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Published: February 25, 2022

Last Updated: February 25, 2022

Introduction – Taxation of Cryptocurrency and NFT

Cryptocurrencies such as Bitcoin, Ethereum, Ether, Litecoin, Ripple, and Dash have become somewhat mainstream investment vehicles for many Canadians. In addition, NFTs or Non-fungible tokens have revolutionized the world of art and collectible investments.

With both the cryptocurrency market and the NFT market rapidly increasing in value, many Canadian cryptocurrency and NFT investors need to know the tax implications of holding and selling cryptocurrency and NFTs. In this article, we will explore some general legal issues surrounding the tax treatment of passing on their cryptocurrency and NFT investment portfolios to beneficiaries after death.

Taxation of Capital Property Upon Death

While Canada has no “death tax” for inheritance, under the Income Tax Act, subsection 70(5) of the Income Tax Act will trigger a deemed disposition of all the deceased taxpayer’s capital property at fair market value on the death of the individual.

Section 70 also contains exemption provisions for this deemed disposition rule when the capital property of the deceased is left to the deceased’s spouse, common-law partner or a spousal trust. In these scenarios, tax is deferred on accrued gains of the deceased until the deceased’s spouse, common-law partner or the spousal trust disposed the property or is deemed to have disposed the property.

On the other hand, under the Income Tax Act, no deemed disposition provision exists for inventory properties used to generate business income. This means inventory properties, or assets used in an adventure in the nature of trade, can pass to the estate of the deceased tax-free. In that case tax would be incurred upon disposition of the assets.

Cryptocurrency and NFTs as Capital Property

 While NFTs, as well as cryptocurrencies such as Bitcoin, Ethereum, Ether, Litecoin, Ripple, and Dash can be viewed as capital property, it is not always the case. Cryptocurrencies and NFTs may be considered inventory under the Income Tax Act if they are handled in a manner consistent with trading and generating business income by their owner. This means in the context of deemed disposition upon death, whether cryptocurrency and NFTs are capital property will depend on whether the income generated from these assets during the life of the deceased is considered capital gains or business income under the Income Tax Act.

The general rules concerning the difference between capital gains vs income is explored here. These factors will have different applications for cryptocurrency and NFTs. Consult an experienced Canadian tax lawyer to see how your cryptocurrency and NFT transactions are affected by various common law income vs capital gains characterization rules.

Tax Deferral for Subsection 70(5) – Cryptocurrency and NFTs

If one’s cryptocurrency and NFT portfolio is determined to be capital property generating capital gains, then it is necessary to consider how to set up estate planning structures to defer the subsection 70(5) deemed disposition.

If the subsection 70(5) tax is not deferred, then the taxpayer’s estate and beneficiaries can end up paying far more taxes than necessary due to market fluctuations. Consider the following scenarios.

  1. Howard passed away with a cryptocurrency and NFT portfolio worth around $500,000 at the time of his death with an adjusted cost base of $200,000. There will be a deemed disposition and a deemed capital gain of $300,000. Howard’s estate trustee only managed to dispose of his cryptocurrency and NFT portfolio a year and a half after his passing for $600,000, incurring a capital gain of $100,000. Howard’s estate pays tax on the $300,000 capital gain for deemed disposition on behalf of Howard, as well as the $100,000 capital gain for the actual disposition for the estate.
  2. Sheila passed away with a cryptocurrency and NFT portfolio worth around $500,000 at the time of her death with an adjusted cost base of $200,000. There will be a deemed disposition and a deemed capital gain of $300,000. However, when Sheila’s estate trustee disposed her cryptocurrency and NFT portfolio a year and a half after her passing, the market has taken a dip and the portfolio was only disposed for $400,000. Her estate pays tax on the $300,000 capital gain for deemed disposition on her behalf, however, it has nowhere to carry forward nor back the $100,000 capital loss since the estate is deemed to have acquired the assets at the time of her death.

To avoid scenario B, Canadian taxpayers should consider taking advantage of estate planning structures to defer the subsection 70(5) deemed disposition tax. We will discuss three of the structures below.

Section 85 Rollover

 A section 85 rollover allows eligible transferors to elect jointly with a transferee corporation to transfer eligible property for an agreed amount. This agreed amount becomes the proceeds of disposition to the transferor and the starting point in determining the tax cost of the property to the transferee.

This rollover provision allows the transferor to defer all or part of the tax liability that would otherwise arise on such transfer to a corporation by allowing the taxpayer to transfer the property for cost without having the transfer price deemed as fair market value under section 69(1) of the Income Tax Act. The corporation as a taxpayer under the Income Tax Act becomes the owner of the property and can survive the death of the transferor. However, the shares in the holding corporation will still be subject to subsection 70(5) deemed disposition rule so additional estate planning from experienced Canadian tax lawyers is needed.

Gift to Spouse and Spousal Trust

The Income Tax Act allows the deceased to pass the asset of the deceased to his or her spouse or a spousal trust on a tax deferral basis. No planning is needed beyond making a will to that effect. The tax deferral advantage ends when the spouse passes away and the property is deemed to be disposed under subsection 70(5) of the Income Tax Act.

Depending on the specific circumstances and anticipated lifespan of the married couple, the tax deferral advantages through gifting to spouse or to a spousal trust can be limited.

Inter Vivo Trust.

An inter vivo trust is a trust created to hold assets of the settlor. Like the rollover mechanism described above, the settlor would transfer his or her capital property to the inter vivo trust and the trust becomes the legal owner of the property under the Income Tax Act and any property it holds will not be subject to the deemed disposition rule. However, unlike an eligible transferee corporation, the settlor must pay any applicable capital gain tax based on the fair market value of the property when he or she vests the asset into the inter vivo trust.

On the other hand, an inter vivo trust allows for a flexible structure in setting out a class of beneficiaries, which could be the deceased’s children and any future grandchildren. An inter vivo trust can be run by a third-party trustee with the discretion to allocate income to its beneficiaries as the trustee sees fit, unlike shareholders in a corporation, beneficiaries in this case cannot influence the operation of the trust by voting.

It is important to know that a trust can be the shareholder of a corporation and a corporation can conversely be the beneficiary of a trust. This opens up many interesting and complex estate planning strategies than the three we discussed above. Our experienced Toronto tax lawyers can help you combine the benefits of an inter vivo trust and rollover transactions based on your specific tax planning needs.


Pro Tax Tip – Determine Your Cryptocurrency and NFT Characterization and Tax Plan Your Will

It is important to ensure you do your due diligence regarding the tax characterization of your cryptocurrency and NFT portfolio before considering estate planning transactions. A well-researched memorandum written by expert Canadian tax lawyers can often serve as proof of such due diligence against future CRA reassessments beyond the normal reassessment period in addition to forming the basis for tax structuring your will to minimize taxes on death. Speak to one of our experienced Canadian crypto tax lawyers to come up with a will tax planning strategy that fits your individual cryptocurrency situation and minimizes taxes on death.


"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."


Canadian taxpayers must declare business income and capital gains arising from their cryptocurrency transactions. However, unlike US taxpayers, there is no cryptocurrency holding declaration for simply holding cryptocurrency assets as of February 2022. In addition, cryptocurrency and NFT will be subject to T1135 foreign property reporting requirements.

For Canadian based cryptocurrency exchanges, the CRA have the power to compel a limited scope disclosure of their customer’s identity []. If you use an exchange based in Australia, the Netherlands, the United Kingdom, and the United States, the J5 enforcement program [] will likely give CRA access to customer records from cryptocurrency exchanges based in these countries as well. When illegal activities are suspected to be carried out through cryptocurrencies, the government can employ various blockchain analytics tool to track cryptocurrency transactions to pseudonymous wallets and pseudonymous wallets to actual people.

There is no deemed disposition upon death rule for inventory property or property used for an adventure in the nature of trade under the Income Tax Act.  This means that noncapital property will be passed to the estate of the deceased tax free.

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