Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: In custodial staking between a Canadian resident taxpayer and a crypto trading platform that is compliant with Canadian Securities Administrators regulations: 1) For crypto-assets held on account of capital, is there a disposition of crypto-assets by such taxpayers: a. When they deposit crypto-assets with the Platform? b. When they stake crypto-assets through the Platform? 2) Where taxpayers stake crypto-assets through the Platform: a. Are the staking rewards earned by taxpayers (“User Rewards”) income under section 9 of the Income Tax Act? b. Are the User Rewards income from a business or income from property? 3) When are User Rewards included in the income of a taxpayer?
Position: 1) Where custodial staking occurs through a platform that is compliant with the requirements of the Canadian Securities Administrators: a. No; b. No. 2) a. Yes, User Rewards earned through custodial staking are generally income under section 9. b. A taxpayer’s “level of activity” will generally be a relevant factor in distinguishing between income from a business and income from property. This determination requires an examination of the taxpayer’s whole course of conduct viewed in the light of surrounding circumstances. 3) User Rewards can generally be included in a taxpayer's income in the taxation year when the User Rewards are credited to the taxpayer's account by the Platform, or on an accrual basis as they are earned.
Reasons: 1) Common law meaning of disposition. Based on the requirements of the Canadian Securities Administrators, beneficial ownership of the crypto-assets remains with the users at all relevant times. 2) a. Broad definitions of “business” and “property”. b. Jurisprudence including Canadian Marconi Co. v. Canada, [1986] 2 S.C.R. 522. 3) Canderel Ltd. v. Canada, [1998] 1 S.C.R. 147.
Mr. Salomon Buzaglo, CPA HEADQUARTERS
Compliance Specialist Income Tax Rulings Directorate
XXXXXXXXXX J. Fung, CPA, CA
GST/HST and Digital Compliance Directorate 2024-103182
Compliance Programs Branch
January 17, 2025
Dear Mr. Buzaglo:
Re: Custodial staking on a centralized crypto-asset exchange platform
This is in reply to your request dated August 12, 2024 regarding the application of the Income Tax Act (hereinafter the “Act”) to taxpayers that deposit and stake crypto-assets on a hypothetical custodial centralized crypto-asset trading platform (the “Platform”). Although the present technical interpretation refers to the “Platform”, we understand that your question does not relate to a specific platform. The description of the Platform’s relationships and transactions with its users is based on your understanding of standard provisions included in agreements between users and platforms that comply with Canadian securities regulations. As such, this technical interpretation provides general comments about the application of the provisions of the Act and related legislation (where referenced) to the hypothetical platform described. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.
Unless otherwise noted, all statutory references herein are references to the Act.
Background
In this document, “staking” refers to the act of validating transactions in respect of a crypto-asset and adding them to a publicly distributed ledger on proof-of-stake blockchain protocols. On a proof-of-stake blockchain, the nodes that validate transactions are called “validators”.
To participate in staking, participants must “lock up” a certain amount of crypto-assets to be held at stake, as a form of collateral. If a validator’s behaviour is disruptive to the blockchain protocol and its community, the crypto-assets held at stake may be “slashed” – that is, destroyed or taken away by the protocol.
The crypto-assets at stake are “locked up” through the use of smart contracts. Depending on the rules of the specific blockchain protocol, the smart contract may also impose “lock-up” periods before and after the staking period, respectively referred to as “bonding” and “unbonding”. During bonding and unbonding, no staking rewards are earned. Staked crypto-assets cannot be used in on-chain transactions during any of the bonding, staking or unbonding periods.
Facts and assumptions
1. It is assumed that the Platform is at all relevant times compliant with the requirements of the Canadian Securities Administrators (“CSA”), including those set out in CSA Staff Notice 21-332, Crypto Asset Trading Platforms: Pre-Registration Undertakings – Changes to Enhance Canadian Investor Protection, dated February 22, 2023 which requires, inter alia, that crypto-assets deposited with a Platform are held separately from the Platform’s own assets and in trust for each respective investor.
2. Users of the Platform are required to accept the terms of service (“Terms of Service”) of the Platform. Unless otherwise indicated, the description of the Platform below is based on the Terms of Service.
3. Crypto-assets that the Platform holds on behalf of its users (“Deposited Crypto”) may be held directly by the Platform or by a crypto custodian engaged by the Platform (“Delegated Custodian”). In particular:
a. The Deposited Crypto is segregated from the assets of the Platform (or of the Delegated Custodian, where applicable). The Platform and/or the Delegated Custodian will not at any time represent or treat the Deposited Crypto as its own property.
b. The Platform will record each user’s Deposited Crypto in its books and records as separate and apart from any other users’ crypto-assets.
c. The Deposited Crypto is held in one or more omnibus crypto addresses along with other users’ crypto-assets. Only the Platform (or the Delegated Custodian, if applicable) knows the private key to the omnibus crypto addresses.
4. While Deposited Crypto is held by the Platform or its Delegated Custodian, users will not have the right to participate in voting actions associated with the Deposited Crypto (e.g., votes relating to the governance of protocol-level issues).
5. Transactions involving the Deposited Crypto, including trades and staking or unstaking, are undertaken at the instruction of the users. Except as required by law or as instructed by the users, the Platform will not sell, transfer, loan, hypothecate, or otherwise use the Deposited Crypto.
6. Risk of loss of the Deposited Crypto is borne by the users, unless the loss is caused by the Platform’s wilful misconduct.
7. Users are informed of, and are required to acknowledge, risks associated with using the Platform, including but not limited to the risk of theft of crypto-assets held through the Platform.
8. At a high level, staking transactions on the Platform generally occur as follows:
a. A user will direct the Platform to stake his or her Deposited Crypto (“Staked Crypto”).
b. For staking purposes, the Platform will delegate (or direct the Delegated Custodian to delegate) the Deposited Crypto to a validator (the “Validator”). The Validator may be the Platform, the Delegated Custodian or a third-party service provider. Custody of the Staked Crypto remains with the Platform and/or the Delegated Custodian during staking even if a third-party service provider is engaged as the Validator.
c. Rewards, which are paid in crypto-assets generally of the same type as those staked, may be earned in connection with the staking of the Staked Crypto. The rewards are generally distributed in the following order:
i. If applicable, the Delegated Custodian will be entitled to a fee in respect of the rewards. The Platform or the Delegated Custodian may pay a fee from the rewards to any third-party service provider it selects to act as the Validator.
ii. Any remaining portion of the rewards will be delivered to one of the Platform’s custodial wallets (or one of the Platform’s custodial wallets with the Delegated Custodian). The Platform will be entitled to a fee in respect of the rewards.
iii. After the Platform’s fee has been paid, the user’s account will be credited with any remaining portion of the rewards (the “User Rewards”) and, subject to any unbonding or lock-up period under the blockchain protocol’s rules, the user will be able to hold, sell or withdraw their rewards. The Platform indicates the estimated percentage return to users from staking a certain type of crypto-asset but there is no guarantee of receiving any rewards, and the User Rewards that are ultimately received may differ from the estimate. Further, users have no right to any rewards associated with the Staked Crypto until the rewards are generated by the blockchain and credited to the user’s account by the Platform.
d. The user may request that the Platform stop staking their Staked Crypto and, after the passage of any relevant unbonding or lock-up period that is imposed under the blockchain protocol’s rules, the user may sell or withdraw their Deposited Crypto. However, at its sole discretion, the Platform may allow investors to transact with their Staked Crypto before its typical lock-up period has ended, subject to whether the Platform has sufficient liquidity in that type of crypto-asset.
9. Where validators have acted maliciously, the protocol may punish such behaviour by “slashing” their staked crypto-assets. When crypto-assets are “slashed”, they are either destroyed or confiscated by the protocol. As the Validators are staking users’ crypto-assets, there is a risk that Staked Crypto may be slashed. In certain cases, the Platform may reimburse users for their slashed Staked Crypto-assets, or the Platform may pass on any reimbursements received from the Validators.
Issues
In custodial staking between a Canadian resident taxpayer and a centralized crypto-asset trading platform that is compliant with CSA regulations:
1. For crypto-assets held on account of capital, is there a disposition of crypto-assets by taxpayers:
a. When they deposit crypto-assets with the Platform?
b. When they stake crypto-assets through the Platform?
2. Where taxpayers stake crypto-assets through the Platform:
a. Are the staking rewards earned by taxpayers (“User Rewards”) income under section 9 of the Income Tax Act?
b. Are the User Rewards income from a business or income from property?
3. When are User Rewards included in the income of a taxpayer?
Given the general nature of the facts provided to us, our response is accordingly limited to general comments. It should be noted that variations in a platform’s Terms of Service – and accordingly, the resulting legal relationships between the platform and its users – may result in different conclusions than in the situation described above.
CRA response to question 1
What constitutes a “disposition” is defined for the purposes of the Act in subsection 248(1). The definition, however, is not exhaustive. As mentioned in document 2023-099654, when determining if or when a disposition of property has taken place, it is necessary to determine if or when ownership was transferred or extinguished under the applicable private law, and whether specific inclusions and exclusions listed in the definition in subsection 248(1) apply.
Based on the available information, it is our understanding that, as a crypto-asset trading platform that is compliant with the CSA’s requirements, the Platform does not acquire beneficial ownership of any of the Deposited Crypto or Staked Crypto. Instead, users retain beneficial ownership of the Deposited Crypto and Staked Crypto at all relevant times. Further, it is our view that, based on the facts submitted, none of the specific inclusions in the definition of “disposition” in subsection 248(1) would apply to trigger a disposition.
As such, there should not be a disposition by taxpayers of either the Deposited Crypto when it is deposited with the Platform, or of the Staked Crypto when it is staked through the Platform.
CRA response to question 2
Based on the facts provided, in our view, it is unlikely that User Rewards received in a custodial staking arrangement can be considered to be derived from personal activities that are not of a commercial nature. As such, User Rewards will generally be included in income under section 9 of the Act.
In distinguishing between income from property and income from a business, the leading case often referred to is the Supreme Court of Canada decision in Canadian Marconi Co. v. Canada, [1986] 2 S.C.R. 522, which considers the “level of activity” of the taxpayer in earning that income. The determination of whether an amount is income from property or income from a business should be based on an examination of the taxpayer’s whole course of conduct viewed in light of the surrounding circumstances.
CRA response to question 3
Subsection 9(1) of the Act defines a taxpayer’s income for a taxation year from a business or property as the taxpayer’s profit from that business or property for the year.
“Profit” is not defined in the Act but has been considered by the courts. In Canderel v. R., [1998] 1 S.C.R. 147, the Supreme Court of Canada laid out principles for determining profit. In particular, a taxpayer can choose any method of determining profit that provides an accurate picture of the taxpayer’s profit for the year, provided that it is not inconsistent with the provisions of the Act, rules of law (i.e., case law), and well-accepted business principles.
We expect that, under this framework, User Rewards will generally be included in a taxpayer’s income for the year when the User Rewards are credited to the taxpayer’s account on the Platform.
Notably, we are of the view that the principles of Canderel would not typically permit the income inclusion of User Rewards to be deferred until such time that the User Rewards are disposed of.
Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.
We trust our comments will be of assistance.
Yours truly,
Sophie Larochelle
Section Chief
for Division Director
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2025
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2025
Email this Content