Author: FinTax
In the process of exploring cryptocurrency regulation, the Canadian government has built a governance system that balances risk prevention and control with technology inclusion through progressive legislation and penetrating supervision. Based on Canada's existing system and the latest legislative trends, this article will attempt to systematically analyze Canada's cryptocurrency taxation and regulatory framework.
1. Overview of Canada's Basic Tax System
1.1 Canadian Tax System
Canada implements a three-level taxation system of federal, provincial and local governments. The federal government and provinces have relatively independent tax legislation powers, but provincial tax legislation cannot be contrary to federal tax legislation, and local tax legislation powers are granted by the provinces. In terms of tax types, Canada is known as the "country of ten thousand taxes". Its current tax types are numerous and have penetrated into every aspect of every resident's life, mainly including corporate income tax, personal income tax, sales tax, land transfer tax, property tax, consumption tax, digital service tax, etc. 1.2 Main tax types 1.2.1 Personal income tax According to the Income Tax Act, Canadian resident taxpayers are required to pay personal income tax on their global income, and non-resident taxpayers are only required to pay tax on their income in Canada. Canadian individuals need to pay federal and provincial personal income taxes separately. The federal personal income tax is a comprehensive income system, and the income to be reported includes employment income, business income, property income and capital income.
The criteria for identifying residents are as follows:
(1) An individual who has a residence or ordinarily resides in Canada is generally considered a Canadian resident;
(2) A non-resident who stays in Canada for at least 183 days in a calendar year will be considered a Canadian resident in that year;
(3) An individual who resides or travels outside Canada but still maintains a significant residential connection with Canada will be considered a de facto resident. Important criteria for determining residential connection include an individual's residence, property, social relations, economic ties, immigration status, etc. in Canada.
Federal individual income tax adopts five progressive tax rates, namely: the tax rate for taxable income not exceeding 53,359 Canadian dollars is 15%; the tax rate for 53,359 Canadian dollars to 58,713 Canadian dollars is 20.5%; the tax rate for 58,713 Canadian dollars to 70,569 Canadian dollars is 26%; the tax rate for 70,569 Canadian dollars to 235,675 Canadian dollars is 29%; the tax rate for the part exceeding 235,675 Canadian dollars is 33%. In addition, provincial and territorial taxes will be levied, and the provincial and territorial tax rates and surcharges of up to 25.75% will be applied to different provinces and regions.
In addition, Canada implements two types of individual tax preferential policies, namely tax credits and tax deductions, for taxpayers who meet the statutory conditions. Tax credits include basic personal tax credits, medical expenses, social security contributions, donations, child benefits that qualify for tax credits for children under 17 or children with disabilities, and other personal tax credits such as employment, care, and skills training. Tax deductions include specific types of personal expenses such as interest expenses, insurance expenses, child care allowances, alimony, child support, and eligible child care expenses.
1.2.2 Corporate Income Tax
Canadian companies pay corporate income tax in accordance with the Income Tax Act and are divided into resident companies and non-resident companies. Resident companies refer to companies that are incorporated in Canada or whose main management and control institutions are located in Canada, and they are required to pay taxes on their global income; non-resident companies only pay taxes on income from business activities in Canada, regardless of whether they are obtained through a permanent establishment.
Resident companies are required to pay federal and provincial corporate income taxes on their global income, and non-resident companies are required to pay Canadian income taxes on income from business activities in Canada, regardless of whether the income is obtained through a permanent establishment. Regarding tax rates, the basic federal corporate income tax rate is 38%, while provincial corporate income tax rates vary from province to province, with a tax range of 0% to 16%. Companies that meet certain conditions can enjoy preferential tax rates of 28% and 15%, and small and micro-profit companies and companies in specific industries also have special tax incentives. In addition, branches of foreign companies that have signed a tax agreement between the two countries can apply the agreed tax rate.
Non-resident companies are also required to pay withholding tax, that is, dividends, interest, royalties, technical service fees, branch remitted profits, rental income, management fees, other income, etc. obtained from Canadian resident companies are subject to a withholding tax of 25%, unless the applicable tax rate is reduced under the conditions stipulated in the applicable tax agreement.
1.2.3 Sales Tax
Canada has a complex sales tax system that requires sales tax at both the federal and provincial (or territorial) levels. Depending on where you do business, Canadian businesses may have to deal with three types of sales taxes: the federal government's sales tax, some provinces' own retail sales taxes, and several provinces' harmonized sales taxes.
The federal sales tax is the goods and services tax (GST), which applies to most goods and services transactions in Canada at a rate of 5%. The provincial or territorial sales tax is the provincial sales tax (PST), which is levied by local governments. Except for Alberta, the Northwest Territories, Nunavut and Yukon, which only collect GST, and Quebec, which collects Quebec sales tax QST on top of GST, other local governments collect PST at the retail level, with a PST rate of 8% to 10%.
In recent years, the Canadian government has integrated GST and PST to implement the harmonized sales tax (HST) reform, that is, taxpayers who pay HST no longer pay GST and PST, but currently only a few provinces have participated in the merger. HST is managed by the federal government. Except for the different tax rates, the applicable rules and operating methods of HST are the same as GST. The HST rate in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island is 15%, and the rate in Ontario is 13%.
In short, sales tax can be understood as a broad value-added tax levied on the consumption of goods and services, but the collection method varies due to differences in provincial policies. This tax is borne by the final consumer and collected by the enterprise or supplier at each stage of the production or distribution of goods and services.
2. Canadian Cryptocurrency Tax Policy
Regarding the nature of cryptocurrency, the Canada Revenue Agency (CRA) takes the position that cryptocurrency is a commodity with certain financial attributes, not a currency. Therefore, the income generated by cryptocurrency transactions should be taxed as income or capital. In addition, since the CRA does not consider cryptocurrency to be legal tender, when someone uses cryptocurrency to pay for services or goods, such a transaction can also be regarded as a special transaction mode of exchanging goods or services, namely "barter transaction". Regarding the determination of the tax value of cryptocurrency, the CRA believes that its "fair market value" (FMV) should be used as the basis for tax declaration. Fair market value is the price that would be agreed upon by a willing buyer and seller who are familiar with the market in an arm's length cryptocurrency transaction. Given that gains or losses from cryptocurrency transactions are taxed as either income or capital, the distinction between business income and capital gains affects the corresponding tax amounts and how taxpayers report their cryptocurrency on their taxes. For business income, 100% of cryptocurrency profits are taxable. For capital gains, the taxable amount is reduced to 50%. The CRA classifies cryptocurrency trading income as business income when: there is an intent to make a profit (regardless of the likelihood of short-term profit); the product or service is promoted; the activity is carried out for business reasons and in a commercially viable manner; and the activity is done in a "business-like manner" (such as acquiring inventory or capital assets or developing a business plan). When it is not sold for business income and someone makes a profit from selling it, the CRA taxes cryptocurrency as capital gains. When filing your tax return, Canadians need to list any capital gains from the sale of cryptocurrency on the income portion of their tax return. Taxpayers can also use these capital gains to offset capital losses from the sale of cryptocurrency. However, you cannot use cryptocurrency capital gains to offset losses from other sources. In the event that capital losses are greater than capital gains, the losses can be carried forward for up to three years. This capital gain must be calculated using an adjusted cost basis or average cost, which means that the taxpayer must average the purchase costs of the same property. In simple terms, one must calculate a single average for each cryptocurrency. For example, if someone buys BTC at two different times in a year and buys ETH at three different times and sells them all in the same year, the adjusted cost basis would be the average of the two BTC purchases and the average of the three ETH purchases. Due to the nature of cryptocurrency, the Canada Revenue Agency believes that taxpayers do not incur any tax obligations when they hold cryptocurrency, but they will incur tax obligations when they give, sell, exchange, convert, or pay. Under Canada's crypto tax policy system, certain cryptocurrency transactions are taxed in the following manner: (1) Day trading cryptocurrencies: Day trading is classified as business income, so the net profit less net losses from day trading cryptocurrencies by taxpayers need to be reported in the income tax return. (2) Obtaining cryptocurrencies through mining: "Mining" refers to the process of people calculating and producing cryptocurrencies through dedicated mining machines. When levying taxes, it is necessary to distinguish whether the nature of mining activities is a personal hobby activity or a business operation. If it is a personal hobby, the taxpayer needs to pay capital gains tax, the cost basis is zero, and the CRA does not allow any expenses to be deducted; if it is a business activity, cryptocurrencies are regarded as inventory, income tax is required, and cryptocurrencies are valued at the acquisition cost or its fair market value. To judge between commercial operators and enthusiasts, it is necessary to explore the intentions and behavioral characteristics of crypto miners based on individual cases: commercial operators usually conduct mining activities in a commercial manner for the purpose of profit, with high transaction frequency, long time consumption, and complete professional knowledge; while enthusiasts are more "amateur" and mainly for entertainment and enjoyment.
(3) Holding cryptocurrencies: No tax is required when only holding cryptocurrencies.
(4) Transferring cryptocurrencies between wallets: No tax is required when transferring cryptocurrencies between two wallets, exchanges or accounts.
(5) Purchasing cryptocurrencies: No tax is required when purchasing cryptocurrencies. However, the purchaser should keep accurate records because the value at the time of purchase may be used to calculate the cost basis when selling cryptocurrencies in the future.
(6) Selling cryptocurrency for fiat currency: When someone sells cryptocurrency in exchange for fiat currency such as Canadian dollars, the related profit will be taxed as capital gains.
(7) Selling one cryptocurrency in exchange for another cryptocurrency: The profit in this case is also taxed as capital gains. To calculate the value of the cryptocurrency at the time of sale, you need to refer to the value of the cryptocurrency being sold. For example, suppose someone buys 1 cryptocurrency A for 100 Canadian dollars. A few months later, he exchanges it for 3 cryptocurrency B. When calculating the capital gain, you need to look at the value of the 3 cryptocurrency B at the time of exchange. Assuming its value is 200 Canadian dollars, then this person should report a capital gain of 100 Canadian dollars on cryptocurrency A.
(8) Using cryptocurrency to purchase goods or services: CRA considers the use of cryptocurrency to purchase goods or services to be a barter transaction. Therefore, taxpayers need to determine the value of the goods or services purchased with cryptocurrency and treat it as the amount of the sale of cryptocurrency for tax purposes. (9) Earning cryptocurrency: Those who earn cryptocurrency through work must report it as income for tax purposes. 3. Canadian Crypto Regulatory Framework and Dynamics 3.1 Regulatory Framework In addition to the Canada Revenue Agency's regulation of cryptocurrency from a tax perspective, the Canadian government also implements certain regulatory measures on the cryptocurrency market from other levels. Canada's cryptocurrency regulation is mainly handled by two core agencies, namely the Canadian Securities Administrators (CSA) and the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). The two agencies regulate cryptocurrencies from different perspectives: CSA is responsible for regulating cryptocurrencies with securities attributes, ensuring that cryptocurrency trading platforms and related activities comply with securities regulations and protect the rights and interests of investors; FINTRAC is responsible for regulating anti-money laundering and anti-terrorist financing activities related to cryptocurrencies, ensuring that cryptocurrency trading platforms and wallet providers comply with relevant regulations. 3.2 Regulatory Evolution Canada's crypto regulatory system has developed from exploratory regulation to gradual improvement. In 2014, the Canada Revenue Agency (CRA) issued its first tax guidance on cryptocurrencies, treating cryptocurrencies as commodities rather than legal tender and requiring taxes on their transactions. However, the guidance did not focus on the risks of cryptocurrency transactions to other areas. In recent years, the Canadian government has gradually realized the need to establish a dedicated regulatory framework to deal with this emerging field, and has taken a series of important measures in cryptocurrency regulation: On June 1, 2020, Canada passed an amendment to the Money Services Business Regulations, which included cryptocurrency service providers in the definition of money services businesses (MSBs), requiring all cryptocurrency exchanges and related businesses to register with FINTRAC and comply with AML and KYC regulations, and bringing cryptocurrency trading platforms under the regulatory scope of anti-money laundering and counter-terrorist financing. In March 2021, CSA issued the "Guidelines for Crypto Asset Trading Platforms", clarifying that cryptocurrency trading platforms must register with CSA and comply with relevant securities regulations, bringing cryptocurrency trading platforms into the securities regulatory framework. The above measures show that the Canadian government has begun to pay attention to the potential risks of cryptocurrencies in money laundering, terrorist financing, and securities trading, and has established a basic regulatory framework through legislative means.
In 2022, the Canadian government further strengthened its regulation of cryptocurrencies and proposed the Digital Asset Trading Platform Act, which requires cryptocurrency trading platforms to comply with strict operational and reporting requirements - implementing stricter customer identification (KYC) and anti-money laundering (AML) measures, and regularly submitting operational reports to regulators and accepting audits. In November 2022, the Canadian government plans to launch a review of financial sector legislation for currency digitization to maintain the stability and security of the financial sector. The government budget proposed in April of the same year pointed out that the government will provide a budget of US$17.7 million over 5 years to carry out the aforementioned review. The first phase of the review is aimed at digital currencies, including: examining how to adjust the financial sector regulatory framework to manage new digital risks; examining how to ensure the security and stability of the financial system under evolving business models and technologies; and examining the potential demand for digital currencies of the Bank of Canada. This move lays the foundation for the subsequent policy adjustments to cryptocurrency regulation. In December 2022, the bankruptcy of cryptocurrency exchange FTX continued to cause market turmoil, and many affiliated companies closed down one after another, causing heavy losses to investors. The collapse of FTX has triggered global attention to cryptocurrency regulation, and the Canadian government is also on the list. On February 22, 2023, the Canadian Securities Administrators (CSA) issued a notice requiring all cryptocurrency trading platforms to sign a legally binding pre-registration commitment to comply with new regulatory requirements and continue to operate in the country. Against this background, the operating threshold of cryptocurrency exchanges has been raised, prompting some large cryptocurrency exchanges such as Binance to withdraw from the Canadian market one after another. Although digital assets and cryptocurrencies have been used to circumvent sanctions and carry out illegal activities in the past, the government has continued to strengthen regulatory measures while still stating that it is "open to projects that can bring greater benefits." On April 18, 2024, the Canadian government announced plans to implement the international cryptocurrency reporting framework (CARF) developed by the Organization for Economic Cooperation and Development from 2026, requiring cryptocurrency service providers located in Canada or doing business in Canada to submit annual reports to the CRA. According to the budget, these service providers must disclose information about each customer and each cryptocurrency, including the exchange between cryptocurrency and government-issued currencies such as the Canadian dollar, the exchange of other cryptocurrencies, and the transfer of cryptocurrency assets. Canadian cryptocurrency service providers are also obliged to provide the CRA with information about each customer, such as name, address, date of birth, and jurisdiction of residence. The requirement will apply to transactions after 2026, and the first exchange of information collected by Canada with other countries will take place in 2027. The policy is proposed as a one-time update of Canada's domestic and international tax and reporting frameworks as new economic sectors grow, which will improve the compliance and transparency of cryptocurrency service providers and promote international compliance in the cryptocurrency market. In September 2024, the Canadian Securities Administrators (CSA) also updated the stablecoin regulations for cryptocurrency trading platforms, extending the compliance period for cryptocurrency trading platforms to the end of 2024, providing trading platforms with more time to meet new regulatory requirements to ensure a smooth transition in the market.
In terms of the evolution of the Canadian government's crypto regulation in recent years, since the regulatory framework was established, Canadian cryptocurrency transactions have faced increasingly stringent and comprehensive regulatory review, but under the premise of curbing potential financial risks, the Canadian government still maintains a relatively open attitude towards the development of cryptocurrencies, trying to find a dynamic balance between promoting innovation and protecting investors. But as Lucas Matheson, director of Coinbase Canada, said at the Blockchain Futurists Conference in August 2024, "Frankly speaking, Canada still has a lot of work to do in changing the law, and the goal is to change Canadian laws so that we can increase economic freedom and update Canada's financial system." Canada still has a long way to go in modernizing crypto regulation.
4. Summary and Outlook
In short, the Canadian government's attitude towards the cryptocurrency market is relatively open. The Canadian government recognizes the potential of cryptocurrency and blockchain technology, encourages innovation and technological development, and is also aware of the risks brought by the cryptocurrency market, especially in anti-money laundering, investor protection and market order maintenance. In the future, Canada may further strengthen international cooperation in cryptocurrency regulation, introduce more stringent and specific regulatory measures, and implement more specific regulations for investor protection of cryptocurrency trading platforms, such as strengthening information disclosure and severely punishing cryptocurrency-related fraud, to ensure the healthy development of this emerging industry of cryptocurrency under the premise of compliance.
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