Background Information on Bill C-30
On June 29, 2021, Bill C-30, Budget Implementation Act, 2021, No.1, received royal assent. This bill contains amendments to the Excise Tax Act (ETA) that has significant implications to the GST/HST of cryptocurrency transactions. In this article, we will discuss the ramifications of the amendments that deal with the GST/HST treatment of cryptocurrency transactions.
How GST/HST Works in Canada – The Mechanics of GST/HST in Canada
The ETA states that GST/HST must be imposed on every recipient of a taxable supply (purchase) made in Canada. Although GST/HST is theoretically levied on the recipient of the tax supply (the purchaser), the ETA is structured so that the supplier of the tax supply (the vendor) bears the obligation to collect and remit the sales tax. The CRA’s administrative policy is that if there is outstanding GST/HST, the CRA will generally pursue the supplier instead of the recipient.
Then, what is a taxable supply? The ETA defines that a taxable supply is a provision of property or a service in any manner that is made in the course of a commercial activity. A commercial activity is defined broadly to include business activities and any activity that is an adventure or concern in the nature of trade. (An adventure or concern in the nature of trade is a transaction that was performed by a taxpayer with an intention to earn profit. In other words, if a taxpayer purchases an asset such as, for example, a commodity or a real property, with an intention to earn profit and then sells it, then the transaction will generally be an adventure or concern in the nature of trade. The courts have come up with a number of factors to determine whether or not a transaction is an adventure in the nature of a trade.) The ETA, however, provides some exemptions. If a particular commercial activity constitutes an exempt supply, then it will not be a taxable supply. In other words, if a taxpayer performs a commercial activity that constitutes an exempt supply, then the taxpayer will not be required to collect and remit any GST/HST from the purchasers.
GST/HST and Financial Services and Financial Instruments
One of the exempt supplies set out in the ETA is financial services. Financial service is defined in the ETA to include transactions for the purchase or sale of financial instruments and the use of financial instruments as a method of payment. Therefore, transactions relating to purchase or sale of financial instruments would be exempt from any GST/HST.
As described earlier, the ETA was amended through the enactment of Bill C-30 and the amendment included a new addition under the definition of financial instruments: virtual payment instruments. In other words, the ETA now includes virtual payment instruments as part of the definition of financial instruments. This amendment has huge implications to the GST/HST treatment of cryptocurrencies because some of them will be included in the definition of virtual payment instruments. A virtual payment instrument is defined as the following:
…property that is a digital representation of value, that functions as a medium of exchange and that only exists at a digital address of a publicly distributed ledger, other than property that
(a) confers a right, whether immediate or future and whether absolute or contingent, to be exchanged or redeemed for money or specific property or services or to be converted into money or specific property or services,
(b) is primarily for use within, or as part of, a gaming platform, an affinity or rewards program or a similar platform or program, or
(c) is prescribed property;
Accordingly, generally speaking, as long an asset is a digital representation of value that exists only in a digital address at a publicly distributed ledger, the asset will be a virtual payment instrument. Many cryptocurrencies that are frequently traded in the market, such as Bitcoin, Ethereum, and Cardano, will qualify for this definition.
GST/HST Implications of a New Addition Under the Definition of Financial Instruments: Virtual Payment Instruments:
As a result of this new inclusion in the definition of financial instruments, the ETA’s exempt-supply regime for financial services indicates that a cryptocurrency-trading business does not attract GST/HST liability. Depending on what type of cryptocurrency is being traded, one’s cryptocurrency trading activities could constitute an exempt supply because now, certain cryptocurrencies will meet the ETA’s definition of financial instrument by virtue of the newly added term – virtual payment instrument.
Pro Tip: Many Cryptocurrencies Will Be GST/HST Exempt
Many cryptocurrencies will be exempt from GST/HST. If a cryptocurrency relies on the blockchain technology, then it will likely fall under the definition of a virtual payment instrument. On the other hand, if the cryptocurrency confers a right to be exchanged for money, property or services, or if it is to be primarily used in a gaming or a rewards platform, then it will not fall under the definition of a virtual payment instrument. For help with determining whether GST/HST applies to your cryptocurrency transactions, please contact our experienced Canadian tax lawyers.