2014-0561061E5 Specified Foreign Property

Principal Issues: Whether 1. a digital currency (e.g. Bitcoins) and 2. a foreign partnership holding digital currency (i.e. Bitcoins) are "specified foreign property" as defined in subsection 233.3(1).

Position: 1. Yes and 2. Yes, to the extent the partnership is not a “specified Canadian entity” as defined in subsection 233.3(1).

Reasons: 1. Digital currency is funds or intangible property and "specified foreign property" includes funds or intangible property held outside of Canada. 2. Paragraph (e) in the definition of "specified foreign property" includes an interest in a partnership that owns or holds specified foreign property and paragraph (o) of the same definition excludes an interest in a partnership that is a specified Canadian entity.

Author: Ho, Judy
Section: 233.3(1), 248(1)

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                                                                                                                                                          2014-056106
                                                                                                                                                          Judy Ho

April 16, 2015

Dear XXXXXXXXXX:

Re:   Specified Foreign Property

We are writing in response to your fax dated October 30, 2014 in which you requested our view as to whether digital currency (e.g. Bitcoins) and an interest in a foreign partnership that holds digital currency are “specified foreign property” as defined in subsection 233.3(1) of the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.) (the “Act”) as amended.

You described a situation where a Canadian corporation invests over CAD$XXXXXXXXXX in a foreign partnership, which in turn invests in digital currency (e.g. Bitcoins).  The foreign partnership uses currency arbitrage/exchange and other trading methods to increase the net asset value of the fund in a foreign currency.

Our comments

This technical interpretation provides general comments about the provisions of the Act and related legislation.  It does not confirm the income tax treatment of a particular situation but is intended to assist you in making that determination.  The income tax treatment of transactions will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

Funds or intangible property situated, deposited or held outside of Canada is included in paragraph (a) of the definition of “specified foreign property” in subsection 233.3(1) of the Act.  In our view, digital currency would be funds or intangible property and would be specified foreign property of a person or partnership to the extent that it is situated, deposited or held outside of Canada and not used or held exclusively in the course of carrying on an active business.  An interest in a partnership that owns or holds specified foreign property is included in paragraph (e) of the definition of “specified foreign property” in subsection 233.3(1) of the Act, however, pursuant to paragraph (o) of the definition, the partnership interest would not be specified foreign property if the partnership is a specified Canadian entity. A partnership is a specified Canadian entity if, pursuant to paragraph (b) of the definition of “specified Canadian entity” in subsection 233.3(1) of the Act, the total of all non-resident members’ shares of the income or loss of the partnership for the fiscal period is less than 90% of the total income or loss of the partnership for the period.

Based on the limited description of the foreign partnership’s business, in our view, the digital currency would be held outside of Canada and would not be considered to be used or held exclusively in the course of carrying on an active business.  As such, the digital currency would be specified foreign property of the foreign partnership and the interest in the foreign partnership (to the extent the partnership is not a specified Canadian entity) would be specified foreign property of the Canadian corporation. 

We trust our comments will be of assistance.

Yours truly,

Lori M. Carruthers CPA, CA
Section Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy Regulatory Affairs Branch

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