Introduction
As cryptocurrency trading matures in Canada, many traders are incorporating their businesses to access tax benefits available to Canadian-Controlled Private Corporations (CCPCs). By operating through a CCPC, crypto businesses can take advantage of lower corporate tax rates, tax deferral opportunities, and asset transfer strategies like Section 85 rollovers.
This guide explores how CCPCs benefit from tax breaks such as the Small Business Deduction (SBD), corporate tax deferral, and tax-efficient structuring while ensuring full compliance with the Canada Revenue Agency (CRA).
How Cryptocurrency Trading is Taxed in Canada
The CRA classifies cryptocurrency as a commodity, meaning that profits from frequent trading, staking, or DeFi activities are often considered business income rather than capital gains.
- Capital Gains Tax: Applied to occasional investors who buy and hold crypto before selling. Only 50% of capital gains are taxable.
- Business Income Tax: Applied to frequent traders, crypto businesses, or DeFi participants. 100% of business income is taxable.
If crypto trading is operated as a business, incorporating as a CCPC can provide substantial tax advantages.
Tax Benefits of CCPCs for Cryptocurrency Trading
Small Business Deduction (SBD)
- The SBD reduces the corporate tax rate on the first $500,000 of active business income, significantly lowering tax liabilities.
- Federal Corporate Tax Rate (With SBD): 9% instead of 15%.
- Provincial Corporate Tax Rates: Vary by province but are also lower under the SBD.
Example:
A crypto trading CCPC in Ontario earning $500,000 in active business income:
- Without SBD: Corporate tax at 26.5% = $132,500.
- With SBD: Corporate tax at 12.2% = $61,000.
- Tax Savings: $71,500 on the first $500,000 of income.
For crypto businesses earning over $500,000, profits above this limit are taxed at general corporate rates (26.5%).
Tax Deferral on Retained Earnings
- One of the biggest benefits of a CCPC is the ability to retain earnings and reinvest them into the business.
- Instead of paying personal income tax rates as high as 53.53%, profits can be taxed at lower corporate rates and reinvested tax-free.
Example:
A sole proprietor earning $2.1 million in crypto trading income in 2023:
- As a sole proprietor: Taxed at 53.53%, total taxes = $1,124,130, net income = $975,870.
- As a CCPC: First $500,000 taxed at 12.2%, remaining $1.6M taxed at 26.5%.
- Total corporate taxes = $485,000, leaving $1,615,000 in retained earnings.
- Tax Deferral Savings: $639,130 compared to a sole proprietorship.
By deferring personal income tax, crypto businesses can grow their capital more efficiently.
Using Section 85 Rollovers for Tax-Deferred Crypto Transfers
The Section 85 Rollover allows crypto traders to transfer assets into a corporation without triggering immediate tax liabilities.
How It Works:
- A trader can transfer appreciated assets (e.g., Bitcoin, NFTs, DeFi holdings) into their corporation in exchange for shares.
- Instead of realizing an immediate taxable capital gain, the transfer is deferred until the shares or assets are sold in the future.
Example:
A trader holds $500,000 worth of Bitcoin and transfers it to a CCPC:
- Without Section 85: The transfer triggers a capital gain, and tax is owed immediately.
- With Section 85: The transfer defers the capital gain by assigning a lower agreed-upon value, reducing tax liability.
Filing Form T2057
- To qualify for the Section 85 Rollover, taxpayers must file Form T2057 with the CRA.
- Late filing penalties can reach up to $8,000, so proper filing is essential.
Tax Planning Strategies for Crypto Businesses
Income Splitting & TOSI Rules
- Previously, CCPC owners could split income with family members through dividends.
- New TOSI (Tax on Split Income) rules restrict this unless the recipient is actively involved in the business (20+ hours/week).
- Proper tax structuring can help minimize exposure to TOSI penalties.
Offshore Transfers & Section 85 Limitations
- Section 85 rollovers only apply to Canadian corporations.
- If crypto assets are transferred to offshore entities, they are taxed at fair market value (FMV) immediately.
Estate Planning for Crypto Business Owners
- Once a crypto trading business is incorporated, the owner holds shares in the corporation.
- Estate planning ensures corporate assets are distributed properly after death.
Compliance Risks & CRA Audits
The CRA actively monitors crypto transactions and has increased audits of crypto businesses. Key risks include:
- Misclassifying Business Income as Capital Gains: Business income is fully taxable, while only 50% of capital gains are taxed.
- Failure to Report DeFi Transactions: Staking rewards, liquidity mining, and airdrops must be reported as income.
- Use of Unreported Foreign Crypto Accounts: Crypto holdings on offshore exchanges must be reported on Form T1135.
Proper compliance and tax planning ensure businesses avoid penalties and audits.
Conclusion
Incorporating a cryptocurrency trading business as a CCPC provides significant tax benefits, including:
- Lower tax rates on active business income through the SBD.
- Deferral of personal income tax by retaining earnings in the corporation.
- Tax-efficient asset transfers using Section 85 rollovers.
However, navigating CRA regulations and structuring a CCPC correctly requires careful tax planning. Businesses should work with experienced crypto tax professionals to maximize benefits and avoid compliance risks.
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.