The CRA’s Present Position on Crypto-Tax
The CRA’s Present Position on Crypto-Tax
Part 1 of the Smartblock Law "Crypto-Tax Primer" Blog Series
Chetan Phull · Feb 23, 2018
There is no directly binding authority, in the form of legislation or an advance tax ruling, regarding Canadian cryptocurrency taxation.
This blog post surveys the CRA’s position to date on these issues.
Crypto = Commodity
In Canada, there are currently three recognized functions of digital currency (also known as “cryptocurrency” or “virtual currency”):
- a form of money;
- a commodity; and
- a payments system.
(See: Standing Senate Committee on Banking, Trade and Commerce, “Digital Currency: You Can’t Flip This Coin!” [June 2015] [“Committee’s 2015 Report”] at 12.)
Notwithstanding the recognized use of digital currency as money, the CRA has stated that virtual currencies are not considered legal tender.
Rather, virtual currencies are treated as commodities and invoke the rules of barter transactions. (See: CRA Doc No. 2013-0514701I7 [Dec 23, 2013] [“2013 CRA letter”]; CRA’s 2015 fact sheet, “What you should know about digital currency” [“2015 Fact Sheet”]).
Crypto Income Tax Principles
Cryptocurrency transactions for goods or services will invoke the following income tax rules:
(a) Common denomination of value
- the taxpayer’s value received is pegged to CAD (CRA Doc No. IT-490 [Jul 5, 1982] [“Barter Rules”], para. 4; 2013 CRA letter; June 5, 2014 Proceedings of the Standing Senate Committee on Banking, Trade and Commerce [“2014 Committee Tax Proceeding”]);
- value quantification in CAD is a question of fact that depends on the available evidence (see 2014 Committee Tax Proceeding).
(b) Value quantification for arm’s length transactions
- the taxpayer’s received value is equal to or greater than the value of the supplied good or service (Barter Rules, para. 3);
- a taxpayer’s received value is the price that would normally be charged to a stranger for the supplied good or service (Barter Rules, para. 7);
- if the taxpayer’s received value can be ascertained, but the exchanged value cannot be ascertained, the transaction price is generally considered to be the received value (Barter Rules, para. 8).
(c) Value quantification for non-arm’s length transactions
- the taxpayer’s received value can be either: (a) the price that would normally be charged to a stranger for the supplied good or service; or (b) fair market value (Barter Rules, para. 7).
(d) Income vs. Capital vs. Inventory
- a taxpayer’s received value can be considered income or expense, capital acquisition or capital disposition, or inventory in the case of a business (Barter Rules, para. 4; CRA Doc No. 2014-052511E5 “Virtual Currencies (Bitcoins)” [March 28, 2014] [“2014 CRA letter”]);
- there are different tax consequences for each category of value received. The threshold question to determine the applicable category is whether the taxpayer transacts in a business versus personal capacity. (See 2014 Senate Committee Tax Proceeding);
- employee earnings for bartered goods or services on a regular basis are brought into the employee’s income (Barter Rules, para. 5);
- where an employee earns a salary or wages in the form of digital currency, the rules for employment income are engaged (see 2015 Fact Sheet; 2014 Senate Committee Tax Proceeding);
- if the transaction occurs in the taxpayer's personal capacity, the received value will likely be taxed as capital under the Income Tax Act (see 2014 Committee Tax Proceeding).
- in the context of gifts to a qualified donee, the gift’s fair market value in CAD is considered for the donor’s tax purposes. This rule applies irrespective of whether the gift is cryptocurrency, or property originally purchased with cryptocurrency by the donor. (See 2013 CRA letter);
- virtual currencies acquired as gifts (excluding employment fringe benefits) are not taxable in the hands of the donee (see 2014 CRA letter).
(f) Specified foreign property
- cryptocurrency can be “specified foreign property”, whether held personally or by a partnership, when “it is situated, deposited or held outside of Canada and not used or held exclusively in the course of carrying on an active business”. (See CRA Doc No. 2014-0561061E5, "Specified Foreign Property" [April 16, 2015] [“2015 CRA letter”]; Income Tax Act, s.233.3(1) “specified foreign property”);
- the practical consequence is that cryptocurrency existing as “specified foreign property” must be claimed via Form T1135 if the adjusted cost base is $100,000 or more (see Income Tax Act, ss.233.3(1) “reporting entity”, 248(1) “cost amount” (b); CRA, “Questions and answers about Form T1135” (Feb 23, 2016)).
Crypto GST-HST Principles
This rule also applies to parties transacting in cryptocurrency with a private business. The traded goods and/or services will be taxed GST-HST in CAD, on the basis of the above barter rules (see 2013 CRA letter).
Moreover, the taxpayer who receives cryptocurrency may also need to pay GST-HST, on the basis of the CRA’s view of cryptocurrency as a commodity (see, generally, 2014 Senate Committee Tax Proceeding).
It is possible that cryptocurrency is exempt from GST-HST. Cryptocurrency potentially falls within the broad definition of “money” in the Excise Tax Act, despite it not being recognized as legal tender by the CRA. If cryptocurrency is money, this triggers the definition of “financial services”, which is exempt from GST-HST (see Excise Tax Act, s.123(1), and Schedule V, Part VII).
This was alluded to in the 2014 Senate Committee Tax Proceeding:
Ms. [Eliza] Erskine: ... [F]rom the goods and services tax point of view, ... they are currently looking at whether digital currency is money, because that is a defined term for GST purposes. Also, the GST treatment may end up varying, depending on whether it is currency. A goods and services tax, which is a sales tax or a services tax, may — when you are exchanging cash for cash, it has different goods and services tax implications.
However, it is presently uncertain whether this potential exemption is effective.
Personal vs. Commercial Activity
“Personal” and “commercial” cryptocurrency activities carry different tax consequences, for both income tax and GST-HST issues.
Cryptocurrency activities will be considered commercial in nature if there is a subjective intention to profit, and evidence of business-like behaviour which supports that intention (see Stewart v. The Queen, 2002 SCC 46).
If the cryptocurrency is considered commercial property, the next question is whether it constitutes “inventory” versus “capital”.
All of these issues depend on the particular facts of the case. (See 2014 CRA letter, in which the tax liability of a Bitcoin miner was considered.)
Continue to Part 2: Crypto as Specified Foreign Property.
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