Tax Law Analysis: Recent CRA guideline regarding cryptocurrency
Tax laywer and accountant David J. Rotfleisch on how the CRA sees cryptocurrencies
Introduction: What is Cryptocurrency in the Tax Law Context
The rise of cryptocurrency (e.g: Bitcoin, Ethereum, Litecoin), both as an investment vehicle as well as a medium of exchange, presents challenges for participants in the cryptocurrency market. While cryptocurrency can come in different types such as dApps, Privacy Coins, and Supply Chain Coins, they tend to give rise to the same kind of tax issues in the eyes of the Canada Revenue Agency (CRA). It is important for taxpayers who hold cryptocurrency to understand how the current state of tax law would apply to cryptocurrency as well as for CRA's position on cryptocurrency. The recent CRA guideline on cryptocurrency, Guide for cryptocurrency users and tax professionals, provides CRA's positions on various issues surrounding cryptocurrency.
David J. Rotfleisch, CPA, JD, is the founding tax lawyer of Rotfleisch & Samulovitch P.C.
CRA Guideline on Cryptocurrency Income: Business or Capital Gain?
The CRA's guideline lists several factors in determining whether income from a disposition of a cryptocurrency is considered business income or a capital gain for Canadian Tax purposes:
- you carry on the activity for commercial reasons and in a commercially viable way
- you undertake activities in a businesslike manner, which might include preparing a business plan and acquiring capital assets or inventory
- you promote a product or service
- you show that you intend to make a profit, even if you are unlikely to do so in the short term
CRA Guideline on Cryptocurrency: Currency vs. Commodity
The most recent guideline also reiterated CRA's position from 2013 and 2014 that cryptocurrency is a commodity and not a currency for Canadian tax purposes. This means that although many vendors accept various cryptocurrencies as payment, the purchases of goods and services using cryptocurrency are treated as barter transactions. The vendor in such a transaction would pay income tax on the fair market value of the goods or services rendered in exchange for the cryptocurrency. The CRA may look to the fair market value of the cryptocurrency to decide on the fair market value of the goods or services rendered by the vendor. However, it is important to remember that the value of the cryptocurrency can coincide with the fair market value of the goods or services exchanged for it, but it is not determinative. This could be crucially important when it comes to HST/GST issues that could arise from cryptocurrency transactions that will be discussed later
Cryptocurrency: Income vs. Capital Gain
While these factors are generally relevant in determining whether the taxpayer is carrying out business or not, the case law on income versus capital gain goes into substantially more detail in articulating a host of factors in determining whether dispositions from a series of transactions is capital gains or business income:
- The nature of the property sold: If a property does not yield to its owner an income or personal enjoyment simply by virtue of its ownership. Then the disposition of that property is more likely to be characterized as income rather than capital gains.
- The length of the period of ownership: Generally, property meant to be dealt in is realized within a short time after acquisition. This would result in the characterization of income rather than capital gains. Nevertheless, there are many exceptions to this general rule.
- The frequency or number of other similar transactions by the taxpayer: If the same sort of property has been sold in succession over a period of years or there are several sales at about the same date, a presumption arises that there has been dealing in respect of the property.
- Work expended on or in connection with the property realized: If some effort is put into bringing the property into a more marketable condition, then such an effort could point to income rather than capital gains
- The circumstances that were responsible for the sale of the property: There may exist some explanation, such as a sudden emergency or an opportunity calling for ready money, that could result in the dealing being characterized as capital gains rather than income.
- Motive: The intention at the time of acquiring an asset as inferred from surrounding circumstances and direct evidence is an important element in determining whether a gain is of a capital or income nature.
The Issue with the CRA's Characterization of Cryptocurrency as a Commodity
As mentioned above, one of the most important implications in the characterization of cryptocurrency as a commodity rather than currency is the obligation to remit GST/HST when trading cryptocurrency for other cryptocurrencies, for government-issued money, or for goods and services.
GST/HST is imposed on every recipient of a taxable supply made in Canada. While the tax is levied on the recipient of a taxable supply, the person who makes the supply bears the obligation actually to collect the tax. Moreover, per its administrative policy, the CRA will generally pursue not the recipient but the supplier for outstanding GST/HST. A taxable supply is the provision of property or a service in any manner that is made in the course of commercial activities. A commercial activity" includes both "a business" and "an adventure or concern in the nature of trade," but it excludes such activities if they constitute an "exempt supply."
A Supply of financial service is exempt from GST/HST. A "financial service" includes "the exchange, payment, issue, receipt or transfer of money." The ETA's definition of money appears at subsection 123(1):
- Money includes any currency, cheque, promissory note, letter of credit, draft, traveler's cheque, bill of exchange, postal note, money order, postal remittance, and other similar instruments, whether Canadian or foreign, but does not include collector's money
There are cases in Canadian case law supporting the position that cryptocurrency is money. For example, the Supreme Court of Canada stated in Reference re Alberta Statutes—The Bank Taxation Act
- Money, as commonly understood, is not necessarily legal tender. Any medium which by practice fulfills the function of money and which everybody will accept in payment of a debt is money in the ordinary sense of the words even although it may not be legal tender
The ruling from the Supreme Court of Canada, coupled with ETA's rather broad definition of cryptocurrency, can likely support a position that cryptocurrency is to be characterized as money and therefore falls under exempt supplies under the ETA.
While a taxpayer may have good reasons to believe CRA guideline's characterization of cryptocurrencies as commodities is wrong, or as a transaction on income account instead of capital gains, it can nevertheless be expensive and time consuming to go through the objection and judicial review process against the CRA. It would be advantageous to retain an expert counsel as soon as the issue of reporting cryptocurrency income arises. Doing one's due diligence can often prevent further reassessments by the CRA past the three year normal reassessment period.
David J. Rotfleisch, CPA, CA, JD, is the founding tax lawyer of Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law firm. With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax litigation. Visit www.Taxpage.com and email David at firstname.lastname@example.org.