As digitalization continues to rise, so do online transactions. Bitcoin was introduced to help ease these transactions. Not only is Bitcoin considered a digital currency but also a great form of investment; because of this many Canadians have been investing in Bitcoin in the recent years.
However, Canadian taxpayers should be aware that the Canada Revenue Agency (CRA) considers Bitcoin as ‘specified foreign property’ under Income Tax Act (ITA) Section 233.3 and therefore subject to be reported on Form T1135, Foreign Income Verification Statement.
What is Bitcoin?
Bitcoin are a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, they work like any other currency. All Bitcoin payments are digitally signed using cryptography and therefore offer a very secure form of payment for online transactions. Bitcoin can be used to pay for online goods and services wherever they are accepted. With great price swings in the value of Bitcoin, many people hold on to them as commodity investments. Bitcoin is the largest of its kind in terms of total market value.
Taxation of Bitcoin in Canada
Bitcoin does not have a standard value indicated on them like other currency, each Bitcoin holds a market value. This value increases and decreases on a regular basis like any other investment.
Any taxpayer owning Bitcoin, should keep a record of the market value at the time it was received or purchased. Any subsequent disposition will be determined whether the gain or loss is income or capital, and will depend on whether the Bitcoin was held for investment or for active trading.
In CRA Document No. 2014-0561061E5 “Specified Foreign Property” (April 16, 2015), the CRA was asked whether digital currency or an interest in a foreign partnership holding digital currency would be considered specified foreign property. The CRA concluded that, digital currency would be funds or intangible property, and would be specified foreign property if situated, deposited or held outside Canada and not used or held exclusively in the course of carrying on an active business.
Reporting on Form T1135
Canadian taxpayers need to include/consider the value of the Bitcoin to determine if they hold foreign assets worth more than CAD$100,000, and accordingly report the Bitcoin on their annual T1135 Form, also known as Foreign Income Verification Statement.
Additionally, an interest in a partnership that owns or holds specified foreign property would itself be specified foreign property unless the partnership was a “specified Canadian entity” (i.e., a partnership where the total of all non-resident members’ shares the income or loss of the partnership for the fiscal period is less than 90% of the total income or loss of the partnership for the period). The CRA stated that in this case, the digital currency would likely be specified foreign property and the partnership interest would be specified foreign property of the Canadian corporate owner.
AG Tax LLP Can Help
If you wish to discuss further on the above issue, or have any tax-related queries or need assistance with tax planning or filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle even your most complex tax situation.
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