T1135 For Cryptocurrencies: Guidance From A Canadian Crypto Tax Lawyer

The T1135: What is it?

Any specified foreign properties that a Canadian resident taxpayer owns where the cumulative adjusted cost base is $100,000 CAD or more must be reported to the Canada Revenue Agency on Form T1135. Although failure to file the T1135 may result in failure to file tax penalties of up to $2,500 each tax year, the form itself does not impose a duty to pay tax. Any income related to the specified foreign property would be declared in the normal course on the annual Canadian income tax return.

See our article CRA T1135 Forms for more information on the T1135.

The Filing of T1135 for Cryptocurrency

The realties of cryptocurrencies, NFTs, and other such blockchain technologies are still "catching up" with Canadian cryptocurrency tax laws, and the CRA is currently in the process of doing so. Determining whether taxpayers who own cryptocurrencies, such as Bitcoin and Ethereum, are required to file Form T1135 is a part of that "catch up." This determination is made in two steps. First, if cryptocurrencies fall under the definition of "specified foreign property" as defined in subsection 233.3(1) of the Income Tax Act. Secondly, how to evaluate whether a cryptocurrency is held domestically or is a foreign asset.

What is Specified Foreign Property?

There are numerous types of "specified foreign property" listed in subsection 233.3(1) of the Income Tax Act. Digital money is "funds or intangible property," which is deemed specified foreign property under category (a) of the specified foreign property definition, according to the Canada Revenue Agency Technical Interpretation 2014-0561061E5 . There is no reason to think that the Canada Revenue Agency's conclusion in this case is incorrect, even if the Technical Interpretations issued by the agency are not considered to be legally binding. In light of this, in the view of our knowledgeable Canadian crypto tax lawyers who specialize in cryptocurrency, that cryptocurrency qualifies as specified foreign property.

Cryptocurrency: Foreign or Domestic Property?

The T1135 is aimed to provide the Canada Revenue Agency with information regarding a person's foreign holdings, enabling the tax agency to find people who may be underreporting their income or trying to conceal assets abroad in order to evade taxes. Accordingly, the form T 1135 only applies to foreign assets. 

Given its intangible character, it becomes difficult to evaluate whether cryptocurrency is a domestic or foreign property.

The type of cryptocurrency wallet you use to store your cryptocurrency is a consideration, according to Jamie Golombek in his article "The Foreign Property Tax Implications Associated with Owning Cryptocurrencies". You can keep your cryptocurrency in a "hot" or "cold" wallet. The public and private keys for your cryptocurrency are stored on physical devices like USBs called cold wallets or cold storage, which are not online. When the bitcoin owner is prepared to trade, he or she links the cold wallet to a computer. The location of the cryptocurrency for users who use cold wallets is said to be wherever the cold wallet itself is kept. However, in our opinion, the location of the wallet does not determine whether or not cryptocurrency is considered to be specified foreign property. No matter where the wallet is located or whether it is a hot or cold wallet, cryptocurrency is in our view essentially specified foreign property. For instance, specified foreign property that needs to be reported includes a portfolio of US stocks kept in a Canadian brokerage account.

Exemption for Active Business

"Property that is utilized or held exclusively in the course of carrying on an active business of the person or partnership (determined as if the person or partnership were a corporation resident in Canada)" is not considered to be specified foreign property. Depending on their trading operations and other external conditions, those who mine and/or trade cryptocurrencies may be seen to be doing so as an active business. The T1135 reporting obligation does not apply to certain cryptocurrency owners who run active businesses and employ their crypto holdings in such operations.

While using cryptocurrency as part of an active business may circumvent the need for a T1135, the overall amount of tax paid will frequently be higher. Trades on account of capital are taxed at 50% of the total gain or loss from the sale, whereas business income is taxed at the whole amount of the gain (or loss) from the sale. It is often difficult to determine whether a certain crypto trader is acting in accordance with business or capital in any individual case. Our expert Canadian crypto tax lawyers frequently draft thorough memos that analyze whether cryptocurrency transactions be accounted for as capital, income, or both.

Tax Pro Tips: Use the Conservative Approach in Reporting

"Do I report my cryptocurrency holdings on the T1135 form?" is the key question posed by the discussion above. As was said above, it is not always clear-cut whether or not to report cryptocurrency on the T1135. In the face of such uncertainty, our expert Canadian crypto tax lawyers typically advise taking a conservative approach to ensure that our clients maintain compliance with their crypto tax reporting obligations; however, specific advice will vary depending on the taxpayer's distinct situation and circumstances. We can help you decide whether you need to submit a T1135 for your crypto holdings or determine the proper reporting of your cryptocurrency holdings and activity, including whether you need to declare business income, capital gains, or losses.

Disclaimer:

"This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the articles. If you have specific legal questions, you should seek the advice of a lawyer."