Today we're joined by Aaron Grinhaus, a prominent Canadian attorney specializing in digital asset estate planning. Aaron helps many of our Canadian clients navigate the complex tax landscape when dealing with crypto assets.
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00:00Today we have the pleasure of having Aaron Grinhaus on with us. We've had him here before.
00:04He is a great attorney up there in Canada and he works with a lot of our clients on the estate
00:10planning side when they're dealing with digital assets up there. How are you Aaron? I'm good.
00:15Yeah, thanks for having me back. Absolutely brother. We've had a lot of questions. We've
00:20had a lot of people set up LLCs here in the U.S. that were Canadians and that's not the best way
00:26to do it. So anyway, we're just looking through things and we thought it'd be a really good idea
00:32to have you back on and kind of run through some of the best practices for Canadians when they are
00:36establishing their estate and what that looks like if they do want some presence here in the U.S.
00:41Yeah, I wanted to also say that I appreciate you having circulated. You know, my name comes up a lot
00:48among your clients and a lot of them reach out to me and they've expressed to me how difficult it is
00:54to find legitimate information about crypto tax. It's hard because there are very few people and
01:01particularly in Canada. So there might be some good resources in the U.S. and when some people look,
01:07I mean, I have people resorting to social media, they're looking on X and other places to try and
01:13find tax advice, which is really inaccurate to the point where a lot of the people that have come from
01:18you or just from all over the place we get referrals from. They've asked me to start doing
01:25a podcast about crypto tax in Canada. And in speaking with your colleague yesterday and a few
01:31other people, we are going to start, we are in production of doing that. So if anyone watching
01:36this is interested in being included in when that comes out, just send an email to info at
01:44grinhouselaw.ca, G-R-I-N-H-A-U-S-L-A-W.ca and just put in the subject heading podcast and I'll make
01:53sure that you're informed when it becomes available. And that way people are getting, you know,
01:58legitimate information from somebody who actually acts in this space. So I know you've mentioned this
02:04in the past, but just as a quick background, you know, I'm a lawyer. I'm based in Toronto.
02:10I have a law firm. My background and expertise is in tax structure and corporate and estate planning.
02:17And with a niche expertise in crypto, I started out in the space around 2015. I was originally,
02:23you know, just dabbling, investing in Bitcoin and ETH when it first came out. And then I was,
02:29got really interested in the technology, became one of the few lawyers in the country, like really
02:34a handful who were doing this stuff. And I was doing crypto tax structuring, Bitcoin mining operations,
02:41BTM operations, ICOs, everything you can name. In 2018, I published the first textbook in the world
02:48on crypto tax, on digital asset tax. I've been the co-director of the Osgoode Law School
02:56blockchain program for the last seven years. And I teach at Osgoode. I'm an adjunct professor at
03:02Osgoode on international tax and Web3 tax law. So on the practical side, on the personal side,
03:09and on the academic side, I've done it all. And I'm always happy to speak to people. If you have
03:13any questions, please feel free to reach out to me directly. And my email address is available,
03:18I think, in the materials here. So I just want to start off by saying that although I'm giving
03:26some information here, disclaimer, tax is very fact specific. And I'm not just saying that because
03:32I'm a lawyer, and it's a cop out like it really is. You know, if you're single, or if you're married,
03:37that can make a difference. If you're a Canadian citizen, but a US resident, that makes a difference.
03:43If you've got a home that you own, that will make a difference. If you own other investments,
03:48it will make a difference. Because what we decide to do might be an international structure,
03:54it might be a cross border structure, and it might just be a domestic thing. And what you do
03:59will determine what the tax consequences of all those actions are. So I just want to have that
04:06little disclaimer there. First, the second thing I'm going to tell you is that last week or two,
04:14the markets have been going wild. But from a regulatory perspective, particularly, I know a
04:20lot of people in your group are into Ripple, right? Into XRP. And even though everything's been
04:28dropping like a stone, we're looking at the possibility of a Ripple ETF being approved. We're
04:35looking at potentially the SEC, the securities of all. Yeah, like, those might be, they've been
04:44dropping a lot of those lately, against Coinbase against other crypto companies. And the biggest
04:50one that's on everyone's radar is what are they going to do with Ripple? What are they going to do
04:53with XRP? So if these stars align, everything could pop right back up. And you want to be prepared
04:59for that. And having the structure in place now is what helps with that. Also, I just read in Texas,
05:05I'm sure this is on your radar, Jake, but coming to the Senate floor is a strategic Bitcoin reserve
05:12in Texas. So many states are considering or doing this. So the movement is still happening. Now,
05:20if we're talking about Canada, like most countries, remember taxes, very political tax is one of those
05:27things that's like a mark of sovereignty that people do not want to mess with. And in Canada,
05:32like in many other countries, it changes every year when the budget comes out. And we will likely
05:38have not only a budget, but an election this spring, federally. So I don't know if you know what's going
05:43on in Canada right now, but there's a bit of a, it's a bit of a mess, right? We have no real prime
05:48ministers effectively resigned. And it's been this way for a few months. And we're trying to figure out what
05:54we're going to do. But the point of all this is when we do have an election, if the, if one party
06:00like the conservatives come in, they've already shown how they are very crypto friendly, very
06:06regulation friendly, and they're going to scrap the capital gains rise. Uh, so that we were going
06:12to raise the right. And that there was not a lot of political will for that here. In fact, the ruling
06:17party postponed it for another year, even though they said it was in effect, they haven't actually
06:23passed the law yet. And so they pushed it to 2026. And now if there's an election and the conservatives
06:28win, they said, we're just going to scrap it all together. So we've got a lot of, uh, positive
06:34potential outlook. So that brings us to the questions and the content. So the first question
06:40that, uh, that was brought to, to me before we started, this was considerations for Canadians
06:48when incorporating in the U S. So let's talk about that for a second. So a lot of people
06:53listen to your podcast and they listen to your information and a, a really beneficial strategy
06:59in the United States is to have what's called an LLC. Now an LLC is an interesting type of entity.
07:05So it's what's considered an S corp in the U S, right? So we have a C corp and an S corp and a
07:12partnership. Those are kind of the three general business structures. And I want to just briefly explain
07:18the difference between each one, because that'll lead us to how we should do it in Canada, if you're
07:23Canadian. So in Canada, a C corp is, and in the U S it's like an, it's like a person. It's like
07:32another person. It files a tax return on its own and it insulates you from liability. So if you're a
07:38shareholder of a C corp, you don't, and the C corp gets sued, you're safe, you're protected.
07:44If you're in a partnership, however, which is the other end of the spectrum,
07:49let's say Jake and I form a partnership. It's different from us being shareholders in a
07:54corporation. We're the ones who pay the tax and we're the ones who are liable if the partnership
07:59entity or the partnership business gets sued. An LLC, which is unique to the United States,
08:06we don't have this in Canada, is kind of in between the two. So on the one hand,
08:12you do get the liability protection if you're sued, but the shareholders or the partners are
08:18the ones who pay the tax. So, and it's considered an S corp in the United States. So a C corp
08:25pays its own tax, assumes all the liability, the shareholders pay their own tax if they take a
08:31dividend or a draw from the corporation, but the corporation itself has to file its own tax return.
08:36And if the corporation gets sued, the shareholders are not liable. Partnership, the partners have to
08:42pay the tax and they're the ones who are liable. And by the way, it could be a partnership between
08:46corporations. That's okay, but it's different from a C corp. An S corp is in the middle where the
08:55partner, the shareholder partners pay the tax, not the entity, but they are insulated from liability.
09:01Yeah. So that's where the problem. Yeah. Sorry. You get the best of both worlds. You get the best
09:07of both worlds, unless you're Canadian. So the problem is in Canada, we don't, Canada doesn't
09:14recognize LLCs. So the consequence of a Canadian having an LLC is they get taxed twice. Once the
09:21entity gets taxed in the United, in Canada, and second, the individual shareholders get taxed.
09:27So what it results in is double taxation, which is why it is not a good idea for Canadians
09:35to, to set up LLCs, unless you have a more broad, uh, plan or a more broad picture. So generally
09:43speaking, if you're looking to use a corporation for crypto investment or yield farming or, uh, any
09:50other types of activities, not a great idea to use an LLC. Instead, we will stick with a C corp.
09:56And I know that you're, uh, you have services that require Canadians to be incorporated.
10:02So what we'll do is, uh, this brings me to the second best practices, which is called a rollover.
10:09So how do we get your, let's say we've decided now you need a corporation to do what you want
10:15to do in the United States to invest or yield farm or whatever it is. And you're required to do it
10:20because of, uh, you know, digital wealth partners requires your corporation or something else in
10:25a custody requires you to have a corporation or whatever. So the next step is, okay, you're an
10:31individual with digital assets and you need to get them into the corporation. Now. Now the problem
10:37in Canada is if those digital assets are, and in, in many cases they are treated like capital property,
10:44then putting them into a corporation that you own and control triggers a tax consequence.
10:50It's as if you sold them to the corporation at fair market value. And even if you don't take a
10:55dollar out of that corporation, it's as if you sold it. And let's say you had, you know, a hundred
11:01thousand dollars worth of Bitcoin and you put it into the corporation, the tax consequence, you're
11:07deemed to have received a hundred thousand dollars and you have to pay tax on the game on whatever game
11:13there is. So there are two ways that we deal with this. There are two different ways that we could deal
11:17with this. Number one, if you have an existing corporation with cash in it already, then this
11:23is a good way to strip that money out. Because what you're doing is you're taking the money out as a
11:28capital gain. If you just take it as a dividend or you take it as a draw, it's taxed at a very high
11:33rate. Okay. Dividends are taxed at a lower rate, but still at a higher rate than capital gains.
11:38So if you sell your digital assets to the corporation, you can take that retain those retained
11:44earnings out as a capital gain. It's a good way to strip income out. But sometimes, okay, sorry,
11:49do you have a question? Could you sell those assets at a loss, like less than fair market value to the
11:53corporate? No, it has to be fair market value because it's non-arm's length parties, right? So
11:59arm's length is me to you. If I want to sell you something, if I want to sell you my house for a
12:03dollar, well, there's still a question of how that's treated. But if it's fair market value, then,
12:07you know, it is what it is. We bargained and we have equal bargaining power and we just,
12:13but if it's from you to a corporation you own and control, it's deemed to occur at fair market value.
12:18So you can't choose what price you want it to be, generally speaking. Okay. So if you decide to sell
12:24your assets, it's still good. And it's called the capital gain strip, which we used to do in a
12:30different way where we would manufacture certain corporations and things, but they closed that off
12:34by amending the income tax act last June, last year in June. Yep. So we're coming up with more
12:40creative strategies, but for now, one of the best things is if you have any capital property,
12:45sell it to your corporation, if they're retained earnings and we get it out. But in most cases,
12:49I would say for people who are dealing with you, they don't have a corporation or if they do,
12:54it doesn't have a lot of retained earnings. And in any case, if you have an operating business that
12:59has a lot of money, you don't necessarily want to co-mingle your...
13:03Well, there might be a little busy there that, you know, got sued, then those assets are now
13:09exposed to that lawsuit, right? That's one thing. But another thing is if you have an active business
13:16with income, you don't want to taint the capital treatment of your crypto with income treatment
13:23from your business. Because then if you sell your crypto and you try to declare it as a capital gain
13:27and the tax authority comes and looks at it and says, you know what, this is actually active
13:32business income. We're not going to let you take the capital gains treatment. So you lose, right?
13:36So it's good to segregate that, right? Keep it separate. And so the next thing that we can do
13:41is called a rollover. There's an exception in the Income Tax Act that allows you to put those capital
13:49assets or other assets into the business. And instead of taking cash out, you can take it back
13:53shares of equal value. Now, this is a complicated tax procedure has to be done the right way. And the
13:59corporation has to be structured a certain way because you have to have certain classes of
14:02shares to allow it. You have to subsequently file an election form with your income tax return.
14:08Like there's a lot of rules you have to follow to get it done. But we do a very high volume of this
14:12and we can turn them around within about a week and we can help your accountant if they're not sure
14:16how to do this, we can help them go through it. So this is the strategy that most people go with
14:23to avoid that tax consequence. So those are two really important, um, really important points
14:30for Canadians to consider when they're looking at, uh, setting up corporate structures for crypto
14:36holding or crypto trading. Okay. So that's number one. I don't know if you have any questions about
14:41that so far before we move on to the next, uh, the next part here.
14:46That's kind of what we do here in the U S so when, when we move the assets into an LLC,
14:50we use them as a capital contribution in exchange for the equity units in the LLC, right? So you're,
14:56it's a swap of that value. You're moving your assets in there to capitalize the business. And
15:01for that contribution, you are getting the equity to you now own the corporation. Um, yes, it sounds
15:07like the same thing there in Canada, except it's with a C corp entity versus an LLC. So it would be the
15:12stocks and you would have to have special provisions for the certain types of stocks that are able to be
15:16swapped in that manner to be able to do the same do-si-do that we do here in the U S.
15:22Yeah. I mean, another option is doing it as a loan, but with capital assets, that's not so good. If
15:27you want to capitalize the company with loans, like of cash, that's different. Uh, and in this case
15:34though, that's not really what we're talking about. We're talking about rolling digital assets into a
15:39corporation for the purpose of either yield farming, investing, or doing other things.
15:43Now there's two other side notes. I want to mention one, I get a lot of questions about
15:47trusts. Now trusts you can think of as blow through entities. Okay. And they're used in many different
15:55ways to distribute, uh, revenues or funds of some other kinds to other individuals through the
16:03corporation. If this is something that, um, we can discuss because it is really a case by case
16:11basis basis situation. Same with offshore. So people ask me a lot about offshore and we do a
16:15very high volume of cross border, uh, offshore advisory, offshore company formation. You know,
16:22we have an associate office in the Caribbean. We do a lot of work there. So, um, you know,
16:27we can advise you on that, but I can tell you that unless your assets are a million plus,
16:31uh, or you have other significant reasons to set something up there, in many cases, you're going to
16:37have to terminate your residency in Canada to make it worthwhile. So it's very fact specific,
16:42um, can be very expensive to set up. Uh, but if it's worth it, it's worth it. That's what I really
16:48love about tax. And I know you don't hear people say that phrase very often. That's what I love about
16:54tax. One of the things I do love about tax is that it's objective. So you can decide like, do I spend all
17:01this money to set up this structure? Well, you only do it if you're going to save this much in tax.
17:05So it's objective, right? Yeah. You can not do it, but then you're paying X dollars in tax.
17:10But if you do do it and it costs you a bunch of money to set it up, but then you save 10 times
17:14that amount in tax that you would have otherwise given to the government, it's worth it. So we do
17:19that analysis. We'll decide whether it's worthwhile for you. And then if we need to pull the trigger,
17:25we do, you know, we just get it back. And then, uh, so that's, that's the offshore and trusts
17:31discussion. The other question that Jake, you wanted me to discuss here was, uh, best practices
17:38for Canadians to use when managing digital assets. So, uh, I have a few comments about that. So one
17:46thing is to remember, uh, that tax systems are generally residency based unless you're American.
17:54So in the U S it's citizenship based, which means if you're a Canadian, if you're a U S citizen,
18:01who's living in Canada, you are, you have a bit of a confusing and anybody who's listening here who
18:09does have either dual citizenship or U S citizenship, who's Canadian resident, you'll know that it gets
18:15very confusing at tax time because certain things, there's no double taxation. There's a treaty that says
18:21that anything that's taxed in one of the jurisdictions, you ought to pay tax on in the other. But if there's
18:26something that you did have a gain on that wasn't taxed in the other jurisdiction, you have to pay tax on
18:32it in the other one, if that makes any sense. So a good example, an easy example is your principal
18:39residence. In the U S you can write off your mortgage amounts, right? You can't do that in Canada. In Canada,
18:45the entire amount of your principal residence, when you sell it, the entire gain is tax-free in the U S it's not.
18:51So if you sell your house and you exceed the allowable amount in the U S in Canada,
18:56that's tax-free, even if you're a Canadian resident, but you're a U S citizen, you have to pay tax on it
19:00in the U S. So, so what if our, what if Trump makes all American based cryptos tax-free here in the U S
19:07if you have those and you sell those for capital gain, you know, it's tax-free here. But if you're
19:12in Canada, you're still going to pay taxes there in Canada. Yeah. Pay tax in Canada. Yeah. If you're a Canadian
19:20resident, right. If you're a U S citizen, who's Canadian resident or a U S citizen, who's also a
19:27Canadian citizen, who's a Canadian resident, and then you terminate your Canadian residency
19:32and go back to the U S, then you're not subject to the U the Canadian tax regime anymore. However,
19:38there is a consequence to terminating your tax residency. You can really only be a resident
19:44of one country at a time for tax purposes. You can be a citizen. You could be like a mobile
19:51citizenships like Elon Musk. Right. He's, uh, I think he's got a U S citizen. So he's South of
19:57African and he's got Canadian citizenship even, right. He's gone, but he's a U S resident. So for tax
20:03reasons, he's just U S right. I think he lives in Texas. Yeah. Yeah. So, um, but if you're a Canadian
20:11resident, who's a U S citizen and a Canadian says, you decide to terminate your Canadian tax
20:17residency, we have to exit plan. We have to determine what is the tax consequence going to be
20:24for that termination. So think that's something to think about, especially if you're doing offshore
20:30structuring, or if you do want to, if, if, you know, there are some laws changed on, on the tax side
20:35in the U S and people want to start repatriating themselves down there. Uh, we should have a discussion
20:40about that. And when, uh, on the trust side of things, I just want to circle back to that for a
20:46second, uh, there in Canada. So one of, one of the things that we look at here in the U S
20:50is the lifetime gift tax threshold. So we have a good lifetime gift tax of anything over 13.99
20:56million per person here in the U S. So it's like close to 28 million or yeah, close to 20 million.
21:02If you're married couple that you can gift out of your taxable estate there in Canada, there is no
21:08limit, right? Like you can gift till your heart's content into a trust or if it's cash, if it's
21:14cash, ah, so you can't digital assets. It has no cash. Yeah. So if you, if you start gifting digital
21:21assets to people, it's, there's a tax consequence to the gift or the person giving the gift.
21:27What if it's a currency? If it's cash, it's okay. Well, um, so how is it written? Is it,
21:34is it written Canadian dollars or is it written as currency in the, Oh, that's a good question.
21:39I have to look into that. I'm not sure how that is. It's probably currency. I would say
21:44if it is probably MC, I think there might be a loophole there for XRP in particular. Um,
21:50well it not stable coins though. Stable coins don't count. Right. Well, well, XRP is,
21:55it's not a stable coin, obviously. Um, but they were coming out with one. No. Yeah. So ripple,
22:00there's a ripple stable coin coming out. Yeah. Uh, but yeah, that, that's where it gets a little,
22:05but the gifts, um, using gifts can be good, especially with estates. But typically if you
22:12are giving gifts that are taxable, the important thing to know is that the give the gift or two
22:17things, the gift door is the one that's responsible for the tax and the person receiving it will
22:23receive it at the cost base at the time that it's worth. Oh, okay. So like you receive it. Yeah. And yeah.
22:30Yeah. So that, that's, uh, that's a pretty big advantage when you're receiving it. Keeping in
22:36mind that somebody is still paying the tax, right? Like they're receiving it at cost base,
22:41but they're not some, somewhere the government's getting its money, right? The person giving it is
22:46the one paying, paying the tax. So the gain has been paid for in other words. Right. Yeah. So
22:52it's going to be paid somewhere. Uh, yes. I'm interested in that potential loophole because
22:58FinCEN designated XRP a currency in 2014 here in the U S. Uh, so if it, and, and Congress in the
23:07stable coin act or the bill that they have on the floor right now, it would be designated a bridge
23:11currency. Uh, so I don't know if it'll fall under that qualification or not. Well, nice to see when
23:17the guidance comes out. Yeah. There's a lot, there's a lot in the hopper right now has been a lot of
23:21activity in legislatures across the board because of the election. Uh, Europe's pretty well settled.
23:26They, they came up with their framework, which is pretty good. Uh, Canada's got its ideas, but
23:31again, we're going to have an election soon and everything could change. Yeah. So we don't,
23:35we don't know where it's going to go. And just so you know, the crypto community has been very
23:40vocal in Canadian politics and, and they, they've been hosting the leaders and the, you know, like
23:47they have a lot of influence. They have a lot of influence. So we'll see what happens. Uh, so yeah.
23:52So when you have dual citizenship, that's something you should consider because that,
23:56or if you have us citizenship and you're Canadian resident, we have to consider the best ways of
24:01doing things. And then the other thing to always think about is capital gains versus income. So
24:09whether you are holding crypto and you want to cash it out as a capital gain depends on how you've
24:16been trading and using it. If you just bought and held for a long period of time, chances are it's
24:22capital property. But if you've been doing trades over time between cryptos or just buying and selling,
24:31and if you're just accumulating, that's okay. But if you're selling and buying and selling and buying,
24:36then that could taint it. And also, as I mentioned earlier, if you start commingling assets that are
24:45income in a corporation with capital assets, that also could taint it in the eyes of the CRA or the
24:52Canadian tax authority, Canon revenue agency. And, uh, and so you want to try and, um,
24:58seg separate that if you can. So if you have, so what I often will recommend people to do is
25:06even if you are rolling assets into a corporation, keep some of it in your name personally as capital
25:13property and just hold. So if you've got, you know, a hundred thousand, put 25% of it in your
25:20name, like keep it and roll 75% into the court. That way you actually have the option of retaining
25:27the earnings in the corporation. Don't have to pull it out. Even if you reach a time where you
25:31think it's reached a high and you want to like cash out, keep it in there and then take a capital
25:36dividend later or do something. But in the meantime, you can cash out what you own in your name
25:41personally, slowly over time. The other thing is if you, uh, are, have any possible way of
25:49incorporating your employment. So if you are an independent contractor, you can become an
25:54independent contractor with your employer. As long as we can substantiate it and we can go through
25:59that analysis and discuss it in more detail, but that's great because then you can keep your income
26:04from work in the corporation and pay 13% on it. And as opposed to adding it to your personal income
26:12and then cash out your crypto slowly over time to live off of as capital gains. And you're paying
26:18very little tax when you do that. And so there are ways, uh, I can go through with you based on your
26:24situation to maximize that calculation. And then, uh, I think that was, uh, pretty much
26:32most I was going to cover. I was just going to say, you know, I put my email here and my name,
26:37uh, my name on the, uh, on the zoom window here. So please, you can reach out to me directly. If you
26:44want to discuss your specific situation further, uh, check out the website, which I think we're going
26:50to list the URL and the materials, Grinhouse law, G R I N H A U S L A W dot C A, which has a number
26:57of resources, a number of articles and, uh, talks about what we've been up to and what our services are.
27:02And, uh, the resources. And of course, uh, please, you know, if you want to find out about
27:09the podcast info at Grinhouse law.ca with just the subject heading podcast, and I'll make sure
27:15that you're informed when it becomes available and how to, how to get access to it.
27:19That's awesome. Super glad to hear that you're doing that because I know that there's a lot
27:23of confusion up there for Canadians on what best practices are and how to be able to mitigate
27:28taxes on their estate for their digital assets. Cause again, you know, like we mentioned,
27:32earlier, there's just not really that much information out there. There's not enough
27:36people that are actively working in this space that are, you know, putting the information
27:41out there available for people. Uh, we've seen a lot of success here in the U S, uh, based on
27:47our presence and just putting out media around these topics and, um, super excited for you to
27:52start doing that too. And we'll continue to refer you people. Uh, again, I think you're the best
27:57tax attorney up there in Canada for this stuff. And that's the reason we've, we've chosen to
28:01partner. So thank you again for being on the show. Uh, we will have all the links that he
28:04mentioned down in the show notes below for this, uh, on YouTube and all the other platforms where
28:09we listed and, um, yeah, appreciate you coming back and, uh, taking the time here.
28:14Yeah. Thank you again for having me. I really appreciate our relationship. I love the people that
28:18we work together with and the services you offer are great as well. And I'm always trying to
28:22recommend them for people as well. Appreciate you brother. We'll see you on the next one.
28:28All right. Thanks again.