Canada’s Revenue Agency (CRA) states that Bitcoin is ‘Specified foreign property’

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The Canadian Revenue Agency (CRA) has given guidance on how Bitcoin and other digital currencies are viewed for tax purposes. The specific topics in question were whether:

a digital currency (e.g. Bitcoins); and

a foreign partnership holding digital currency (i.e. Bitcoins) are “specified foreign property” as defined in Subsection 233.3(1) [Income Tax Act]

In response to the first point, the CRA stated that it was indeed a ‘specified foreign property’ as:

‘Digital currency is [considered as] funds or intangible property and “specified foreign property” includes funds or intangible property held outside of Canada.’

In this sense, the digital currency should have been deposited and held outside of Canada. The CRA went on to further state that:

‘…[these funds] should not used or held exclusively in the course of carrying on an active business.’

In relation to the second point, the CRA stated that a foreign partnership holding digital currency such as Bitcoin would be considered a ‘specific foreign property’ but that this would exclude a ‘specified Canadian entity’ as defined under Subsection 233.3(1) [Income Tax Act]

In order to qualify as a ‘specified Canadian entity’ Subsection 233.3(1)(b) [Income Tax Act] should also be considered whereby:

(b) ‘a partnership […] where the total of all amounts, each of which is a share of the partnership’s income or loss for the period of a non-resident member, is less than 90% of the income or loss of the partnership for the period.’

The guidance provides an important clarification for those Canadian companies investing in a foreign partnership which in turn invest in digital currency. In fact, if those foreign partnerships invest in digital currency and use a currency exchange in order to increase the overall net asset value of the specific fund in a foreign currency, then this would be considered a ‘specified foreign property’.