoin and other cryptocurrencies, including Dash and Ether, fall under the category of "funds or intangible property."
If these cryptocurrencies are situated, deposited, or held outside of Canada and are not exclusively used for carrying on an active business, they will be considered specified foreign property for the purposes of the Income Tax Act. Therefore, if a Canadian taxpayer possesses cryptocurrency on a foreign exchange costing $100,000 or more, or if his cryptocurrency investment is less than $100,000 but he already own other specified foreign property costing more than $100,000, he must report his cryptocurrency holdings to the CRA using Form T1135.
Failure to file Form T1135 as required by the Canadian Tax Act results in an automatic penalty of $2,500 for each annual failure to file, and significant penalties and criminal prosecution may be possible for severe cases of non-compliance. A top Canadian crypto tax lawyer can advise you on your Form T1135 crypto tax filing requirements.
Pro tax tips – file a voluntary disclosure application if you have unreported crypto income
For taxpayers who have unreported crypto income, they should retain a knowledgeable Canadian crypto tax lawyer to file a voluntary disclosure application to avoid potential penalties and possibly receive partial interest relief. However, the CRA is not obligated to accept any voluntary disclosure application and has the discretion to determine whether to accept to reject an application. Therefore, it is highly recommended to consult with an experienced Canadian crypto tax lawyer to maximize your chance for your application to be accepted.
What's the legal test to determine whether crypto gains should be considered as business income vs capital gains?
The test to determine whether particular income is classified as business or capital income was developed in the leading case Happy Valley Farms Ltd. v. Her Majesty the Queen. The test contains six elements. None of these elements are determinative on their own and must be considered together with the overall conduct and circumstances of the taxpayer. The six factors are as follows:
- The nature of the property sold: Certain types of property are more likely to result in capital income or business income. For example, shares generally result in capital income, though business income can be earned from selling shares as well. Other property, like certain real estate, are neutral. Generally, property which gives the owner a return that is either financial or personal enjoyment simply by owning the property will give rise to capital income upon its sale.
- The length of period of ownership: shorter periods of ownership suggest business income is being earned. Nevertheless, the courts have considered whether shorter periods of ownership are appropriate given the circumstances and thus not indicative of business income.
- The frequency or number of similar transactions by the taxpayer: A taxpayer who has a pattern of making similar sales or makes several similar sales around the same date is generally conducting business.
- Work expended on or in connection with the property realized: Those conducting business are typically actively looking to sell their property and will expend work to make the property marketable or find purchasers. This factor can often be analyzed by comparing the taxpayer's activities to those of a person conducting business with the same property.
- The circumstances that were responsible for the sale of the property: Reasons for the sale of property which are unexpected at the time of purchase, such as job loss, are indicative of capital income.
- Motive: The taxpayer's intention, to conduct business or earn capital income, at the time of acquiring the property.
What are the conditions of a voluntary disclosure application?
A voluntary disclosure application must meet the following conditions to be valid. The application must:
- Be voluntary,
- Be complete,
- Involve the application or potential application of a penalty,
- Include information that is at least 1 year past due, and
- Include payment of the estimated tax owing.
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. You should consult a Canadian tax lawyer if you have specific legal questions.