In a landmark decision that sets a precedent for cryptocurrency taxation in Canada, the Tax Court of Canada has overturned a ruling by the Canada Revenue Agency (CRA) and allowed a taxpayer to write off a significant bitcoin loss. The judge ruled that the taxpayer's $505,142 loss, stemming from the collapse of the QuadrigaCX exchange, could be deducted against her income.
The Taxpayer's Crypto Journey and QuadrigaCX Collapse
The case, the first of its kind reported in Canada, centered on a taxpayer who began investing in bitcoin in 2017. She opened an account with QuadrigaCX, which was at the time Canada's largest cryptocurrency exchange. Her goal was to generate substantial profits to facilitate an early retirement in her early 60s and to benefit her adult children.
To fund her investments, she deployed personal savings, took cash advances on credit cards with interest rates exceeding 20%, obtained a second mortgage on her home at 11.99% interest, and even cashed in her Registered Retirement Savings Plan (RRSP). She testified to making over 100 bitcoin purchases, monitoring her account daily, and dedicating several hours per week to her trading strategy. By late 2017, her account was valued at over $2 million.
The situation unraveled dramatically. QuadrigaCX collapsed in 2019 amid suspected fraud, following the sudden death of its CEO, Gerald Cotten, in late 2018. For "reasons unknown," the taxpayer's account balance vanished in late December 2017. Ashamed of the loss, she did not speak of it for months before finally confiding in one of her sons in August 2018.
The Tax Dispute and Court's Analysis
On her 2017 tax return, the taxpayer claimed a non-capital loss of $505,142, representing the total amount placed with QuadrigaCX plus interest and other costs. A non-capital loss can be deducted against other sources of income, providing a greater tax benefit than a capital loss. The CRA denied this claim, prompting the taxpayer to appeal to the Tax Court.
The court's task was to determine if the loss was deductible and, crucially, whether it was an ordinary business loss or a capital loss. The taxpayer argued her activities constituted an adventure or concern in the nature of trade. She testified that she entered the bitcoin market after seeing friends and family make significant profits during a period of rapid appreciation, viewing it as a direct opportunity to make money.
The judge considered the frequency of transactions (over 100 purchases), the use of leveraged and borrowed funds, the time spent actively managing the investments, and her profit-oriented intention. This led to the conclusion that her activities went beyond passive investment.
Implications for Canadian Crypto Investors
The court's decision to allow the loss as deductible against income is a significant outcome for the taxpayer and establishes an important reference point for other cryptocurrency investors in Canada. It underscores that how crypto activities are characterized—as business income or capital gains—depends heavily on the specific facts and circumstances, including the investor's intention and the nature of their operations.
This ruling provides clarity in the evolving landscape of cryptocurrency taxation and demonstrates that taxpayers can successfully challenge CRA assessments in this complex area. For individuals who suffered losses from the QuadrigaCX debacle or similar crypto exchange failures, this case highlights the importance of proper documentation and the potential for tax relief, depending on the commercial nature of their activities.
