How does the CRA view cryptocurrency transactions for tax purposes
How to minimize your taxes on cryptocurrency
In part 3 of our Taxation of Cryptocurrencies, we will be discussing the various avenues someone can take to help avoid paying a large amount of tax by moving their assets outside of Canada.
Do you like the beach?
In a further effort to pay less tax on your cryptocurrency gains, you may want to consider moving your corporation outside of Canada.
Some people think that offshore companies are only used for global crimes and tax evasion; and are only for the super rich. This not true! In fact, a properly structured offshore company is completely legal once you truly understand what it is. There has also been a recent increase in using offshore companies to enhance the benefits for cryptocurrency trading.
So, what is an offshore company?
There is no single universally accepted definition for “offshore company”, and it can convey different meanings in different contexts. Generally speaking, an offshore company is an enterprise established in another jurisdiction which is different from your home country. However, international tax practitioners often refer to an offshore company as a business entity established in a jurisdiction that charges little to no corporate income tax and usually provides an easy maintenance procedure for things such as annual filings.
Different jurisdictions have varying tax policies than those of Canada or even the United States, and operate according to their local laws and regulations. Some offshore jurisdictions do not charge any tax on corporate income (although corporations in these jurisdictions may be subject to other conditions). In contrast, others impose very minimal tax rates and offer many tax incentives to their tax resident enterprises. This means that an incorporator would choose a foreign jurisdiction with more favourable laws and policies than their home country’s and then set up a company and start a business in that jurisdiction to enjoy the benefits from such policies.
So how do I create an offshore company for my cryptocurrency?
Although there is no uniform company formation procedure for creating offshore companies, the documentation required varies little from country to country and typically involves the use of a registration agent to complete the process. We have simplified the steps set out below.
- The first step is to select a company name.
- It should be unique and not similar to any corporation already in existence
- The name should not violate any copyright laws, and it cannot contain any vulgar or explicit language or imply anything that may be prohibited
- After the name is selected, you need to meet the Know Your Client requirements
- This involves supplying your registration agent with a basic set of documents comprising your passport or identification card, including:
- An original or certified copy verifying your residential address
- A detailed description of your proposed company’s business
- As well as information about the shareholders
- Once the required documentation is completed, it will be submitted by the registration agency in the foreign jurisdiction. The time for the process varies from jurisdiction to jurisdiction.
- Upon completion, an electronic certificate will be issued, indicating the incorporation process is completed.
- Once you have the certificate, the final step is to open a bank account to complete the process.
- This should be researched, as some jurisdictions have strict guidelines and conditions for opening bank accounts even though they have favourable tax laws.
Different ways your cryptocurrency can be held by an offshore company
These structures tend to add more layers between you and your assets, creating better privacy and asset protection. If you decide to repatriate your profits to Canada (meaning transfer the funds to yourself personally as a Canadian resident or to a Canadian corporation), income tax will become payable on the profits at that time. However, if the funds remain with an offshore entity, the profits can frequently be used or reinvested with little to no income tax payable. Below are several different ways to structure your offshore entities and hold your cryptocurrency.
- Establishing an international business company (IBC) and activating a wallet to keep your cryptocurrency in. This digital wallet has similar functions as offshore bank accounts, enabling transactions to be secure and confidential. Many offshore jurisdictions with stringent privacy laws can even offer maximum protection from civil creditors.
- Moving your cryptocurrency offshore by forming two different IBCs. The first offshore company can store your cryptocurrency as a long-term investment, while the second one will function as a trading company funded by the first company. However, additional licenses may be required if this is not only for yourself.
- Using a combination of private foundations and international business companies. You can form an IBC as a private foundation for charitable purposes. The IBC can receive cryptocurrency as its share capital, provided that the offshore foundation allows donations sent in crypto.
- Setting up an offshore trust. High-net-worth investors with coin funds of more than $1 million prefer starting international trusts for the best estate and asset protection.
Tax optimization of offshore companies
Incorporating in a jurisdiction with unsuitable policies can be a waste of resources and even have negative consequences. Thorough planning and research are necessary when choosing which offshore jurisdiction to incorporate and move your cryptocurrency into. There can be two categorizations of offshore companies: no tax jurisdictions and low tax jurisdictions.
No tax jurisdictions
Some no-tax jurisdictions are changing their policies quickly and are starting to impose taxes and regulations on certain kinds of income and business activities. Certain jurisdictions have bad reputations in the business world and will present more difficulties than they are worth, even for simple things such as opening a bank account. For example, banks in Singapore or Hong Kong have been historically hesitant to open an account for companies in certain tax-havens. The same goes for customers and clients. Having a corporation based on some no-tax jurisdictions may harm the reputation of the business.
Low tax jurisdictions
If your preference is to pay a small amount of tax in return for respect and stability, a low-tax jurisdiction may be the right choice for you. These jurisdictions tend to be more stable, well-recognized, and respectful when compared to no-tax jurisdictions. In addition, they are known to have good reputations and well-structured legal frameworks and adopt a territorial tax system. This means only the income generated from within these countries is subject to tax (while foreign-sourced income is not). Furthermore, these countries usually have a network of international tax treaties, which can bring you tax reduction and potentially even an exemption. These structures offer additional security and predictability and are a big plus in exchange for minimal tax rates.
Belize: If you are looking for an offshore jurisdiction with a competitive price, fast incorporation, and ease of banking needs. The country also has preferable privacy policies and, of course, tax benefits for non-residents.
Cayman Islands: Located in the western Caribbean Sea, this is a very common choice for many foreign investors who are seeking tax-free benefits.
The British Virgin Islands: BVI and Cayman Islands share many common features. But a plus is that the incorporation cost in the BVI tends to be much more affordable and simpler than that in the Cayman Islands. A BVI offshore company is amongst the most popular vehicle for foreigners seeking offshore investments and international trade. They also enjoy favourable tax benefits and reduced compliance requirements by virtue of their business-friendly offshore environment.
Ras Al Khaimah (RAK): RAK is one of the fastest-growing economies in the world, with a highly developed and well-regulated financial sector. Unlike onshore United Arab Emirates companies, business owners are allowed to take up 100% foreign ownership of an international company in RAK. Furthermore, they will have access to an extensive range of UAE Double Tax Treaty (DTT) networks, including more than 200 agreements and enjoy world-class infrastructure with international airports facilitating business travelling. In addition, there is no tax of any kind imposed on a RAK international company. Take advantage of the UAE’s well-known reputation while incurring a reasonable cost of business maintenance in RAK. Finally, the register of company members is not open to the public by the RAK Registrar.
Starting an offshore company may be attractive for all types of business ventures, but you must ensure it is set up properly and the correct jurisdiction is chosen for your business. There are Controlled Foreign Corporation Rules that were created to prevent corporations from profit shifting and ultimately trying to evade paying taxes, with their main goal being to determine how much an offshore company or foreign subsidy will be taxed in their home country.
Contact Millars Lawyers to ensure your offshore company is set up, and your tax rates are optimized.