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Canadian Federal Department of Finance Proposes Changes to Canada’s Tax Regime for Virtual Currency

On May 17, 2019, the Department of Finance (the “Department“) released for public consultation a set of draft legislative proposals (the “Proposals“) which, if enacted, would amend the Excise Tax Act (Canada) (“ETA“) to treat virtual currency as a financial instrument for purposes of the Canadian Goods and Services Tax/Harmonized Sales Tax (“GST/HST“). The Chamber of Digital Commerce Canada filed a reply to the consultation applauding the initiative of the Department and asking the Department to: 

  1. Establish a specialized industry task force to ensure that all tax policy and legislation in Canada is reviewed holistically and can be applied in a manner that will not impede the growth and competitiveness of the emerging digital asset and virtual currency economy in Canada;
  2. Ensure definitions underpinning the tax regimes in Canada are clear, appropriately inclusive of the entire digital asset and digital currency ecosystem; and to,
  3. Ensure tax treatment of digital assets and digital currencies is consistent with provincial, national and international definitions being applied to virtual currency and digital assets.

The Proposal and Impact

The Department stated that the intent of the Proposals is to clarify that certain taxpayers who transact in virtual currency will not be required to charge and collect GST/HST on supplies of virtual currency despite present ambiguity in the ETA concerning virtual currency. The confusion comes from the lack of clarity around whether a virtual currency should be treated as property, a service or currency for GST/HST purposes.

The Canada Revenue Agency (the “CRA“) takes the position that virtual currency is a commodity and property for ETA purposes. If this position were maintained, the interpretation could give rise to anomalous GST/HST consequences for taxpayers who make supplies or transact in virtual currencies. For example, under the CRA’s current view, when a taxpayer acquires virtual currency, the taxpayer may be charged GST/HST by the person supplying the virtual currency.

Moreover, when a customer who is a GST/HST registrant pays a GST/HST registered merchant for a supply of goods or services using virtual currency as a method of payment, not only would the merchant be obliged to charge, collect, and remit GST/HST from the customer for the goods or services, but the customer might also be regarded as having made a taxable supply of the virtual currency to the merchant. As such, the customer may also be obliged to charge, collect, and remit GST/HST against the merchant.

The Proposals aim to address these issues by adding a new definition of “virtual payment instrument” to subsection 123(1) of the ETA and by amending the current definition of “financial instrument” to include virtual payment instruments. This change would make certain common transactions using virtual payment instruments exempt from tax under the ETA or zero-rated if provided to a non-resident, effectively lifting the GST/HST collection and remittance burden from most transactions involving virtual currency.

 

The Chamber’s Response

As part of the public consultation process concerning the Proposals, the Chamber prepared and filed a response (the “Response“) to the Department. The Response includes the following submissions.

1. The Department should establish an expert-led industry task force to facilitate collaborative dialogue to ensure that a holistic approach is taken to regulating virtual currency that will not impede the growth and competitiveness of the digital asset and virtual currency economy in Canada.

 

2. The Chamber supports the intent of the Proposals, which would alleviate the GST/HST tax treatment on virtual currency discussed above, but takes the position that:

·  the definition of “virtual payment instrument” is unduly narrow and would exclude certain virtual currency, such as stable coin, and certain digital asset tokens from this beneficial treatment given that the proposed definition presently carves out exchangeable, redeemable and convertible property;

·  given that the ETA defines “property” to be something other than “currency” the definition of “virtual payment instrument” is internally inconsistent as it requires a virtual currency to be “property” in order to qualify as a “virtual payment instrument” but also requires that the same virtual currency act as a medium of exchange, which is the conventional economic function associated with a currency;

·  the Proposals create uncertainty as to whether miners (and other taxpayers who supply virtual currency) will be able to claim input tax credits to offset GST/HST in respect of costs incurred to obtain and operate the infrastructure necessary to process transactions involving virtual payment instruments; and,

·  the Department needs to take into account definitional consistency and clarity between the ETA and the Income Tax Act (Canada) in order to ensure that the Proposals do not create unintended implications or further inconsistencies for income tax treatment and reporting requirements for virtual currencies.

 

3. The Chamber also highlighted certain present difficulties faced by Canadian taxpayers under the Income Tax Act (Canada), which the Department should address in order to alleviate the income tax burden associated with common transactions like buying a cup of coffee using virtual currencies.