Holding cryptocurrency, NFTs or blockchain belongings within the RRSP – tax

Introduction: Cryptocurrency In Your RRSP – A Tax Disaster Waiting To Happen?

A registered retirement plan (or RRSP) was introduced in 1957 and allows individuals to defer taxes on the income they set aside for retirement. You will be able to claim tax deductions on your RRSP contributions and will not pay tax on any income earned under the plan. Taxes will apply when withdrawing funds from your RRSP. But if you have planned correctly, you do not have to withdraw until retirement age – and fall into a lower tax bracket. In other words, an RRSP essentially allows you to increase your retirement savings tax-free by using money that would otherwise have gone to the government as taxes. Ultimately, you pay those taxes, but you do so after several decades – when you are subject to lower tax rates and after enjoying the returns on the investment funded by pre-tax income.

With cryptocurrencies like Bitcoin, Ethereum, Dash, and Litecoin vying for adoption in the mainstream financial landscape, Canadians looking to retire could see cryptocurrency as a way to get higher returns on their nest egg. The developments in blockchain technology are leading to an ever-growing range of opportunities, agreements and asset smart contracts, cryptocurrency liquidity mining and yield farming, and non-fungible tokens (NFT), to name a few. And Canadians might be curious to combine these opportunities with the tax benefits of an RRSP.

So the question is: can you put cryptocurrency and other blockchain-based assets into your registered retirement plan? Or is a tax disaster waiting for it?

In order to answer these questions, this article first discusses the basic tax regulations for registered retirement savings plans – in particular the requirement that an RRSP contains only “qualified investments”. The article then analyzes whether cryptocurrency or other blockchain assets can qualify as RRSP investments. This article concludes with professional tax tips for Canadian taxpayers looking to keep qualified cryptocurrency investments in their registered retirement accounts.

Registered retirement savings plans, “qualified investments” & the RRSP penalty tax

A registered retirement plan can be established by anyone who is a Canadian tax resident. In other words, the RRSP holder (or RRSP beneficiary) must be a natural person (as opposed to a corporation or other legal entity). In addition, if you are not a Canadian Tax Resident, you will not be able to open or contribute to an RRSP. For more information on determining your resident taxpayer status, please see our article, “Canadian Tax Residency – Are Significant Residential Ties Less Significant to Immigrants to Canada Than Expatriates from Canada?” A person’s status as a Canadian tax resident depends on several interrelated, complex tax laws and may require careful analysis of not only Canadian tax law but also the tax laws in a tax treaty between Canada and another country. Canadian tax residency is fundamentally different from residency for citizenship or land immigrant status. Our experienced Canadian tax attorneys will advise you on your resident taxpayer status and your resulting Canadian tax liabilities.

The first tax advantage of a registered retirement savings plan is that the RRSP holder can deduct RRSP contributions when calculating the net income for a tax year. The second tax benefit of a registered retirement plan is that you don’t pay any tax on income or capital gains accrued within your RRSP.

To qualify for the RRSP deduction, you must pay into your registered retirement savings plan before the end of the RRSP period for the year. Your RRSP grant will only qualify for the RRSP deduction for a given year if you make the contribution in that year or within the first 60 days of the following year (this usually falls on March 1, but in a leap year on December 29th) . February).

Also, Canadian Income Tax Act limits the amount you can contribute to your RRSP each year. Your RRSP contribution limit for the year is the smaller of two numbers: (1) 18% of previous year’s earned income, and (2) the tax year limit (for example, the 2021 tax year limit is $ 27,830. If you make a lifetime contribution that exceeds your RRSP contribution area by USD 2,000 or more, an RRSP penalty tax on the excess amount of 1% per month will apply. OVP, “Individual tax return for RRSP-, PRPP- and SPP surpluses “) and you may face an additional penalty for failing to file this statement. Interest is also paid on the penalty tax at the prescribed rate.

A penalty tax also applies if the RRSP acquires an unqualified system. If the registered retirement savings plan acquires a non-qualified system or if an existing RRSP system becomes a non-qualified system, the RRSP holder receives an RRSP penalty tax of 50% of the market value of the non-qualified system. In addition, the RRSP holder must pay tax on any income from the unqualified asset or any capital gain from the sale of the unqualified asset.

In other words, the preferential tax treatment of the RRSP extends only to the “qualifying investments” within the RRSP. The definition of “qualifying investments” in the Income Tax Act includes the following:

  • Money, GICs and other deposits;
  • most securities listed on a particular stock exchange, such as company shares, warrants and options, and shares in exchange traded funds and real estate investment trusts;
  • Mutual funds and special funds;
  • Canada Savings Bonds and Provincial Savings Bonds;
  • Debt securities of a corporation listed on a particular stock exchange;
  • Investment grade debt securities; and
  • insured mortgages or mortgages.

For Canadian taxpayers looking to hold cryptocurrencies, non-fungible tokens, or other blockchain-based assets in their registered retirement accounts, the main tax question is whether those assets constitute “qualifying investments”.

Do cryptocurrency, non-fungible tokens, or other blockchain assets constitute “qualified investments” for a registered retirement savings plan?

Cryptocurrencies and non-fungible tokens themselves are not “qualified investments”. As mentioned above, the definition of “qualifying investments” in the Income Tax Act basically refers to two elements: (i) money and (ii) securities listed on a particular stock exchange. The rating agency takes the – legally correct – view that “digital currencies, such as e [B]itcoins, are not considered money issued by any government of any country and are not qualifying investments “(see Section 1.12 of the Canada Revenue Agency, Income Tax Folio S3-F10-C1,” Qualified Investments – RRSPs, RESPs, RRIFs, RDSPs “. And TFSAs”, October 1, 2018). Likewise, no cryptocurrency or non-fungible token itself is traded as a security on an exchange designated as such by the Canadian Minister of Finance. So cryptocurrencies and non-fungible tokens do not meet the definition of “qualified investments” of the Income Tax Act and cannot be kept in your RRSP.

Still, the investment market has seen a surge in cryptocurrency-based ETFs (or exchange-traded funds) recently, many of which are traded on designated exchanges. So while cryptocurrencies themselves are not “qualified investments”, many of the publicly traded cryptocurrency ETFs are. Therefore, these cryptocurrency-based ETFs can qualify as RRSP investments. In particular, the cryptocurrency-based ETF meets the definition of a “qualifying investment” if the fund is listed on a particular exchange such as the Toronto Stock Exchange (TSX), the New York Stock Exchange (NYSE), or any of the other Canadian or international exchanges that the Appointed Canadian Treasury Secretary for the purposes of the Canadian Income Tax Act.

In conclusion, your RRSP cannot directly contain cryptocurrencies or non-fungible tokens as these assets are not themselves “qualified investments”. However, your RRSP may contain cryptocurrency-based ETFs or other cryptocurrency-based funds – but only if the fund is listed on a specific exchange such as the Toronto Stock Exchange or the New York Stock Exchange.

Professional Tax Tips – Canadian Tax Advice from a Canadian Tax Attorney: Exemption from RRSP Penalty Tax Resulting from Unqualified Cryptocurrency Investments

As mentioned above, cryptocurrencies and non-fungible tokens do not meet the Income Tax Act’s definition of “qualified investments”, so they cannot be held in your RRSP. Therefore, if your registered retirement plan contains cryptocurrencies, non-fungible tokens, or some other non-qualifying investment, you will be charged an RRSP penalty tax equal to 50% of the fair market value of any unqualified investment in your registered retirement plan.

Subsection 207.06 (2) gives the Canada Revenue Agency the discretion to remove all or part of the RRSP penalty tax resulting from holding non-qualifying assets such as cryptocurrencies or non-fungible tokens in your registered retirement plan. In particular, the Canada Revenue Agency may waive the RRSP penalty tax if the CRA “deems it fair and appropriate, taking into account all circumstances, including (a) whether the
[RRSP penalty tax] arose as a result of a reasonable mistake; (b) the extent to which the transaction or series of transactions leading to the [RRSP penalty tax] also led to another tax under [the Income Tax Act]; and (c) the extent to which payments have been made by [the registered retirement
savings plan]. “

Our experienced Canadian tax attorneys have assisted numerous clients with requests for the waiver of the RRSP penalty taxes under subsection 207.06 (2). We can carefully plan your application in accordance with Section 207.06 Paragraph 2 and prepare it promptly. A properly prepared application for the tax penalty waiver not only increases the likelihood that the CRA will accept your request, but also lays the foundation for a request for judicial review in the federal court in the event that the CRA unjustifiably rejects your request and refuses to waive your RRSP penalty Steer.

The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.