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Jack Bernstein is one of Canada’s leading tax lawyers and Head of the International Tax Group at Aird & Berlis. He is also a senior member of the firm’s Tax Group, Estates & Trusts Group, and Tax Litigation Group.
Family wealth is typically expected to flow from parents or grandparents to the next generation. Digital assets present a different dynamic. Often younger entrepreneurs and first-generation wealth creators have built significant fortunes through cryptocurrency and blockchain ventures, and many now want to support their parents or siblings.
In my practice, I have recently advised high-net-worth clients under the age of 40 who founded blockchain companies or invested early in Bitcoin or Ethereum. Their objectives extend beyond wealth creation and include minimizing future tax, protecting wealth, establishing family offices, diversifying investments, considering relocation to low- or no-tax jurisdictions, implementing estate plans, and supporting family members. For this new generation of digital wealth creators, these priorities raise unique tax, estate, and succession planning considerations.
Where feasible, individuals may relocate to lower-tax jurisdictions where future gains from crypto and investment income are not taxed. Canada and other countries impose an exit or departure tax, which may make emigration too costly where gains have accrued on crypto assets owned prior to departure.
Planning becomes more complicated when the crypto owner is both a Canadian resident and a US citizen. Because the US taxes based on citizenship, relocating to a low-tax jurisdiction does not necessarily reduce US tax exposure. US citizens may also be subject to punitive estate tax rules, and individuals who renounce US citizenship may face expatriation tax consequences.
A founder may receive restricted utility tokens from a company. It may be possible to transfer those tokens to a trust for children at a low value, thereby shifting future growth. The challenge is obtaining a credible valuation. Unlike traditional securities, utility tokens do not represent equity ownership and, given their unique characteristics, can be difficult to value defensibly, particularly where the tokens have the potential to be worth millions once restrictions expire.
Young crypto millionaires and founders are not only planning for future generations; many also want to support parents and siblings. This can create unique planning challenges within a family. A client may wish to help parents without having those benefits ultimately shared with siblings on the parents’ death. A trust for the parents may help ensure that, on death, the assets return to the donor or the donor’s family. The plan can ensure that the client retains control regardless of the structure of the plan.
A Canadian resident with significant crypto assets may transfer them to a Canadian corporation in exchange for fixed-value preferred shares on a tax-deferred basis using a section 85 election under the Income Tax Act. The preferred shares would be redeemable and retractable for the fair market value of the crypto at the time of transfer. A price adjustment clause may apply if the Canada Revenue Agency (CRA) and the shareholder later agree to a different value. This can avoid triggering a capital gain if the CRA determines the crypto was worth more than the redemption price. The preferred shares may be voting or non-voting and may carry a discretionary dividend. The crypto investor may also retain voting, non-participating shares to maintain control.
A discretionary trust may be settled by a relative or friend for the benefit of the crypto investor and family members, including parents, siblings, and children. The trust may subscribe for common shares for nominal consideration, such as CAD 100, and participate in future growth. The trust will be subject to a deemed disposition at fair market value on its 21st anniversary, unless assets are distributed to a Canadian-resident beneficiary before that date.
If a beneficiary is a US resident or citizen, the trust may be structured as a foreign grantor trust, and the corporation may be an unlimited liability company (ULC). A US beneficiary of a foreign grantor trust is generally not taxable in the USA on trust distributions, although reporting obligations apply. A ULC is treated as a corporation in Canada but is either disregarded or treated as a partnership in the USA, avoiding the passive foreign investment company (PFIC) and controlled foreign corporation (CFC) regimes. ULCs may be established in Alberta, British Columbia, Nova Scotia, and Prince Edward Island.
Individuals whose wealth has increased substantially through crypto should ensure that their wills and powers of attorney for property and personal care are up to date. They should review their testamentary objectives in light of their increased wealth and any desire to support parents or siblings.
As many successful crypto investors are relatively young, it is not unusual for them to be single. They should have a will that reflects their current circumstances and understand the importance of cohabitation agreements and marriage contracts. These documents should be reviewed if they marry or start a family.
They should also review their choice of executor and, ideally, appoint someone familiar with digital assets. Trust companies affiliated with banks may be reluctant to act where an estate intends to retain significant crypto holdings, as their preference may be to liquidate those assets and invest in more traditional investments.
A power of attorney for property authorizes another person to act on the individual’s behalf in the event of incapacity. Before releasing a power of attorney, a law firm may require confirmation from a physician that the individual is incapacitated.
Crypto has no third-party institution that can be compelled to transfer assets upon production of a probate certificate. If an executor cannot reconstruct seed phrases, hardware wallet PINs, or exchange two-factor authentication credentials, the asset may be effectively lost. However, subsection 70(5) of the Income Tax Act will still trigger a deemed disposition at fair market value on death (unless assets are bequeathed to a spouse or spouse trust), leaving the estate liable for tax on assets it cannot access.
Ontario Estate Administration Tax (probate fees) is approximately 1.5% of estate assets requiring probate in excess of CAD 50,000. In Ontario, individuals commonly sign both a primary and a secondary will. The public primary will covers assets requiring probate, including bank accounts, publicly traded securities, and real estate.
The private secondary will covers self-custodied crypto, hardware wallets, hardware-secured seed material, NFTs, and private company shares. Because personally held crypto does not generally require probate for transfer, it is often well suited for a secondary will.
Assets held through regulated exchanges, such as Wealthsimple Crypto or Coinbase Canada, will typically require probate before release. Those holdings should generally remain under the primary will or be transferred to self-custody in advance.
Planning may include donating crypto to a registered charity or private foundation during the donor’s lifetime or on death. The crypto is deemed to be disposed of at fair market value, and the donor receives a charitable donation tax credit. A capital gain will arise unless the donor is carrying on a crypto trading business. In most cases, only 50% of the capital gain is taxable.
The CRA’s April 2015 technical interpretation (2014-0561061E5) concluded that crypto may constitute “funds or intangible property” and therefore be specified foreign property to the extent it is situated, deposited, or held outside Canada. This can apply to individuals, trusts, and estates. The CRA has indirectly provided the opinion that where crypto trading platforms are resident in Canada and compliant with Canadian regulations, cryptocurrency held through the platform for a Canadian beneficiary by a non-resident will typically not be considered as “situated, deposited, or held” outside Canada and, therefore, reporting will not be required.
The first generation of crypto wealth creators faces challenges very different from those of traditional family businesses. For many young entrepreneurs, the focus has shifted from building wealth to preserving it. Effective tax, estate, and succession planning can help ensure that digital wealth becomes a lasting family legacy.
As the global leader in residence and citizenship planning, Henley & Partners is best placed to advise you and your family. Contact us for a free consultation.
