Introduction
For Canadian residents moving abroad, departure tax is a key consideration when transitioning to non-resident status. Under Canadian tax law, residents are taxed on their worldwide income, while non-residents are only taxed on Canadian-sourced income. When a Canadian tax resident leaves the country, they may be subject to departure tax, which applies to certain assets, including cryptocurrencies and NFTs.
Understanding how departure tax impacts digital assets, potential exemptions, and available tax planning strategies is essential for crypto investors and businesses seeking to mitigate unnecessary tax liabilities.
1. How Does Departure Tax Apply to Cryptocurrency?
Under Section 128.1 of the Income Tax Act, when a Canadian resident becomes a non-resident, they are deemed to have disposed of their assets at fair market value (FMV), even if they haven’t actually sold them. This deemed disposition generates capital gains or losses, with 50% of the capital gain being taxable.
Certain assets are exempt from departure tax, including:
- Canadian real estate
- Personal property valued under $10,000
- Registered accounts such as RRSPs and TFSAs
However, cryptocurrency and NFTs are not listed as exempt assets, meaning they are generally subject to departure tax.
Example: How Departure Tax Works for Crypto Investors
- Ron, a Canadian resident, purchased a Bored Ape NFT for $10,000 in 2021.
- When he moves to England and becomes a non-resident, the NFT’s fair market value (FMV) has increased to $40,000.
- Since Ron is deemed to have sold the NFT at FMV, he must report a capital gain of $30,000.
- 50% of this gain ($15,000) is taxable under departure tax rules.
Crypto investors must plan ahead to reduce their tax exposure before becoming a non-resident.
2. Exemptions: When Crypto Can Avoid Departure Tax
Although cryptocurrencies and NFTs are generally subject to departure tax, there are some key exemptions.
a. Crypto Held in Registered Accounts
- RRSPs and RRIFs: Cryptocurrencies cannot be held directly in these accounts, but crypto-backed ETFs qualify and are exempt from departure tax.
- TFSAs: Crypto ETFs held in a Tax-Free Savings Account (TFSA) are also exempt from departure tax.
b. Crypto Inventory in Active Businesses
- Crypto held as inventory in a business with a permanent establishment in Canada is exempt from departure tax.
- A permanent establishment typically refers to a fixed place of business, such as an office or warehouse.
- To claim this exemption, businesses must maintain clear documentation proving that cryptocurrency is part of their inventory.
Proper structuring of crypto holdings can help reduce departure tax obligations for businesses and investors.
3. Can Departure Tax Be Deferred?
If an investor does not have liquid assets to cover the departure tax liability, they can elect to defer payment until the actual disposal of the assets. This deferral helps prevent financial strain caused by taxation on unrealized gains.
Conditions for Deferral
- Security may be required if the federal portion of the departure tax exceeds $16,500 (or $13,777.50 for Quebec residents).
- No interest accrues on the deferred tax amount.
- Taxpayers must file the deferral election before leaving Canada to avoid penalties.
Electing to defer departure tax is a strategic move for those who intend to hold their crypto assets long-term.
4. Pro Tax Tips: Managing Cryptocurrency Departure Tax
For crypto investors and Web3 businesses, proactive tax planning is essential.
- Optimize Asset Allocation:
- Consider transferring crypto holdings into a TFSA or RRSP using eligible crypto-backed financial instruments.
- This can eliminate departure tax on these holdings.
- Classify Crypto as Business Inventory (If Eligible):
- If you operate a crypto trading business, you may qualify for an exemption if your assets are held as inventory.
- Maintain detailed records proving business use.
- Plan Before Moving Abroad:
- Engage in crypto tax planning well before becoming a non-resident to explore options for reducing tax liabilities.
- Selling or restructuring holdings before departure may result in better tax outcomes.
- Elect to Defer Departure Tax When Necessary:
- If liquid assets are insufficient, filing a deferral election can prevent financial strain.
5. FAQs on Cryptocurrency Departure Tax
Q1: What is departure tax?
Departure tax is a deemed disposition tax applied to certain assets when a Canadian resident becomes a non-resident for tax purposes.
Q2: Does departure tax apply to cryptocurrencies?
Yes, cryptocurrencies and NFTs are generally subject to departure tax unless they are:
- Held within a TFSA, RRSP, or other registered account.
- Classified as inventory in an active Canadian business.
Q3: Can departure tax be deferred?
Yes, taxpayers can elect to defer departure tax until they actually dispose of the assets, provided they meet the CRA’s security conditions.
Conclusion
Departure tax imposes significant obligations on Canadian residents moving abroad, particularly those holding crypto assets and NFTs. Since digital assets are typically subject to departure tax, investors should explore exemptions such as:
- Holding crypto-backed ETFs within an RRSP or TFSA.
- Classifying crypto as inventory in an active business.
- Deferring departure tax payments when necessary.
By engaging in strategic tax planning before becoming a non-resident, crypto investors can reduce tax liabilities and ensure compliance with Canadian tax laws. Consulting with a crypto tax professional is the best way to navigate departure tax complexities and secure the most tax-efficient outcome.
If you have any questions or require further assistance, our team at Block3 Finance can help you.
Please contact us by email at inquiry@block3finance.com or by phone at 1-877-804-1888 to schedule a FREE initial consultation appointment.
You may also visit our website (www.block3finance.com) to learn more about the range of crypto services we offer to startups, DAOs, and established businesses.