Can I Rollover my Cryptocurrency Account into a Corporation

Neufeld Legal PC: Chris@NeufeldLegal.com - 403-400-4092 / 905-616-8864

Yes, in Canada, you can generally "rollover" your cryptocurrency (Bitcoin, Ethereum, Tether, Binance Coin, Solana, etc.) into a corporation, and it can offer significant tax advantages, particularly if your crypto activities are considered a business rather than just an investment. This is typically done using a Section 85 rollover under the Income Tax Act (Canada).

Section 85 of the Income Tax Act allows for the tax-deferred transfer of assets (including cryptocurrencies) to a Canadian corporation in exchange for shares of that corporation. This means you can move your appreciated crypto into your corporation without immediately triggering capital gains taxes.

The Simplified Explanation as to the procedure, is that you and the corporation agree on a transfer price (elected amount) that is usually lower than the fair market value (FMV) of the assets. This defers the tax liability. This rollover generally applies to transfers made to taxable Canadian corporations.

The primary purpose for incorporating your Cryptocurrency holding is Tax Deferral, given that the proper structuring of a Section 85 rollover allows you to defer capital gains taxes when transferring appreciated crypto to your corporation.

This can also provide access to the Small Business Deduction (SBD), which is available to a corporation that qualifies as a Canadian-Controlled Private Corporation (CCPC) and your crypto activities are considered an "active business income," such that you might benefit from a significantly reduced corporate tax rate (currently around 9% federally, with provincial reductions as well) on the first $500,000 of active business income. This is a major tax advantage compared to subject your cryptocurrency holding to one's personal income tax rates.

Although this next aspect demands ever-increased caution, there may also be opportunities for legitimate Income Splitting. While complex and subject to "Tax on Split Income" (TOSI) rules, there might be opportunities for income splitting with family members through the corporation. However, TOSI exemptions require active involvement (e.g., working at least 20 hours per week in the business or active involvement for at least five years).

There is also the potential for Liability Protection, as a corporation is designed to provide a legal separation between your personal assets and your business assets, offering some liability protection.

Meanwhile, you need to appreciate the distinction of Capital Gains vs. Business Income. The tax implications for your crypto within a corporation depend heavily on whether your activities are classified as capital gains (investment) or business income (trading).

Capital Gains: If your crypto is held as a long-term investment, only 50% of your capital gains are taxable.

Business Income: If you are actively trading, mining, or otherwise engaging in frequent and organized crypto activities with the intention of profit, the Canada Revenue Agency (CRA) may consider it a business. In this case, 100% of your profits are taxable as business income.

The CRA looks at factors like frequency of transactions, intention and period of ownership, expertise and time spent, and regularity/organization to determine if you're carrying on a business, as opposed to holding crypto as an investment.

Given the ever-increasing scrutiny coming from the CRA, it is important to recognize that the CRA is increasingly aware of cryptocurrency transactions and has sophisticated tools to track them. As such, it is imperative that you maintain accurate records of all your crypto activities, that conform the CRA's specifications as to retention time and documentation retained.

As for Professional Advice: The tax rules surrounding cryptocurrency are complex and constantly evolving. It is highly recommended to consult with a qualified tax professional (like a tax lawyer or accountant specializing in crypto) to determine the best strategy for your specific situation and ensure compliance with CRA regulations.

For knowledgeable and experienced tax law representation for corporate tax rollovers and other tax planning strategies, contact tax lawyer Christopher R. Neufeld at Chris@NeufeldLegal.com or call 403-400-4092 (Calgary, Alberta) / 905-616-8864 (Toronto, Ontario).

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Can I Rollover My Cryptocurrency Account into a Corporation? Yes, in Canada, you can generally "rollover" your cryptocurrency into a corporation, and it can offer significant tax advantages, particularly if your crypto activities are considered a business rather than just an investment. This is typically done using a Section 85 rollover under the Income Tax Act. . . .  Continue reading.

Why would I use a Section 85 Rollover? What are the benefits? A Section 85 Rollover is a provision in the Canadian Income Tax Act that allows individuals, partnerships, trusts, or corporations to transfer "eligible property" to a taxable Canadian corporation on a tax-deferred basis. This means that you can transfer assets that have appreciated in value without immediately triggering a capital gain and the associated tax liability. . . . Continue reading.

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