Canada and Cryptocurrency

Canada Cryptocurrency Laws
Regulation of Digital Currencies: Cryptocurrency, Bitcoins, Blockchain Technology

A Centralized Approach to a Decentralized Currency.

As cryptocurrency has trended towards normalization in society, the Canadian government attempted to mitigate the inevitable waves of legal issues that would follow. In 2014, Canada became the first nation to establish laws addressing cryptocurrency by amending the Proceeds of Crime and Terrorist Financing Act (PCA) to cover all persons or entities dealing in cryptocurrencies.[1] To the dismay of the blockchain community and cryptocurrency enthusiasts, the Canadian government’s attempt to classify and embrace cryptocurrency conveyed their attitude toward the new technology: cryptocurrency is a threat with an unspecified role in our society.

This prejudiced stance is illuminated by Canada’s vague classification and subsequent treatment of cryptocurrency. Unlike Germany and the United Kingdom, who have issued regulations to establish cryptocurrency as a payment method similar to a traditional fiat currency,

the Canadian government was not so generous with their classification.[2] As defined in Section 8 of Canada’s Currency Act, only bank notes issued and coins minted by the Bank of Canada are given the status of legal tender.[3] Because cryptocurrencies are not minted by the Bank of Canada, cryptocurrencies are not legal tender, but are considered commodities by the Canada Revenue Agency (CRA).[4]

Regulatory Issues of Cryptocurrency

The regulatory issues affecting crypto users and businesses stem from the nature of cryptocurrency’s status as a commodity and subjection to the PCA. To understand the legal issues and ramifications of the PCA, one must consider Canada’s financial regulatory structure and procedures, as both local and federal regulations affect the treatment of cryptocurrency in Canada. Unlike the Securities and Exchange Commission in the United States, Canada does not have a federal securities regulator.[5] Rather, the authority to regulate securities, property, and other rights is delegated to each province.[6]  The regulatory asymmetry among the provinces and legal status of cryptocurrency poses issues for crypto businesses and users, creating an uphill battle for the civil user or business wishing to partake in crypto services. Users must be dutiful in their operations to abide by the labyrinth of unclear regulations on cryptocurrencies.

PCA & FINTRAC

Unfortunately, Canada’s attempt to answer questions regarding the treatment of cryptocurrency with the enactment of PCA left Canadians with more questions than answers. The PCA classifies persons or entities “dealing in virtual currencies”, an undefined term in the PCA, as money service businesses (MSB).[7] The purpose of this classification was to ensure that cryptocurrency users and businesses abide by the government’s Anti-Money Laundering laws (AML). Not only did the act reveal the government’s anxiety for embracing the new technology, but it also attempted to synchronize provincial regulation and federal interests. The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), a federal agency akin to FinCEN in the United States, is an attempt to correct the asymmetry. FINTRAC assists in the prevention, detection, and enforcement of illegal financial activities and received authority from the 2014 PCA amendment to bring cryptocurrency in its scope, subjecting cryptocurrency users and businesses to FINTRAC’s oversight and to PCA’s regulations.[8]

As cryptocurrency is geographically fluid, a Canadian user can find themselves subjected to various jurisdictions and agencies, depending on the location and activities of the user. At a minimum, any transaction utilizing cryptocurrency invokes the CRA’s policy on barter transactions because cryptocurrencies are a commodity.[9] The recipient of cryptocurrency from a transaction for the selling of goods or services must report the value in Canadian dollars on their income statement, either as business or capital gain.[10] The Canadian Goods and Services Tax/Harmonized Sales Tax (GST/HST) also applies to these transactions.[11] One who acquires crypto and does not engage in trading activity must report any gain or loss from the disposition as on account of capital.[12] However, a recreational cryptocurrency miner who does not mine for profit is exempt from taxation.[13] Cryptocurrency traders and investors must report their gains or losses as being on account of income.[14] These traders may be required to claim GST/HST in addition to any provincial taxes and will likely be subjected to PCA regulations as well. However, the CRA does not have a clear stance on the applicability of GST/HST to crypto traders.[15] Canadian traders should have a clear plan and be advised on their potential tax obligations should they pursue trading or investing in cryptocurrencies.

Regulations increase in complexity and rigor depending on the activities of a crypto holder. A Canadian business or trader using cryptocurrency in a “business-like manner”, determined by: frequency of transactions; duration of ownership; knowledge of matter; relationship to the user’s business; and time spent financing and advertising, may be considered a MSB and subjected to the PCA.[16] All MSBs must register with FINTRAC and abide by the PCA’s AML and compliance requirements. These requirements include maintaining records, reporting suspicious or terrorist related activity, property transactions, and evaluations of customers to determine if they are politically exposed persons.[17]Cryptocurrency MSBs that receive $10,000 or more in a single transaction are required to report to FINTRAC, unless the funds are received by a financial institution.[18] Any request from a person to send an electronic funds transfer of $10,000 or more in a single transaction, or if the MSB receives an international electronic funds transfer of $10,000 or more in a single transaction must also be reported.[19] Canadian banks are not allowed to open accounts with MSBs that are not registered with FINTRAC.[20]

Another layer of the regulation labyrinth is added at the provincial level. For instance, cryptocurrency ATMs and exchanges are now included in Québec’s Money-Services Business Act.[21] This means that a cryptocurrency ATM operator or MSB needs to register with FINTRAC, abide by the PCA, receive a license from Québec’s https://freemanlaw.com/wp-admin/post.php?post=5050&action=edit&classic-editor#Autorité des Marchés Financiers (AMF), and comply with AMF regulations to operate crypto businesses in Québec.

 In addition to domestic activity, any cryptocurrency exchange or business that targets Canadian citizens or entities, regardless of their location, must register with FINTRAC.[22] Canadians who hold crypto in offshore accounts, funds, or invest in entities that deal in crypto are still subjected to Canadian regulations and tax.[23] If the offshore entity does not make regular distributions, then the holder’s securities are considered annual income, which must be reported.[24]

The Future of Cryptocurrency in Canada: Distributed Ledger Technology, Initial Coin Offerings, and Blockchain ETFs

Although Canadians are restricted in their use of cryptocurrency and blockchain technology, the Canadian government has attempted to embrace the technology, although cautiously. In 2015, the Bank of Canada initiated Project Jasper, an experiment for the bank to heighten their understanding of blockchain technology.[25] In Phase One, the bank utilized a distributed ledger (DLT) to facilitate high-value interbank payments in hopes of achieving greater efficiency for their payment and settlement operations.[26] The bank has completed two additional phases, applying DLT to other transactions, and is currently in Phase Four to experiment with the use of DLT to cross-border payments.[27] The willingness of the government to integrate DLT into their core functions may aid the future regulations of blockchain and cryptocurrency technology as the government finds the technology beneficial.

The Canadian government has addressed cryptocurrency in their markets without completely denying the economic opportunities cryptocurrencies offer. Initial Coin Offerings (ICO) are permitted but also subjected to existing and developing regulations. Existing Canadian securities laws are applied to cryptocurrencies to give ICOs a degree of legal recognition as a security.[28] To determine if an ICO constitutes a distribution of securities, the Investment Contract Test is applied to transactions involving a blockchain or cryptocurrency that resembles traditional securities. [29] If an ICO is found to distribute securities, then Canadian securities law requirements apply, requiring registration and filing a prospectus. However, the Canadian Security Administrator (CSA) has warned that an ICO may be found to involve the sale of securities if the ICO triggers the policy objectives of securities legislation, even if the ICO does not clearly fall into the definition of ‘security’.[30] The CSA has also emphasized their ‘substance-over-form’ analysis of ICO’s to aid in their evaluation.[31] Adding to the provincial asymmetry, the Ontario Securities Commission has warned that ICOs may trigger their province’s securities law requirements even if the coins do not represent shares or equity in an entity.[32]

Resale of tokens from an ICO on cryptocurrency exchanges or secondary market is also regulated. Resellers or issuers of tokens from an ICO considered a security need to register as a dealer, comply with registration requirements, or ensure they are exempt. Fines and incarceration are potential punishments for those failing to comply.[33] An issuer of an ICO should be advised of the multiple regulations their tokens and platform may be subjected to in order to ensure compliance.

Other advancements by the Canadian government has widened the acceptance and legitimacy of blockchain and cryptocurrency technology. In 2018, the Ontario Securities Commission approved Canada’s first blockchain ETF, which is currently trading on the Toronto Stock Exchange, with more blockchain ETFs pending approval.[34] Another concrete step taken to accommodate cryptocurrency in Canada has been the 2019 proposal by the Canadian Department of Finance to simplify federal sales tax on certain transactions involving virtual payment instruments (VPI). Transactions involving VPI, applicable to many cryptocurrency transactions and exchanges, would be exempt from federal sales tax as a financial instrument.[35]

CONCLUSION

Even though Canada’s regulations on cryptocurrencies attempt to centralize the inherent decentralized technology and may ward off potential users, Canadians should have a positive outlook for the progression of cryptocurrency in their country. The government has acknowledged the potential benefits and taken concrete steps to incorporate the technology in Canada. It may take time for the government to strike a balance between fear and encouraging innovation. In the meantime, cryptocurrency users should be well versed in the tax laws and regulations in order to protect themselves and their businesses until the government’s apprehensions subdue.

P.S. Insights on Cryptocurrency Legal Issues

Most jurisdictions and authorities have yet to enact laws governing cryptocurrencies, meaning that, for most countries, the legality of crypto mining remains unclear.

Under the Financial Crimes Enforcement Network (FinCEN), crypto miners are considered money transmitters, so they may be subject to the laws that govern that activity. In Israel, for instance, crypto mining is treated as a business and is subject to corporate income tax. In India and elsewhere, regulatory uncertainty persists, although Canada and the United States are relatively friendly to crypto mining.

However, apart from jurisdictions that have specifically banned cryptocurrency-related activities, very few countries prohibit crypto mining.

Our Freeman Law Cryptocurrency Law Resource page provides a summary of the legal status of cryptocurrency for each country across the globe with statutory or regulatory provisions governing cryptocurrency.  The globe below provides links to country-by-country summaries:

Podcast:
The Freeman Law Project – Cryptocurrency Regulation and Taxation: A Brief Primer


Do you have questions about cryptocurrency, digital currencies, or blockchain technology? Freeman Law can help with digital currencies, tax planning, and tax compliance.  Contact us now to schedule a consultation or call (214) 984-3410 to discuss your cryptocurrency and blockchain technology concerns.


[1] Mark J. Krone, et. al., Tales from the Crypt: Cryptocurrency is Here-How Will Crime Insurers Respond?, 24 FIDELITY L.J. 1, 31 (2018).

[2] Gregory V. Ficcaglia, Heads or Tails: How Europe Will Become the Global Hub for Bitcoin Business If the United States Does Not Reexamine Its Current Regulation of Virtual Currency, 40 SUFFOLK TRANSNAT’L L. Rev. 103, 104 (2017).

[3]Tariq Ahmad, Regulation of Cryptocurrency: Canada, (June 2018), https://www.loc.gov/law/help/cryptocurrency/canada.php#:~:text=Canada%20allows%20the%20use%20of,also%20apply%20to%20cryptocurrency%20transactions.

[4]Id.

[5] Krone et al., supra note 1, at 29.

[6] Id. at 30.

[7] Id. at 31.

[8] Id.

[9] Ahmad, supra note 3.

[10] Cryptocurrencies and Tax: Five Things Every Canadian Needs to Know, (Dec. 12, 2017), https://www.wildlaw.ca/resource-centre/legal-updates/2017/cryptocurrencies-and-tax-five-things-every-canadian-needs-to-know/.

[11] Id.

[12] Id.

[13] Id.

[14] Id.

[15] Ahmad, supra note 3.

[16] Supra note 10.

[17] Krone et al, supra note 1, at 31-32.

[18] Christine Duhaime, Canada Implements World’s First National Digital Currency Law; Regulates New Financial Technology Transactions, Duhaime Law (June 22, 2014), http://www.duhaimelaw.com/2014/06/22/canada-implements-worlds-first-national-bitcoin-law/.

[19] Id.

[20] Id.

[21] Krone et. al., supra note 1, at 33.

[22] Id. at 32.

[23] Cryptocurrencies and Tax: Five Things Every Canadian Needs to Know, supra note 10.

[24] Id.

[25]Payments Canada, Bank of Canada and TMX Group Announce Integrated Securiites and Payment Platform as Next Phase of Project Jasper, (Oct. 17, 2017), https://www.tmx.com/newsroom/press-releases?id=615&year=2017.

[26] Id.

[27] Simon Grant et. at., Blockchain & Cryptocurrency Regulation 2020: Canada, Global Legal Insights, https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/canada.

[28] Id.

[29] Id.; The test considers four factors: 1) An investment of money; 2) in a common enterprise; 3) with expectation of profit; 4) that comes significantly from the efforts of others.

[30] Id.

[31] Id.

[32] Id.

[33] Grant et. al., id.

[34] Clare O’Hara, OSC Approves Canada’s First Blockchain ETF, The Globe and Mail (Feb. 1, 2018), https://www.theglobeandmail.com/globe-investor/funds-and-etfs/etfs/osc-approves-canadas-first-blockchain-etf/article37828183/.

[35] Cryptocurrencies and Tax: Five Things Every Canadian Needs to Know, supra note 24.

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