1- Nature of transactions

Property income (including dividend, interest and rental income) is often considered like a return on equity and generally requires very little work and energy. Capital gains are also generally considered investment transactions.

When a security is disposed of, it is important to determine whether the transaction is of the nature of capital or income resembling business income in order to determine the appropriate tax treatment. Tax legislation does not make a clear distinction between these two types of transactions. Accordingly, the nature of each transaction will be based on the particular facts, which will be determined in accordance with the following criteria:

• The intention of the taxpayer at the time of purchase, i.e., quick gain or long-term investment;
• The duration of the possession of the property;
• The relationship between the transaction and the taxpayer’s usual activities;
• The frequency of similar transactions;
• The circumstances surrounding the transaction.

Virtual currency

When digital currency (e.g.: Bitcoins or other cryptocurrency) is used to purchase goods or services, the tax authorities consider that the tax rules applicable to barter transactions apply. Under these rules, each of the parties to such an exchange is considered to have received an amount (in Canadian dollars) that corresponds to the value of the good being disposed of (and not the value of the good being received in the exchange). Thus, each party to the transaction realizes a profit or incurs a loss calculated as if it had sold its good, service or even its cryptocurrency, for a cash payment in an amount equivalent to its fair market value. These same rules apply when digital currency is sold on the market, whether in exchange for a cash payment or for another form of digital currency.

Such transactions must be disclosed in the taxpayer’s tax returns. In order to properly report income, the taxpayer must determine whether the use of virtual currency generates a capital gain (or loss) or business income (or loss).¹

Disposal of Canadian Securities

A taxpayer may ensure that losses or profits on a disposition of Canadian securities (shares, bonds, mutual fund units, notes, mortgages, etc.) are treated as capital gains or losses by making an irrevocable election, valid for the current and subsequent years, on prescribed forms filed with his/her federal income tax return. Securities brokers cannot make this election.

¹ For applicable examples, see the Information for crypto-asset users and tax professionals and Crypto-asset exchanges: your records, obligations and responsibilities pages on the CRA website and the Virtual Currency and Cryptocurrency page on Revenu Québec’s website.