Taxing cryptocurrencies: GST/HST proposals raise concerns
With the rise of cryptocurrencies, uncertainty is growing over their tax treatment. Learn about existing Canada Revenue Agency (CRA) guidance, as well as CPA Canada’s concerns with newly proposed GST/HST legislation.
As cryptocurrencies enter the mainstream, their users and tax advisers need to understand the tax implications.
Until recently, there has been little legislation on the taxation of cryptocurrencies. The Senate looked into cryptocurrency in 2014 and concluded that Canadians needed more guidance to meet their tax obligations.
The CRA followed up with useful guidance (https://www.canada.ca/en/revenueagency/programs/about-canada-revenue-agency-cra/compliance/digitalcurrency/cryptocurrency-guide.html), reiterating its 2013 ruling that transactions involving virtual currencies are subject to tax as a commodity, rather than a currency. When cryptocurrencies are used to buy goods or services, the CRA views this as a barter transaction (https://www.canada.ca/en/revenue-agency/services/formspublications/publications/it490/archived-barter-transactions.html) for income tax purposes. Therefore, when accepting cryptocurrency as payment for goods or services in the normal course of business, the seller pays income tax on the value of the goods or services at the price it would have charged a third party – which is generally the market value of the cryptocurrency received.
In other words, when you use cryptocurrencies to acquire goods and services, the tax cost of the goods or services received equals the market value of the cryptocurrency exchanged.
Similarly, for GST/HST, the CRA says that when a taxable supply of a good or service is made in exchange for cryptocurrency, the amount paid for the supply equals the fair market value of the cryptocurrency at the time.
A key question has been whether the CRA considers a supply of cryptocurrency to be a taxable supply for GST/HST purposes — that is, should you treat cryptocurrency as money or a financial instrument? If it’s neither, the supply could be taxable, requiring users to charge GST/HST each time they use cryptocurrency for a transaction.
Double taxation result — with tax applied once when the cryptocurrency is issued and a second time when it’s used to purchase goods or services.
For example, suppose you are an individual based in Ontario and you are not registered for GST/HST. You buy 100 units of cryptocurrency for $100 and pay $13.00 CAD in HST. If you then buy a good online for 88.50 units (assume the value per unit is unchanged), you’d pay an additional 11.50 units in HST. You’d therefore pay an additional $13.00 CAD in unrecoverable HST compared to what you’d paid for the goods using cash.
As a further problem, some cryptocurrency exchanges keep their users’ identities private. This anonymity makes it difficult to apply the place of supply rules (https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses/charge-collect-place-supply.html) and know what GST/HST rate to charge.
To address these concerns, Finance Canada recently consulted on draft legislation (https://www.fin.gc.ca/drleg-apl/2019/gst-hst-tps-tvh-eng.asp) that would exempt cryptocurrency transactions from GST/HST. This would be done by including eligible cryptocurrencies in the definition of financial instrument. To qualify, cryptocurrencies would need to meet the GST/HST law’s definition of a virtual payment instrument (VPI).
CPA Canada responded to the consultation with a submission (/-/media/site/operational/tx-taxation/docs/01122-tx-june2019-cpacanadactcsubmission-may2019-proposalsvirtualcurrencies.pdf) produced with input from members of CPA Canada’s Commodity Tax Committee (/en/the-cpaprofession/about-cpa-canada/governance-of-cpa-canada/cpa-canadacommittees/tax-committees-overview/cpa-canada-commodity-tax-committee). Our key concerns with the proposals, and what we recommend in the submission, are summarized below.
Businesses can inadvertently be deemed financial institutions
Defining a VPI as a financial instrument effectively exempts the supply of cryptocurrencies for GST/HST purposes when the definition of VPI is met. This treatment is generally welcome, as it eliminates the double taxation risk discussed earlier.
But, defining a VPI as a financial instrument could cause businesses who transact in VPIs to be financial institutions for GST/HST purposes. Affected businesses could see their GST/HST input tax credits reduced and they might need to file an additional information return (https://www.canada.ca/content/dam/craarc/formspubs/pbg/gst111/gst111-18e.pdf) each year, increasing their compliance burden.
In our submission, we recommend that when a VPI is used as a form of money, it should be treated as money and not as a financial instrument for GST/HST.
GST/HST implications for virtual currencies that don’t qualify as VPIs
There is the risk that existing and new forms of virtual currencies will not fit the VPI definition and thus attract GST/HST. Many of these virtual currencies function as money, and, if they are not included in the VPI definition, the concerns discussed above will continue.
New cryptocurrencies with unique attributes are entering the marketplace at a rapid pace (e.g., Facebook Libra), so we recommend that Finance Canada clarify the treatment of non-VPI cryptocurrencies and also allow for the ability to prescribe additional VPI as new virtual currencies emerge.
The proposals don’t tackle the GST/HST treatment of cryptocurrency mining
As cryptocurrency transactions have increased, so have cryptocurrency mining services — where the “miner” verifies the transaction and updates the blockchain ledger accordingly. Finance Canada’s proposals do not address these services and related ITC recoveries, so it’s still uncertain how GST/HST applies to these services.
CPA Canada believes it’s important for Canada to develop specific legislation on cryptocurrency mining. Finance Canada should continue to consult with key stakeholders in this industry to better understand their processes and how their business operates.
CPA Canada welcomes the government’s efforts to address the taxation of this rapidly growing economic activity. We look forward to continuing to offer input on how to ensure Canada’s tax system keeps pace as virtual currencies evolve.
KEEP THE CONVERSATION GOING
What additional issues should Finance Canada and the CRA consider regarding the income tax and GST/HST treatment of cryptocurrencies, including VPIs and mining activities? Post a comment below.
CPA Canada’s Tax Blog is designed to create an exchange of ideas on tax policy and practice issues, and their impact on those who practice tax. Your comments can provide helpful input into the public interest advocacy positions developed by CPA Canada.
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