Source: TaxDAO
1 The use of cryptocurrency by Canadian immigrants involves departure tax
When a taxpayer ceases to be a Canadian tax resident, according to the Canadian Under Section 128.1(4)(b) of the Income Tax Act, taxpayers will be required to dispose of substantially all property (including cryptocurrencies, NFTs and other digital assets) at fair market value. This deemed disposal may give rise to capital gains, commonly known as a "departure tax". Canadian taxpayers must pay income tax on any gains derived from investments held while they reside in Canada. This includes BTC, BHC, LTC, ETH, LINK, Dash, Tao, ZEC, and XRP, among others.
However, Canadian income tax laws exempt certain dispositions of property. For example, real estate in Canada is not considered a disposal (and therefore is not subject to departure tax). Another example of exempt property is inventory in a business carried on through a Canadian permanent establishment.
As a result, in most cases, Canadian immigrants who own cryptocurrency will pay exit taxes on that cryptocurrency portfolio. However, these cryptoassets may be exempt from deemed disposal and resulting departure tax if they constitute inventory in a cryptocurrency trading business.
This article discusses the circumstances under which cryptocurrencies for Canadian immigrants qualify for departure tax exemption. First, we provide an overview of the concept of Canadian tax residence. The deemed disposal rules under subsection 128.1(4)(b) of the Canadian Income Tax Act and the inventory exemption under subsection 128.1(4)(b)(ii) are then discussed. The article concludes with professional cryptocurrency tax advice from Canada’s top cryptocurrency tax lawyers for Canadian cryptocurrency traders and investors.
2 The concept and significance of Canadian tax residence
Section 2(1) and 3 of the Canadian Income Tax Act require Canadian tax residents to account for worldwide income Pay taxes. In contrast, subsection 2(3) of the Canadian Income Tax Act requires Canadian non-residents to pay tax only on income derived from Canadian sources, specifically income from: (1) employment in Canada; (2) carrying on a business in Canada; (3) Disposal of Canadian taxable property. Therefore, Canadian status as an income tax resident determines the extent to which Canada taxes the income.
There are two main forms of Canadian tax residency: de facto residents and deemed residents. In addition, if a bilateral tax agreement (DTA) provides for tax residency of the Canadian treaty partner, Canadian income tax laws may deem you a non-resident.
Factual residence is also called common law residence. This is because the principle comes from judicial decisions that make up the common law of Canada. The Canadian Income Tax Act uses the terms "resident" and "ordinary resident" but neither is defined. The burden of defining "resident" therefore falls on the Canadian courts, namely the Tax Court of Canada, the Federal Court of Appeal and the Supreme Court of Canada.
The Supreme Court of Canada defined a taxpayer’s residence (one of the important criteria for determining whether he is a resident - Translator’s Note) differently: “In his regular daily life, he often, the place where one usually or habitually resides"; and "the extent to which a person in thought and fact adapts or maintains or concentrates his or her normal way of life."
Your specific circumstances determine whether you are an actual resident of Canada, When making decisions regarding an individual's residence status, the courts (and the Canada Revenue Agency) may review the following factors:
Past and present life Custom;
Regularity and duration of visits in the jurisdiction where residence is claimed;
Regularity and duration of visits within that jurisdiction Contact;
Contacts with other regions;
The duration or purpose of stay abroad.
Therefore, a thorough examination of the individual's circumstances is required. This is why the Canadian tax residency test is called the “de facto residence” test.
A "deemed resident" means an individual who is a Canadian tax resident under the Canadian Income Tax Act. Section 250(1)(a) of the Canadian Income Tax Act provides that a person is deemed to be a full-year resident of Canada if he or she "resides" in Canada for 183 days or more in a year. If you visit, you stay. Therefore, unlike de facto residents, deemed residents do not need to have a “established practice” in Canada, nor do they need to be “ordinarily resident” in Canada. In other words,Even if you are not a de facto resident of Canada, you will be considered a Canadian tax resident as long as you have physically lived in Canada for more than half a year.
In contrast, a deemed non-resident is an individual who is not a resident of Canada for tax purposes under the Canadian Income Tax Act. Canada has many bilateral tax treaties with other countries. These conventions or agreements are often called tax treaties. Tax treaties contain provisions designed to prevent double taxation and combat tax evasion. It is worth noting that Canada’s tax treaties often contain a provision that addresses the issue when the domestic tax laws of both countries claim to tax an individual’s worldwide income based on domicile, domicile, place of management or any other similar criteria. For this purpose, subsection 250(5) of the Canadian Income Tax Act provides that a person is treated as a non-resident of Canada if a tax treaty declares that person to be a tax resident of a Canadian treaty partner. Subsection 250(5) ensures consistency between Canada’s domestic cryptocurrency tax laws and Canada’s tax treaties.
3 Deemed disposition and departure tax: subsection 128.1(4)(b) of the Canadian Income Tax Act
When a taxpayer becomes a tax payer for tax purposes When a non-resident of Canada (as opposed to becoming a non-resident for immigration purposes), subsection 128.1(4)(b) of the Canadian Income Tax Act deems the taxpayer to have disposed of certain types of property at fair market value. Such a deemed disposition will result in the immigrant taxpayer realizing a taxable capital gain if the fair market value of the subject property (at the time the taxpayer ceases to be a Canadian tax resident) exceeds the taxpayer's tax costs on the property.
In most cases, this deemed disposal rule will cover BTC, BHC, LTC, ETH, LINK, Dash, ZEC, Tao and XRP, etc. As a result, Canadian immigrants who own cryptocurrencies typically pay exit taxes on that cryptocurrency portfolio.
This departure tax essentially allows the Canada Revenue Agency to treat the subject property as if it were sold by the taxpayer at fair market value when leaving Canada. Taxpayers who emigrate abroad must report departure tax on their Canadian income tax return for the tax year in which they cease to be a Canadian tax resident.
4 Inventory exemption: Item 128.1(4)(b)(ii) of the Canadian Income Tax Act
The Canadian Income Tax Act exempts certain property disposals from tax Departure tax. Category 1 exempt property is "property described in the list of businesses carried on by the immigrant taxpayer at a particular time through a 'permanent establishment' in Canada." Therefore, an immigrant taxpayer’s cryptocurrency may be exempt from deemed disposition (and therefore not subject to departure tax) if the following two conditions are met:
1. The cryptocurrency qualifies as commercial inventory (e.g. in a cryptocurrency trading business) inventory);
2. Taxpayers who immigrate abroad carry out the business through "a 'permanent establishment' in Canada at a specific time."
The following two sections examine each condition in turn.
Condition 1: Is your cryptocurrency an inventory?
Canadian income tax law recognizes only two broad categories of taxable property:
Capital property, upon disposal Capital gains or losses occur when capital gains or losses occur;
Inventory, which is also the basis for inclusion in operating income.
The type of income generated when a property is sold (capital gains or operating income) determines whether the property is capital property or inventory. In other words, first determine the nature of the income and then describe the nature of the property, not the other way around. Therefore, your profits from cryptocurrency trading will be treated as (i) business income or (ii) capital gains, and, if they are treated as business income, your cryptocurrency units constitute inventory.
The income/capital distinction also has other important tax implications. All business or property income is taxable, while capital gains are only half taxable. On the other hand, while only half of capital losses are deductible, losses and expenses related to business or investment activities are fully deductible.
Some cryptocurrency transactions straddle the line between income and capital. Canadian courts have indeed developed considerable case law to resolve the ambiguity between investments that generate capital gains or losses and transactions that generate business income or expenses. Courts will evaluate a variety of factors when deciding whether to characterize gains or losses from a transaction as a capital or income account. When applied to cryptocurrency trading, these factors may include:
Frequency of transactions – for example, buying and selling of cryptocurrency in large quantities or rapid turnover of cryptocurrency units history may indicate the existence of a business;
Length of holding - for example, short-lived holdings of cryptocurrencies indicate business transactions, not capital investments;
Understanding of the cryptocurrency market – for example, increased knowledge or experience of the cryptocurrency market would be helpful in describing the characteristics of the business;
With taxpayers Relationship to other employment – e.g. business if cryptocurrency trading (or similar transactions) forms part of other business of the taxpayer’s employment;
Time spent – e.g. , if the taxpayer spends most of their time researching the cryptocurrency market and investigating potential purchases, it is more likely to be characterized as a business;
Financing - e.g., leveraged Cryptocurrency trading identifies a business;
Advertising – For example, if the taxpayer advertises or otherwise informs that it engages in cryptocurrency trading, the possibility of characterizing the business will increase.
Ultimately, the taxpayer’s motivation or intent when acquiring cryptocurrency is the most important criterion that courts consider when determining whether a transaction resulted in capital gains or business income. Nonetheless, in order to discern taxpayer intent, courts will focus on the objective factors surrounding cryptocurrency purchases and sales. In other words, the court will determine the taxpayer’s intent by evaluating the above factors.
In summary, this multi-factor test determines not only whether cryptocurrency trading generates business revenue, but also whether the cryptocurrency units contain inventory.
Condition 2: Do you carry on business “at a particular time” through a “permanent establishment” in Canada?
Even if the immigrant taxpayer’s cryptocurrency qualifies as inventory in a cryptocurrency exchange business, the cryptocurrency will still trigger departure tax unless the immigrant taxpayer passes through a “Canadian permanent establishment” and “ conduct the business at a specific time.”
What does it mean to establish a permanent establishment in Canada?
Section 2600(2) of the Canadian Income Tax Act defines a personal “permanent establishment”. It essentially refers to the fixed place of business (i.e. physical location) where an individual conducts business in Canada. Therefore, an immigrant taxpayer’s cryptocurrency will be eligible for the inventory exemption only if the immigrant taxpayer conducts a cryptocurrency exchange business through a physical location in Canada. The physical store will qualify as a "permanent establishment" for Canadian income tax purposes.
In addition, the inventory exemption under subsection 128.1(4)(b)(ii) includes a time test. To qualify for the exemption, the property must be related to a business carried on “at a specified time” through a Canadian permanent establishment. The term “at a specified time” is defined in subsection 128.1(4) of the Canadian Income Tax Act and refers to the time when a taxpayer ceases to be a resident.
Accordingly, the inventory exemption only applies if the expatriate taxpayer maintains a Canadian permanent establishment (i.e., a Canadian brick-and-mortar establishment) when he ceases to be a Canadian tax resident. This may occur, for example, if an immigrant taxpayer has employees or agents who continue a cryptocurrency trading business from a fixed place of business in Canada.
On the other hand, if the immigrant taxpayer is the only person operating a cryptocurrency trading business, the taxpayer's cryptocurrencies generally do not qualify for the inventory exemption. This is because most immigrant taxpayers (especially those who are no longer Canadian tax residents) typically do not have a physical presence in Canada when they leave. Therefore, when they cease to be Canadian tax residents, they do not have a permanent establishment in Canada. Therefore, even assuming that the cryptocurrency qualifies as inventory in a cryptocurrency trading business, the inventory exemption does not apply because the cryptocurrency fails to meet the timing test in subparagraph 128.1(4)(b)(ii).
5 Immigration Tax Planning for Canadians Who Own Cryptocurrencies, NFTs and Other Digital Assets
When a taxpayer ceases to be a Canadian tax resident, Canada Section 128.1(4)(b) of the Income Tax Act will trigger the fair market value disposition of virtually all taxpayer property, including cryptocurrencies, NFTs and other digital assets. For immigrating Canadians who own cryptocurrencies, NFTs and other digital assets, this departure tax could result in significant tax bills.
However, if your cryptocurrencies, NFTs, and digital assets qualify as inventory for a business that you continue to operate through a Canadian permanent establishment when you cease to be a Canadian tax resident, you may be able to avoid the tax liability imposed on these assets. Border tax.
As discussed in the previous sections, this departure tax exemption requires that (1) your cryptocurrency qualifies as business inventory, (2) the business is carried on through a Canadian permanent establishment, and (3) When you become a Canadian tax resident, your Canadian permanent establishment still exists.
Additionally, even if your cryptocurrency does not currently qualify for the departure tax exemption, you may be able to rearrange your affairs before leaving Canada in order to reduce or avoid the imposition of departure tax on your cryptocurrency holdings. Tax. For example, you can satisfy the inventory exemption by hiring employees or agents who will continue to operate a cryptocurrency trading business from a fixed place of business in Canada after you leave Canada. But if you go this route, your business income will still be taxed in Canada. Therefore, you need to consider whether the tax savings from avoiding the departure tax are sufficient to justify the tax and compliance costs of continuing operations within Canada.
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