Tax Insights: Proposals for cryptocurrencies to qualify as financial instruments for GST/HST purposes

May 28, 2019

Issue 2019-23

In brief

On May 17, 2019, the Department of Finance (Finance) released draft legislative proposals that will impact those who transact with cryptocurrency. The proposals will add cryptocurrencies (such as Bitcoin) to the definition of “financial instrument” for purposes of the Goods and Services Tax/Harmonized Sales Tax (GST/HST). As a result, supplies of cryptocurrency, defined as a “virtual payment instrument” in the GST/HST legislation will be exempt or zero-rated. The proposals do not address considerations specific to miners of cryptocurrency.

If enacted, these proposals will be effective May 18, 2019. Comments on the proposals must be submitted to Finance by June 17, 2019.

In detail

The proposed rules

The definition of "financial instrument" in subsection 123(1) of the Excise Tax Act (ETA), which is relevant for the definition of "financial service" in subsection 123(1) of the ETA, will be amended to add the term “virtual payment instrument” as new paragraph (f.1). Therefore, a "virtual payment instrument" will be considered a financial instrument for GST/HST purposes.

The term “virtual payment instrument” will be defined as follows:

“virtual payment instrument” means 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

As a result, the following will qualify as a financial service under the ETA:

the sale of a virtual payment instrument on an exchange
the use of such an instrument as a method of payment, and
any similar supply

Financial services are not taxable, as they are generally exempt under the ETA.

Note that a virtual payment instrument is defined to exclude digital gift cards and similar items, along with property that is primarily for use within gaming platforms, affinity/rewards programs and other similar platforms or programs. The primary or intended use of virtual currencies that have elements of this nature, will need to be evaluated to determine whether the definition applies to the particular virtual currency. Generally, the exclusions deal with rights that may only be exchanged for limited purposes.

PwC observations

The Canada Revenue Agency’s (CRA’s) current position regarding the characterization of a cryptocurrency and the GST/HST impact of the use or supply of a cryptocurrency is uncertain. This raised the concern that a cryptocurrency may not qualify as money or a financial instrument. Specifically, if a cryptocurrency was considered to be some other intangible personal property, the supply or use of the cryptocurrency would be taxable. This would result in a potential requirement to charge GST/HST each time a cryptocurrency is sold, traded, transferred, or used as a method of payment, with limited zero-rating available. The proposed rules clarify the status of a cryptocurrency and eliminate the risk of GST/HST applying on each supply or use of a cryptocurrency.

The characterization of a “virtual payment instrument” as a “financial instrument” could impact certain entities that deal with cryptocurrencies, by deeming the entity to be a financial institution, depending on the specific fact pattern and how the proposed and existing rules will be interpreted in respect of transactions with cryptocurrencies. A person whose principal business is a trader, dealer, broker or salesperson of virtual currency may become a listed financial institution. As well, a person may be deemed to be a financial institution if, in the previous year, it derived in excess of $10 million and 10% of its revenue from interest, dividends and a fee or charge for a financial service. An entity that is deemed to be a financial institution for GST/HST purposes, must follow the rules that apply to financial institutions, which may result in changes to input tax credit (ITC) eligibility, additional apportionment and annual reporting requirements, among other changes.

The takeaway

If the legislative proposals are enacted, they will clarify and confirm that users and suppliers of virtual currencies will not be required to collect GST/HST when entering into transactions that involve such currencies. However, a number of issues still need to be addressed, such as the nature of mining activities, financial institution status and ITC entitlement. It also remains to be determined how the CRA will treat transactions entered into before May 18, 2019.

Persons who mine, trade, or use cryptocurrencies should review the impact of these proposed new rules. They should:

determine the status of their supplies of cryptocurrencies and supplies relating to cryptocurrencies, both before and after the change
review if they might qualify (now or in the future) as a “financial institution” (as defined in section 149 of the ETA)
review the related impact on their entitlement to claim ITCs on transaction and operational (including mining) costs
consider if there are additional filing requirements
assess the impact on the existing structure of their operations