Aug 16th, 2023
Feb 19th, 2019
By Alexandre Dufresne
This article originally appeared on The Lawyer’s Daily website published by LexisNexis Canada Inc. on February 19, 2019.
When bitcoin peaked at almost US$20,000 in late 2017 and cryptocurrencies came to the forefront of global news, much speculation and consideration was given to viability, growth and the future of cryptocurrencies. While regulators were concerned with protecting investors, we focused on understanding digital currencies to properly advise our clients.
From a tax perspective, one of the main concerns involves tax on the disposition of cryptocurrencies. For instance, let’s assume that a Canadian resident acquired a stock for $2,000 in 2017 and subsequently sold it for $20,000.
In such a case, it is clear the transactions would create a gain of $18,000, and the question is simply whether the gain is on account of capital (50 per cent taxable) or on account of income (100 per cent taxable). If this example is extended to the sale of a cryptocurrency, then the same logic should stand. Simple enough? Not so fast.
Although this seems logical, the Canada Revenue Agency’s (CRA) position with regards to the taxable nature of cryptocurrencies for purposes of GST/QST/HST complicates the matter substantially. The tax authorities have taken the position that the sale or purchase of a cryptocurrency constitutes a barter transaction, which is a taxable supply subject to GST/QST/HST. In so doing, the tax authorities created a situation where, on the one hand, it seems clear what the investment was and how it should be taxed for income tax purposes, but on the other, it raises the question as to whether the investor is required to collect and remit sales tax on such a transaction?
Taking the above example, upon purchasing bitcoins in 2017 for $2,000, that individual may have had to pay sales tax on the purchase at the applicable rate. Conversely, the vendor, if subject to sales tax, may have been required to remit tax on the sale. Subsequently, upon disposing the bitcoins for $20,000, the vendor may have also had to collect and remit sales tax to the tax authorities.
The position of the tax authorities is problematic for numerous reasons. Firstly, when making a taxable supply to a non-resident that is not registered for GST/QST/HST, the supplier is not required to collect sales tax. In the context of a typical bitcoin transfer on a cryptocurrency exchange, it is almost impossible to verify the identity of the party with whom one is transacting, meaning that it is impossible to ascertain his or her country of residence, or whether a supplier is a small supplier (and thus not required to collect and remit sales tax).
Furthermore, this position places Canadian residents who are investing in cryptocurrencies in a situation where they can no longer be competitive with non-residents. Either they will need to remit the applicable sales tax on the net proceeds (in the above example, on the $20,000), or they will need to collect the tax on the net proceeds. In both cases, either the proceeds would be inferior to market price, or the Canadian would need to charge a 15 per cent premium to the buyer.
From a legislative standpoint, the Excise Tax Act could be amended so as to include cryptocurrencies in the definition of “financial instrument” in s. 123. Accordingly, most transactions involving cryptocurrencies would be exempt supplies and therefore not subject to GST/QST/HST.
This leads to a broader discussion as to whether bitcoin is a currency, security, commodity or asset.
As usual, laws do not adapt quickly to new technologies and phenomena, and bitcoin is sure to have (or “halve” for those in the know) many more ups and downs before we obtain clarity of this topic.
Alexandre Dufresne is a lawyer with Spiegel Sohmer. His practice in tax includes tax planning, cryptocurrency and tax litigation. Jean-Philippe Côté is a member of the firm’s taxation law group. His practice primarily focuses on corporate reorganizations and tax planning, along with assisting clients with commercial mandates.