Canada Proposes New GST/HST Rules for Cryptocurrency Mining– Canadian Tax Guidance from a Canadian Tax Lawyer

Introduction – Draft Legislative Proposals Concerning GST/HST Treatment of Cryptocurrency Mining

Since 2019, Canada has steadily introduced new GST/HST rules aimed at cryptocurrency. In May 2019, for instance, Canada’s Department of Finance released draft legislation that rendered cryptocurrency trading an exempt supply of financial services. These proposals received royal assent—and therefore became law—on June 29, 2021. Canada’s Excise Tax Act now officially contains tax rules that define most cryptocurrency as a “virtual payment instrument,” the purchase, sale, or transfer of which is exempt from GST/HST.

In February 2022, Canada’s Department of Finance released draft legislation concerning the GST/HST treatment of cryptocurrency mining. These proposals have not yet taken effect. If the legislation is passed, these tax rules will retroactively come into force as of February 5, 2022.

After briefly reviewing Canada’s GST/HST system and discussing the nature of cryptocurrency mining, this article examines the proposed GST/HST rules for cryptocurrency mining. This article concludes by offering pro tax tips from our expert crypto tax lawyer in Toronto.

Canada’s GST/HST Regime: A Brief Introduction

Subsections 165(1) and (2) of Canada’s Excise Tax Act impose GST/HST on “every recipient of a taxable supply made in Canada.” A “taxable supply” captures most business transactions—in particular, it refers to a sale, transfer, barter, exchange, rent, or donation of a property or service if the transaction is done in the course of conducting business (see: subsection 123(1)).

Yet while GST/HST is levied on the recipient of the property or service (the purchaser), the person who makes the supply (the vendor) bears the obligation to actually collect and remit the tax (subsection 221(1)). To this end, the Excise Tax Act requires a person to register for and collect GST/HST if, in the course of conducting business, that person sells, transfers, barters, exchanges, rents, or donates a property or service in Canada.

Granted, the Excise Tax Act exempts various businesses from the obligation to collect GST/HST. For example, a taxpayer need not register nor collect GST/HST if its worldwide revenues didn’t exceed $30,000 during the last four calendar quarters combined (see: subsections 240(1), 148(1)).  The threshold is increased to $50,000 if the taxpayer is a public service body—i.e., a non-profit organization, a charity, a municipality, a school authority, a hospital authority, a public college, or a university.

A financial-services business is another example of a business that need not charge or collect GST/HST. The Excise Tax Act’s definition of a “financial service” captures various transactions involving a “financial instrument,” such as:

• The purchase or sale of a financial instrument;
• The use of a financial instrument as a method of payment;
• The lending or borrowing of a financial instrument;
• The issue, acceptance, or transfer of ownership of a financial instrument;
• The provision of a financial instrument; and
• The payment or receipt of money as dividends, interest, principal, benefits, or any similar payment or receipt of money in respect of a financial instrument.

In June 2021, the definition of a “financial instrument” was officially amended to include a “virtual payment instrument.” A virtual payment instrument refers to “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.” So, fungible cryptocurrency—like Bitcoin, Ethereum, or Chainlink—falls squarely within the definition of a virtual payment instrument. As such, cryptocurrency trading or the use of cryptocurrency as a method of payment are GST/HST exempt because they each qualify as a “financial service” under the Excise Tax Act.

(Interestingly, non-fungible tokens, or NFTs, don’t clearly fall under the definition of a virtual payment instrument. NFT artwork, for instance, often consists of a digital representation of a piece of art or music, not a “digital representation of value.” As such, it arguably doesn’t “function as a medium of exchange.” So, although a cryptocurrency-trading business qualifies as a GST/HST-exempt supply of financial services, commercial NFT sales remain a taxable supply under Canada’s Excise Tax Act.)

Cryptocurrency Mining: Verifying Cryptocurrency Transactions on a Proof-of-Work Blockchain

The various cryptocurrency platforms—such as Bitcoin (BTC), Ethereum (ETH), Tether (USDT), Solana (SOL), and Ripple (XRP)—all depend upon a decentralized-ledger technology known as a “blockchain.” A blockchain is a specific type of data structure. It stores and transmits data in packages called “blocks,” which are connected to each other in a digital “chain.” Blockchain technology allows transactions and data to be recorded and shared in a synchronized and decentralized way across network participants. The result is that transactions between network participants can be processed without involving an intermediary or central party.

Blockchain use consensus mechanisms to validate new cryptocurrency transactions. In blockchain protocols that rely on the proof-of-work validation mechanism (e.g., the Bitcoin network), the verification process is known as “mining.”

In this system, the validator—that is, the cryptocurrency miner—devotes computing power toward solving mathematical problems. By doing so, the miner verifies new cryptocurrency transactions and shares the results with other network participants by recording the verified transaction as a new block on the blockchain.

The mathematical problems in proof-of-work systems aim to make validation prohibitively expensive in terms of the computing power and electricity required to solve these problems. As a result, a malicious user can falsify the blockchain only if the attacker incurs a significant cost. As a result, from an economic standpoint, a malicious user will generally find it unprofitable to attempt to falsify a blockchain transaction.

Cryptocurrency mining occurs on a competitive basis. A reward is credited to the miner who validates the transaction first. The mining reward usually consists of new tokens in the native cryptocurrency or transaction fees (or both). (Another disincentive for malicious users is that miners lose their mining rewards if they repeatedly attempt to validate blocks that the remaining network considers invalid.)

For information about cryptocurrency mining and about the resulting Canadian income-tax implications, see our article on cryptocurrency mining.

Proposed GST/HST Tax Rules for Cryptocurrency Mining: 188.2 of the Excise Tax Act

In February 2022, Canada’s Department of Finance proposed the addition of section 188.2 to address the GST/HST treatment of cryptocurrency mining. These proposals have not yet taken effect. If the legislation is passed, these tax rules will retroactively come into force as of February 5, 2022.

In short: Section 188.2 deems the provision of “mining activity” to not be a supply. Cryptocurrency miners therefore need not remit GST/HST on the mining rewards or other remuneration that they receive for their mining activities. In addition, if a cryptocurrency miner acquires, consumes, or uses any property or service in relation to cryptocurrency mining, section 188.2 deems the cryptocurrency miner to not have used that property or service in the course of a commercial activity. This denies cryptocurrency miners from claiming input tax credits (ITCs) for their cryptocurrency-mining operations.

Hence, section 188.2 effectively treats cryptocurrency mining as an exempt supply: the cryptocurrency miner need not collect and remit GST/HST on the miner’s compensation from mining, but the crypto miner also cannot claim input tax credits in Canada for the GST/HST incurred by the miner when running the cryptocurrency-mining operation.

But the proposed crypto-mining tax rules contain an exception: They don’t apply when a person mines cryptocurrency for another person whose identity is known to the first person and who doesn’t qualify as a “mining group operator,” which basically refers to a person who coordinates the cryptocurrency-mining activity of a group (i.e., the coordinator of a mining pool). In these limited circumstances—when a person mines cryptocurrency for a known person who doesn’t coordinate a mining pool—the cryptocurrency miner may need to collect GST/HST and may qualify for ITCs.

Pro Tax Tips: Tax-Law Analysis of Proper Cryptocurrency Tax Reporting

The proposed cryptocurrency-mining rules don’t mean that Canadians who deal in cryptocurrency, non-fungible tokens, and other blockchain-based assets need not worry about GST/HST. First, these proposed tax rules don’t capture the creation and commercial sale of non-fungible tokens. So, a Canadian NFT artist or NFT content creator earning $30,000 or more in gross revenue must register for a GST/HST number with the CRA, charge GST/HST on NFTs sold in Canada, collect that GST/HST, and pay it to the Canada Revenue Agency. The proposed GST/HST-mining exemption also doesn’t apply when a person provides cryptocurrency-mining services to a known recipient. And, of course, the proposed GST/HST-mining exemption has no bearing on the income-tax consequences of cryptocurrency trading and cryptocurrency mining—both of which are fully taxable and must be reported for income-tax purposes.

Therefore, Canadian taxpayers who trade, invest in, mine, or stake cryptocurrency, NFTs, or other blockchain-based assets will benefit from a confidential and privileged tax-law memorandum examining their GST/HST obligations under Canada’s Excise Tax Act and their income-tax obligations under Canada’s Income Tax Act. The distinctive features of various blockchain-validation systems means that Canadian taxpayers who’ve mined or staked cryptocurrency will require competent and expert Canadian tax guidance. Our experienced Certified Specialist in Taxation Canadian crypto-tax lawyer has assisted numerous clients with correctly reporting their cryptocurrency transactions and other blockchain-related arrangements.

The Canada Revenue Agency cannot compel the production of a tax-law memorandum protected by solicitor-client privilege. Thus, solicitor-client privilege bars the CRA from learning about the confidential legal advice that you receive from our tax lawyers. But your communications with an accountant remain unprotected because no such privilege exists for accountants. For that reason, if you seek tax advice but want to keep that information away from the Canada Revenue Agency, you should first approach our Canadian tax lawyers. If you also require the assistance of an accountant, we can take measures to extend our solicitor-client privilege to communications involving the accountant.

Frequently Asked Questions

Question: I hear that Canada has proposed new GST/HST rules for cryptocurrency mining. What is cryptocurrency mining? And what are the GST/HST implications of mining if the proposed GST/HST rules take effect?

Answer: Cryptocurrency mining refers to the transaction-validation process in blockchain protocols that rely on a proof-of-work validation mechanism. The cryptocurrency miner devotes computing power toward solving mathematical problems. By doing so, the miner verifies new cryptocurrency transactions and shares the results with other network participants by recording the verified transaction as a new block on the blockchain. A reward is credited to the miner who validates the transaction first. The mining reward usually consists of new tokens in the native cryptocurrency or transaction fees (or both).

Canada’s Department of Finance proposed the addition of section 188.2 to address the GST/HST treatment of cryptocurrency mining. Section 188.2 deems the provision of most “mining activity” to not be a supply for GST/HST purposes. Cryptocurrency miners therefore need not remit GST/HST on the mining rewards or other remuneration that they receive for their mining activities. In addition, if a cryptocurrency miner acquires, consumes, or uses any property or service in relation to cryptocurrency mining, section 188.2 deems the cryptocurrency miner to not have used that property or service in the course of a commercial activity. This denies cryptocurrency miners from claiming input tax credits (ITCs) for their cryptocurrency-mining operations.

In other words, section 188.2 effectively treats cryptocurrency mining as an exempt supply: the cryptocurrency miner need not collect and remit GST/HST on the miner’s compensation from mining, but the crypto miner also cannot claim input tax credits for the GST/HST incurred by the miner when running the cryptocurrency-mining operation.

But the proposed GST/HST rules contain an exception when a person provides cryptocurrency-mining services to a known recipient. In those cases, the cryptocurrency miner may need to collect GST/HST and may qualify for ITCs.

Question: Over the past few years, I made a lot of money by mining and trading various cryptocurrencies. But I don’t understand how this bears upon my Canadian income-tax obligations or my Canadian GST/HST obligations. What can I do?

Answer: Canadian taxpayers who trade, invest in, mine, or stake cryptocurrency, NFTs, or other blockchain-based assets have thereby engaged in taxable transactions which trigger various tax-reporting obligations. These taxpayers will therefore benefit from a confidential and privileged tax-law memorandum examining their GST/HST obligations under Canada’s Excise Tax Act and their income-tax obligations under Canada’s Income Tax Act. The distinctive features of various blockchain-validation systems means that Canadian taxpayers who’ve mined or staked cryptocurrency will require competent and expert Canadian tax guidance. Our experienced Certified Specialist in Taxation Canadian crypto-tax lawyer has assisted numerous clients with correctly reporting their cryptocurrency transactions and other blockchain-related arrangements.

Question: I want to ensure that the Canada Revenue Agency cannot learn about the tax advice that I receive in relation to my cryptocurrency, non-fungible tokens, and other blockchain-based assets. How can I go about doing that?

Answer: Solicitor-client privilege bars the Canada Revenue Agency from learning about the confidential legal advice that you receive from our knowledgeable Canadian tax lawyers. The Canada Revenue Agency cannot, for instance, compel the production of a tax-law memorandum prepared for you by your Canadian tax lawyer. Your communications with an accountant, however, remain unprotected because no such privilege exists for accountants. For that reason, if you seek tax advice but want to keep that information away from the Canada Revenue Agency, you should first approach our Canadian tax lawyers. If you also require the assistance of an accountant, we can take measures to extend our solicitor-client privilege to communications involving the accountant.