If the world of cryptocurrency appears to you as a “Wild West” it is because it is. Fortunes are made and lost overnight. Equally buffeted or flat-footed by the cryptocurrency events are the taxing authorities. The Canada Revenue Agency promulgated their initial positions on cryptocurrency in 2013 and 2014 after a review by the Senate. The CRA only consolidated their position in March 2019. The current CRA position rests on cryptocurrency being “a representation of value that is not legal tender”, a “digital asset”, and therefore a commodity for purposes of the Income Tax Act. The treatment of income tax on cryptocurrency earnings is thus either on account of income or capital, depending upon the facts of the taxpayer’s situation. This relies on an old standard to discriminate “business” activities from amateur dealing. (See our post-January 16, 2018 “Cryptocurrency: What does the CRA and the IRS want me to report?”) Excise Tax is yet another concern altogether.
The Canada Revenue Agency holds cryptocurrency to be a commodity for Excise Tax purposes just as it does for Income Tax purposes. When bought and sold, commodities, such as oil, wheat, or diamonds, are generally subject to HST. A seller of cryptocurrency is obliged to collect HST from the buyer if they make more than $30,000 in total taxable supplies each year. Under these rules, even occasional traders in cryptocurrency can have heavy HST collection obligations, to say nothing of the virtual exchanges making markets in cryptocurrency for the public. The rules as written would wipe out the industry.
The Department of Finance released its draft proposal on May 17, 2019, to amend section 123(1) of the Excise Tax Act to add a definition of a “virtual payment instrument” (“VPI”) under the definition of “financial instrument”. This proposal would make certain that cryptocurrency is not defined as “money” for the purposes of the act, and remains a type commodity. It removes the potential for double-taxation of cryptocurrency, once when purchased and again when used to buy another good or service. It also removes the complexities of determining the place of supply, something highly problematic in the global crypto market. It also has the effect of deeming a great number of cryptocurrency users to be Financial Institutions, (“FI”s) for GST/HST purposes.
The cryptocurrency industry and many tax practitioners are already adhering to these proposals which are expected to be passed into law shortly after the federal election.
But the proposals contain serious flaws. CPA Canada’s review (June 28, 2019) includes an incisive review of these ramifications. First, would as a single purchase of a cryptocurrency (VPI) make the purchaser a Financial Institution under s.149(1)(b)? This is a serious issue. Many cryptocurrency users would not want to forgo ITCs as required for an FI. Second, would payment in crypto for goods or services supplied by a non-resident be an export of financial service? Again, the purchaser may have to forgo an ITC otherwise available. Third, would a vendor of goods who accepts the only crypto be entitled to ITCs? Fourth, do the proposals unnecessarily exclude certain cryptocurrencies that don’t meet the precise definition of VPI? The current proposals exclude crypto which can be exchanged for a specific property, services, or money (i.e. Libra, Stablecoin) and crypto that is used as part of a gaming platform. Under these rules, a non-resident would pay HST on non-VPI crypto, then again pay HST on purchase using that crypto – potentially 28% in HST, all unrecoverable.
CPA Canada’s suggested modification is arguably much cleaner and efficient. First, “where VPI is used as a form of money it should be treated as money” and not a financial instrument. As CPA Canada points out, this is simply achieved by amending s.123(1)(n) to add the words “or a VPI” after the world “money”. Second, Finance should amend the proposals to treat the consideration in all business-to-business non-VPI transactions as “nil”, similar to the barter rules between registrants in s.153(3). For consumer-to-business exchanges, the rule should apply as it does for gift certificates under s.181.2.
Clearly several questions are unanswered. Meanwhile, how does a taxpayer who uses cryptocurrency file their GST/HST returns? Is an individual with several transactions per year a Financial Institution? How about with only one transaction per year? What is the impact on them if not an FI but earn more than $30,000 on a single cryptocurrency transaction?
Where we go from here is not yet certain. But stay tuned, and news will likely be available daily.
Consult a professional before filing your returns. Initial consultations are always free.
Shawn Bausch, CPA (CA), BBA is a tax manager at Sloan Partners. Contact Shawn by email or call 416-665-7735 (ext.335).