Introduction
The T1135 (Foreign Income Verification Statement) is required for Canadian taxpayers who own foreign assets exceeding CAD $100,000 at any point during the tax year. While filing this form does not automatically increase tax liability, failing to report foreign property can lead to steep fines of up to CAD $2,500 per year.
For crypto and NFT traders, determining whether digital assets qualify as "Specified Foreign Property" is complex. The location of the crypto, the type of wallet used, and whether the holdings are considered business inventory all impact T1135 filing obligations. This article clarifies:
- When Canadian crypto and NFT traders must file a T1135.
- How business-use exemptions apply to crypto assets.
- Penalties for failing to report foreign crypto holdings.
What is the T1135 Form?
The T1135 (Foreign Income Verification Statement) is a mandatory disclosure form for Canadian residents who own foreign property with a combined tax cost of CAD $100,000 or more.
Key facts about T1135 reporting:
- The form applies to foreign bank accounts, stocks, real estate, and other foreign assets.
- The CRA has not explicitly classified cryptocurrency as foreign property, but it has indicated that digital assets may fall under this category.
- Failure to file a required T1135 can result in fines of CAD $2,500 per year, with additional penalties for gross negligence.
For crypto traders, the key question is whether crypto, NFTs, or other blockchain-based assets meet the definition of "Specified Foreign Property."
Does Cryptocurrency Require T1135 Reporting?
Under Section 233.3 of the Income Tax Act, Specified Foreign Property includes:
- Funds or intangible property held outside Canada.
- Cryptocurrency and NFTs stored on foreign exchanges.
The location of digital assets determines whether T1135 applies. Since crypto is decentralized, identifying the location is complex.
1. Crypto Held on Foreign Exchanges
- If cryptocurrency is stored on a foreign exchange (e.g., Binance, KuCoin, Bitstamp, OKX), it is considered foreign property.
- If the combined cost of foreign crypto holdings exceeds CAD $100,000, T1135 reporting is required.
2. Crypto Held in Canadian Exchanges
- If digital assets are stored on a Canadian exchange (e.g., Bitbuy, Coinsquare, Shakepay), they may not require T1135 reporting.
- Crypto held in a Canadian-registered financial institution is NOT considered foreign property.
3. Crypto Stored in Private Wallets
- Cold wallets (Ledger, Trezor) and self-custody wallets (MetaMask, Trust Wallet) do not have a physical location, creating a grey area in tax law.
- The CRA has not issued definitive guidance on whether self-custody wallets are foreign property.
- If the crypto was originally purchased through a foreign exchange, the CRA may consider it foreign property.
Business-Use Exemption for Foreign Property
Cryptocurrency used for active business purposes may be exempt from T1135 reporting.
Exempt Crypto Holdings:
- Crypto held as business inventory (e.g., trading companies, mining operations, NFT marketplaces).
- Crypto used in a business with a permanent Canadian establishment.
Tax Treatment of Business Crypto Holdings:
- Inventory is excluded from the T1135 definition of "Specified Foreign Property."
- Personal crypto investments may still require reporting if held on foreign exchanges.
When is Crypto Considered Business Inventory?
The CRA classifies property as either inventory or capital property based on how it is used.
Crypto is considered business inventory if:
- It is actively traded or used in a business operation.
- The holder intends to generate short-term profits from transactions.
- The owner frequently buys and sells crypto as part of a structured business activity.
Crypto is considered capital property if:
- It is held long-term as an investment.
- The taxpayer does not actively trade or use it for business.
If cryptocurrency qualifies as business inventory, it is NOT considered foreign property, meaning no T1135 filing is required.
Penalties for Failing to File a T1135
Failure to file a required T1135 form can lead to severe penalties:
- CAD $25 per day, up to a maximum of CAD $2,500 per year.
- Gross Negligence Penalties of up to 5% of the unreported foreign property value.
- Additional penalties for false statements or incomplete disclosures.
If a taxpayer fails to file for more than two years, the CRA may impose a 5% penalty on the unreported amount.
The CRA's Voluntary Disclosures Program (VDP)
The CRA allows taxpayers to correct past non-compliance through the Voluntary Disclosures Program (VDP).
Benefits of the VDP:
- Avoidance of criminal prosecution for tax non-compliance.
- Possible waiver of gross negligence penalties.
- Reduced interest on outstanding tax liabilities.
To qualify for the VDP, the taxpayer must apply before the CRA contacts them about the missing T1135.
Best Practices for Compliance
- Determine If Your Crypto Qualifies as Foreign Property
- If stored on a foreign exchange, it is reportable.
- If used for business, it is exempt from T1135 reporting.
- Keep Detailed Records
- Document where crypto is stored, wallet addresses, and exchange transactions.
- Retain records of transaction history, fair market values (CAD), and business activity.
- Consult a Crypto Tax Specialist
- The T1135 reporting rules are complex and still evolving.
- Professional tax guidance ensures compliance and reduces audit risk.
Conclusion
For Canadian crypto and NFT traders, filing a T1135 depends on where their digital assets are stored and whether they qualify as business inventory.
- Crypto held on foreign exchanges (Binance, KuCoin) typically requires T1135 reporting.
- Crypto held in Canadian exchanges or used in business operations may be exempt.
- Failing to file a required T1135 can result in significant penalties.
Due to the grey areas in CRA guidance, working with a crypto tax professional is essential for ensuring compliance and avoiding costly penalties.
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.