Introduction: Cryptocurrency in Your RRSP – A Tax Disaster Waiting to Happen?

Introduced in 1957, a registered retirement savings plan (or RRSP) allows individuals to defer tax on the income that they set aside for retirement. You can claim tax deductions for your RRSP contributions, and you pay no tax on income generated within the plan. You incur tax when withdrawing funds from your RRSP. But if you've planned things correctly, you won't need to withdraw until you reach retirement age—and fall into a lower tax bracket. In other words, an RRSP essentially allows you to grow your retirement savings on a tax-free basis by using money that otherwise would have gone to the government as taxes. You ultimately pay those taxes, but you do so after several decades—when you're subject to lower tax rates and after you've enjoyed the returns from the investments funded by pre-tax income.

With cryptocurrencies like Bitcoin, Ethereum, Dash and Litecoin vying for acceptance in the mainstream financial landscape, Canadians planning for retirement may view cryptocurrency as a way to see higher returns in their nest egg. The developments in blockchain technology bring about an ever-increasing range of opportunities, arrangements, and assets—smart contracts, cryptocurrency liquidity mining and yield farming, and non-fungible tokens (NFT), to name a few. And Canadians might be curious about uniting these opportunities with the tax advantages of an RRSP.

So, the question is: Can you contribute cryptocurrency and other blockchain-based assets into your registered retirement savings plan? Or is this a tax disaster waiting to happen?

To answer these questions, this article first discusses the basic tax rules concerning registered retirement savings plans—in particular, the requirement that an RRSP contain only "qualified investments." The article then analyzes whether cryptocurrency or other blockchain assets can qualify as RRSP investments. This article concludes by offering pro tax tips to Canadian taxpayers seeking to hold qualifying cryptocurrency investments in their registered retirement savings accounts.

Registered Retirement Savings Plans, "Qualified Investments" & the RRSP Penalty Tax

A registered retirement savings plan can be set up by any individual who is a Canadian tax resident. In other words, the RRSP holder (or RRSP annuitant) must be a natural person (as opposed to a corporation or other entity). Furthermore, if you're not a Canadian tax resident, you cannot open or contribute to an RRSP. For more information on determining your status as a tax resident, see our article "Tax Residence in Canada – Are Significant Residential Ties Less Significant for Immigrants to Canada than for Emigrants from Canada?" A person's status as a Canadian tax resident depends on several interrelated, complex tax rules, and it may require a careful analysis of not only Canada's domestic tax law but also the tax rules in a tax treaty between Canada and another country. Canadian tax residence is completely different from residence for citizenship or landed-immigrant status. Our experienced Canadian tax lawyers can provide you with advice on your status as a tax resident in Canada and your resulting Canadian tax liabilities.

The first tax benefit of a registered retirement savings plan is that the RRSP holder may deduct RRSP contributions when computing net income for a taxation year. The second tax benefit of a registered retirement savings plan is that you pay no tax on income or capital gains accumulating within your RRSP.

To qualify for the RRSP deduction, you must contribute to your registered retirement savings plan before the year's RRSP deadline. Your RRSP contribution qualifies for a particular year's RRSP deduction only if you make the contribution during that year or within the first 60 days of the following year (which normally falls on March 1st, but it's February 29th in a leap year).

Also, Canada's Income Tax Act limits the amount that you may contribute to your RRSP each year. Your RRSP contribution limit for the year is the lesser of two figures: (1) 18% of the previous year's earned income and (2) the tax year's prescribed maximum (e.g., the prescribed maximum for the 2021 tax year is $27,830. If you make a lifetime contribution exceeding your RRSP contribution room by $2,000 or more, you incur an RRSP penalty tax on the excess amount at a rate of 1% per month. You must also file a special tax return reporting the RRSP penalty tax (Form T1-OVP, "Individual Tax Return for RRSP, PRPP, and SPP Excess Contributions"), and you may suffer an additional penalty for failing to file this return. The penalty tax is also subject to interest at the prescribed rate.

A penalty tax also applies if the RRSP acquires a non-qualified investment. If the registered retirement savings plan acquires a non-qualified investment or if an existing RRSP investment becomes a non-qualified investment, then the RRSP holder sustains an RRSP penalty tax equal to 50% of the fair market value of the non-qualified investment. In addition, the RRSP holder must pay tax on any income from the non-qualified investment or any capital gain from disposing of the non-qualified investment.

In other words, the RRSP's tax-preferred treatment only extends to the "qualified investments" within the RRSP. The Income Tax Act's definition of "qualified investments" captures all the following:

  • money, GICs, and other deposits;
  • most securities listed on a designated stock exchange, such as shares of corporations, warrants and options, and units of exchange-traded funds, and real estate investment trusts;
  • mutual funds and segregated funds;
  • Canada Savings Bonds and provincial savings bonds;
  • debt obligations of a corporation listed on a designated stock exchange;
  • debt obligations that have an investment-grade rating; and
  • insured mortgages or hypothecs.

Hence, for Canadian taxpayers seeking to hold cryptocurrency, non-fungible tokens, or other blockchain-based assets in their registered retirement savings accounts, the key tax issue is whether these assets constitute "qualifying investments."

Do Cryptocurrency, Non-Fungible Tokens, or Other Blockchain Assets Constitute "Qualified Investments" for a Registered Retirement Savings Plan?

Cryptocurrencies and non-fungible tokens themselves aren't "qualified investments." As mentioned above, the Income Tax Act's definition of "qualified investments" basically refers to two items: (i) money and (ii) securities that are listed on a designated stock exchange. The CRA holds the—legally correct—view that "digital currencies, such as [B]itcoins, are not considered to be money issued by a government of a country and are not qualified investments" (see paragraph 1.12 of Canada Revenue Agency, Income Tax Folio S3-F10-C1, "Qualified Investments – RRSPs, RESPs, RRIFs, RDSPs and TFSAs," October 1, 2018). Likewise, no cryptocurrency or non-fungible token is itself traded as a security on a stock exchange designated as such by Canada's Minister of Finance. So, cryptocurrencies and non-fungible tokens don't meet the Income Tax Act's definition of "qualified investments," and they cannot be held in your RRSP.

Yet the investment market has seen a recent surge in cryptocurrency-based ETFs (or exchange-traded funds), many of which are traded on designated stock exchanges. So, while cryptocurrencies themselves aren't "qualified investments," many of the publicly listed cryptocurrency ETFs are. As such, these cryptocurrency-based ETFs may qualify as an RRSP investment. In particular, the cryptocurrency-based ETF meets the definition of a "qualified investment" if the fund appears on a designated stock exchange, like the Toronto Stock Exchange (TSX), the New York Stock Exchange (NYSE), or any of the other Canadian or international stock exchanges that Canada's Minister of Finance has designated for the purposes of Canada's Income Tax Act.

In summary, your RRSP cannot directly contain cryptocurrencies or non-fungible tokens because these assets aren't themselves "qualified investments." Your RRSP can, however, contain cryptocurrency-based ETFs or other cryptocurrency-based funds—but only if the fund is listed on a designated stock exchange, such as the Toronto Stock Exchange or the New York Stock Exchange.

Pro Tax Tips – Expert Canadian Tax Guidance from a Canadian Tax Lawyer: Relief from RRSP Penalty Tax Resulting from Non-Qualified Cryptocurrency Investments

As mentioned above, cryptocurrencies and non-fungible tokens don't meet the Income Tax Act's definition of "qualified investments," so they cannot be held in your RRSP. As a result, if your registered retirement savings plan holds cryptocurrencies, non-fungible tokens, or any other non-qualified investment, you will sustain an RRSP penalty tax equal to 50% of the fair market value of each non-qualified investment in your registered retirement savings plan.

Subsection 207.06(2) gives the Canada Revenue Agency the discretion to cancel some or all of the RRSP penalty tax resulting from holding non-qualified investments—like cryptocurrencies or non-fungible tokens—in your registered retirement savings plan. Specifically, the Canada Revenue Agency may cancel the RRSP penalty tax if the CRA "considers it just and equitable to do so having regard to all the circumstances, including (a) whether the [RRSP penalty tax] arose as a consequence of a reasonable error; (b) the extent to which the transaction or series of transactions that gave rise to the [RRSP penalty tax] also gave rise to another tax under [the Income Tax Act]; and (c) the extent to which payments have been made from [the registered retirement savings plan]."

Our experienced Canadian tax lawyers have assisted numerous clients with applications to cancel RRSP penalty taxes under subsection 207.06(2). We can carefully plan and promptly prepare your subsection 207.06(2) application. A properly prepared penalty-tax-cancellation application not only increases the odds that the CRA will accept your application but also lays the groundwork for a judicial-review application to the Federal Court should the CRA unfairly deny your application and refuse to cancel your RRSP penalty taxes.