Have you held foreign property with a total cost exceeding $100,000 at any time within a tax year? Then, you
need to file Form T1135. The form covers general aspects like your cayman offshore investment portfolio or
Swiss bank account. However, the form is also needed for foreign stocks like Microsoft Corp, Google owner
Alphabet, and Apple Inc., held in a Canadian non-registered brokerage account.

But to the primary question! Are cryptocurrencies considered foreign property? If Yes must they be documented
on the T1135 form?

Are cryptocurrencies considered foreign property?
This question was discussed and tackled in a recent article published by Ashvin Singh and William Musani of
Felesky Flynn LLP. They evaluated whether or not cryptocurrencies fit into the definition of “specified foreign
property” under the Income Tax Act. Under the act, the specified foreign property includes intangible property
deposited, held, and situated outside Canada. However, these properties are not held or used solely to execute
any business.

As early as 2015, CRA made some assertions about taxing cryptocurrencies. They asserted that digital coins
would fall under intangible properties and be categorized as specified foreign property of a person. However,
provided that the digital coins are deposited, and situated outside Canada.

But how do we exactly define where cryptocurrency is located?

This is the juncture where things get complicated. Generally, thanks to the appeal and nature of cryptocurrencies,
they are held in a digital wallet on a secure server. But that isn’t the case given cryptocurrencies as regards
intangible property given cryptocurrencies are not physically held or deposited anywhere.

In reality, investors’ entitlement to cryptocurrency is in the form of a digital ledger on the blockchain network. And since it’s stored on the blockchain, it can be said to simultaneously exist in various locations. Also, based on the nature of these digital ledgers, they are regarded as both decentralized and distributed. Its distributed nature
simply means not a single database is an isolated source of actual ownership of any cryptocurrency.

To put it simply, a digital wallet does not store actual cryptocurrency but a combination or one of the private or
public keys. In a conventional approach, you can think of the private key and your PIN (personal identification
number) and public key as your account number.

The authors of the article argued that as regards the location of crypto holdings at bitcoin-code.live, the
private key’s geographical location is the most relevant factor. They affirmed that the private key's location should equate to where the cryptocurrency is deposited, situated, and held.

The Private Key
Another underlying factor in determining the location of a private key is the type of private key used. The private
key’s location depends on whether one is using a cold or hot digital wallet. Hot wallets are crypto digital wallets
linked to the internet. Virtually all online crypto platforms and exchanges use Hot wallets to store crypto assets.

On the other hand, Cold wallets are not linked to the internet. They are wallets stored in a physical storage drive.
From this definition, It’s apparent that the geographic location of a cold wallet is anywhere the USB key,
computer, or physical storage drive is stored. Therefore, if the cold wallet is stored in Canada, then the person
holding the crypto asset won’t be subjected to the T1135 foreign property requirements.

But as regards hot wallets, it is argued that the primary server location of the wallet provider should be used to
determine the geographical location. As a result, if the location is outside Canada, the person holding the crypto
asset will be subjected to the T1135 foreign property requirements.

However, things can further get complicated if one stores his/her private key in several locations at once. This
creates a dilemma of whether or not such individuals will be exempted from the T1135 foreign requirements. This
is a dilemma that remains unsolved. Hopefully, we’ll have some answers shortly.

Conclusion
In conclusion, to avoid harsh punishments from the CRA for non-disclosure, you should disclose your crypto
assets on the T1135. Hopefully, in the future, a more definite answer as regards crypto holdings will surface. Till
then, we advise you to play it safe and disclose your crypto assets on the T1135.