Cryptocurrency Governance "Maple Beacon": Canada's Cryptocurrency Taxation and Regulatory System

Written by: FinTax

The Canadian government is exploring cryptocurrency regulation and has established a governance system that balances risk prevention and technological inclusiveness through incremental legislation and penetrating regulation. This article will attempt to systematically analyze Canada's cryptocurrency tax and regulatory framework based on existing systems and the latest legislative developments in Canada.

1. Overview of Canada's Basic Tax System

1.1 Canada's Tax System

Canada implements a three-tiered taxation system at the federal, provincial, and local levels. The federal and provincial governments have relatively independent tax legislative powers, but provincial tax legislation cannot contradict federal tax legislation, and local tax legislative powers are granted by the province. In terms of tax types, Canada is known as the "country of a thousand taxes," with a wide variety of current tax categories that permeate every aspect of residents' lives, including corporate income tax, personal income tax, sales tax, land transfer tax, property tax, consumption tax, digital services tax, and more.

1.2 Main Types of Taxes

1.2.1 Personal Income Tax

According to the Income Tax Act, Canadian resident taxpayers must pay personal income tax on their worldwide income, while non-resident taxpayers only need to pay tax on their income earned in Canada. Canadians must pay both federal and provincial personal income taxes separately. The federal personal income tax is a progressive tax system, requiring the declaration of income including employment income, business income, property income, and capital income.

The criteria for determining residency are as follows:

(1) Individuals who have a home in Canada or usually reside in Canada are generally considered Canadian residents;

(2) Non-residents who stay in Canada for at least 183 days in a calendar year will be considered residents for that year;

(3) Individuals living or traveling outside Canada but maintaining significant residential ties to Canada will be considered factual residents. Important criteria for determining residential ties include the individual's home, property, social relationships, economic ties, immigration status, etc.

The federal personal income tax adopts a five-tier progressive tax rate: for taxable income not exceeding CAD 53,359, the tax rate is 15%; for income between CAD 53,359 and CAD 58,713, the tax rate is 20.5%; for income between CAD 58,713 and CAD 70,569, the tax rate is 26%; for income between CAD 70,569 and CAD 235,675, the tax rate is 29%; and for income exceeding CAD 235,675, the tax rate is 33%. Additionally, provincial and territorial taxes are levied, with a maximum provincial and territorial tax rate and surcharge of 25.75% varying by province and region.

Furthermore, Canada implements two types of personal tax incentives for qualifying taxpayers: tax credits and tax deductions. Tax credits include the basic personal tax credit, medical expenses, social security contributions, donations, child benefits for children under 17 or disabled children, and other personal tax credits related to employment, care, and skills training. Tax deductions include interest expenses, insurance costs, childcare allowances, alimony, child support, and other specific types of personal expenditures.

1.2.2 Corporate Income Tax

Canadian corporations pay corporate income tax under the Income Tax Act, which is divided into resident and non-resident corporations. Resident corporations are those registered in Canada or whose primary management and control are located in Canada, and they must pay tax on their worldwide income; non-resident corporations only pay tax on income from business activities conducted in Canada, regardless of whether it is obtained through a permanent establishment.

Resident corporations must pay federal and provincial corporate income taxes on their worldwide income, while non-resident corporations must pay Canadian income tax on income from business activities conducted in Canada, regardless of whether that income is obtained through a permanent establishment. The basic federal corporate income tax rate is 38%, while provincial corporate income tax rates vary by province, ranging from 0% to 16%. Corporations meeting specific conditions may enjoy preferential tax rates of 28% and 15%, and small businesses and certain industries also have dedicated tax incentives. Additionally, foreign company branches from countries with tax treaties can apply treaty rates.

Non-resident corporations are also subject to withholding tax, which is levied on dividends, interest, royalties, technical service fees, branch profits, rental income, management fees, and other income received from Canadian resident corporations at a rate of 25%, unless a lower rate is applicable under the conditions specified in a tax treaty.

1.2.3 Sales Tax

Canada's sales tax system is relatively complex, requiring sales tax to be levied at both the federal and provincial (or territorial) levels. Depending on the place of business, Canadian businesses may have to deal with three types of sales tax: the federal sales tax, some provinces' own retail sales tax, and the harmonized sales tax in several provinces.

The federal sales tax is the Goods and Services Tax (GST), which applies to most goods and services transactions within Canada at a rate of 5%. The provincial or territorial sales tax is the Provincial Sales Tax (PST), levied by local governments. Apart from Alberta, Northwest Territories, Nunavut, and Yukon, which only levy GST, and Quebec, which levies the Quebec Sales Tax (QST) in addition to GST, other local governments impose PST on retail sales, with rates ranging from 8% to 10%.

In recent years, the Canadian government has integrated GST and PST to promote the Harmonized Sales Tax (HST) reform, meaning that taxpayers paying 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, and apart from differing rates, the rules and operations of HST are consistent with GST. The HST rates for New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward Island are 15%, while Ontario's rate is 13%.

In summary, sales tax can be understood as a broad value-added tax levied on the consumption of goods and services, but due to policy differences among provinces, the collection methods vary. This tax is borne by the final consumer and is collected by businesses or suppliers at each stage of production or distribution of goods and services.

2. Canada's 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, rather than currency. Therefore, profits generated from cryptocurrency transactions should be taxed as income or capital. Additionally, since the CRA does not consider cryptocurrency to be legal tender, transactions where cryptocurrency is used to pay for services or goods can also be viewed as a special transaction model of commodity or service exchange, known as a "barter transaction." Regarding the determination of the tax value of cryptocurrency, the CRA believes it should be based on its "fair market value" (FMV) for tax reporting purposes. Fair market value is defined as the price agreed upon by knowledgeable buyers and sellers in a fair cryptocurrency transaction under voluntary conditions. Given that profits or losses from cryptocurrency transactions are taxed as income or capital, the distinction between business income and capital gains will affect the corresponding tax amounts and how taxpayers report their cryptocurrency in taxes.

For business income, 100% of cryptocurrency profits are taxable. For capital gains, the taxable amount can be reduced to 50%. The CRA classifies cryptocurrency transaction income in the following situations as business income: intent to profit (regardless of the likelihood of short-term profit); promotion of products or services; the activity is conducted for business reasons in a commercially viable manner; and the activity is completed in a "business-like manner" (e.g., acquiring inventory or capital assets or developing a business plan). When not sold as business income, and someone profits from selling it, the CRA will tax cryptocurrency as capital gains. When filing taxes, Canadians need to report any capital gains from the sale of cryptocurrency in the income section of their tax returns. Taxpayers can also use these capital gains to offset capital losses incurred from selling cryptocurrency. However, capital gains from cryptocurrency cannot be used to offset losses from other sources. In cases where capital losses exceed capital gains, the losses can be carried forward for up to three years. This capital gain must be calculated using the adjusted cost base or average cost, meaning taxpayers must average the purchase costs of the same property. In simple terms, individuals must calculate a single average value for each type of cryptocurrency. For example, if someone purchases BTC at two different times during the year and purchases ETH at three different times, then sells all within the same year, the adjusted cost base will be the average of the two BTC purchases and the average of the three ETH purchases.

Due to the nature of cryptocurrency, the CRA believes that taxpayers do not incur any tax obligations while holding cryptocurrency, but tax obligations arise during gifting, selling, exchanging, converting, or paying. Under Canada's cryptocurrency tax policy framework, specific cryptocurrency transactions are taxed as follows:

(1) Day trading cryptocurrency: Day trading is classified as business income, so taxpayers must report the net profit from day trading cryptocurrency minus net losses on their income tax return.

(2) Acquiring cryptocurrency through mining: "Mining" refers to the process of producing cryptocurrency through dedicated mining machines, and taxation must distinguish whether the nature of the mining activity is a personal hobby or a business operation. If it is a personal hobby, the taxpayer must pay capital gains tax, with a cost basis of zero, and the CRA does not allow any expense deductions; if it is a business activity, the cryptocurrency is treated as inventory, requiring income tax to be paid, and the cryptocurrency must be valued at its acquisition cost or fair market value. Determining whether someone is a business operator or a hobbyist requires examining the intent and behavioral characteristics of the cryptocurrency miner on a case-by-case basis: business operators typically engage in mining for profit, conduct transactions frequently, invest significant time, and possess comprehensive expertise; hobbyists tend to act more "amateurishly" and primarily for entertainment and enjoyment.

(3) Holding cryptocurrency: No tax is due when merely holding cryptocurrency.

(4) Transferring cryptocurrency between wallets: No tax is due when transferring cryptocurrency between two wallets, exchanges, or accounts.

(5) Purchasing cryptocurrency: No tax is due when purchasing cryptocurrency. However, the buyer should keep accurate records, as the value at the time of purchase may be used to calculate the cost basis when selling the cryptocurrency in the future.

(6) Selling cryptocurrency for fiat currency: When someone sells cryptocurrency for Canadian dollars or other legal tender, the related profits will be taxed as capital gains.

(7) Selling one cryptocurrency for another: Profits in such cases are also taxed as capital gains. To calculate the value of the cryptocurrency at the time of sale, the value of the cryptocurrency being sold must be referenced. For example, if someone purchases 1 cryptocurrency A for CAD 100 and later exchanges it for 3 cryptocurrency B, when calculating capital gains, the value of the 3 cryptocurrency B at the time of exchange must be considered. If its value is CAD 200, then the person should report a capital gain of CAD 100 for cryptocurrency A.

(8) Using cryptocurrency to purchase goods or services: The CRA considers using cryptocurrency to purchase goods or services as a barter transaction. Therefore, taxpayers need to determine the value of the goods or services purchased with cryptocurrency and treat it as the amount for the sale of cryptocurrency for tax purposes.

(9) Earning cryptocurrency: Individuals who earn cryptocurrency through work must report it as income for tax purposes.

3. Canada's Cryptocurrency Regulatory Framework and Dynamics

3.1 Regulatory Framework

In addition to the Canada Revenue Agency's (CRA) tax-related oversight of cryptocurrency, the Canadian government also implements certain regulatory measures for the cryptocurrency market from other perspectives. The regulation of cryptocurrency in Canada is primarily overseen by two core agencies: the Canadian Securities Administrators (CSA) and the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). These two agencies regulate cryptocurrency from different angles: the CSA is responsible for overseeing cryptocurrencies with securities attributes, ensuring that cryptocurrency trading platforms and related activities comply with securities regulations and protect investor rights; FINTRAC is responsible for regulating anti-money laundering (AML) and anti-terrorist financing activities related to cryptocurrency, ensuring that cryptocurrency trading platforms and wallet providers comply with relevant regulations.

3.2 Regulatory Evolution

Canada's cryptocurrency regulatory system has evolved from exploratory regulation to gradual improvement. In 2014, the CRA first issued tax guidelines regarding cryptocurrency, classifying it as a commodity rather than legal tender and requiring taxation on its transactions; however, these guidelines did not address the risks posed by cryptocurrency trading in other areas. In recent years, the Canadian government has gradually recognized the need to establish a dedicated regulatory framework to address this emerging field and has taken a series of important measures in cryptocurrency regulation:

On June 1, 2020, Canada amended the Proceeds of Crime (Money Laundering) and Terrorist Financing Act to include 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, thereby bringing cryptocurrency trading platforms under the purview of anti-money laundering and anti-terrorist financing regulations. In March 2021, the CSA released the "Guidance for Crypto Asset Trading Platforms," clarifying that cryptocurrency trading platforms must register with the CSA and comply with relevant securities regulations, thus incorporating cryptocurrency trading platforms into the securities regulatory framework. These measures indicate that the Canadian government has begun to pay attention to the potential risks of cryptocurrency 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 cryptocurrency by proposing the "Digital Asset Trading Platforms Act," which stipulates that cryptocurrency trading platforms must comply with strict operational and reporting requirements—implementing more rigorous customer identification (KYC) and anti-money laundering (AML) measures, and regularly submitting operational reports and undergoing audits to regulatory authorities. In November 2022, the Canadian government planned to initiate a legislative review of the financial sector regarding the digitization of currency to maintain the stability and security of the financial sector. The government budget proposed in April of the same year indicated that CAD 17.7 million would be allocated over five years to conduct the aforementioned review. The first phase of the review focuses on digital currencies, including examining how to adjust the financial sector's regulatory framework to manage new digital risks; exploring how to ensure the safety and stability of the financial system amid evolving business models and technologies; and assessing the potential demand for a central bank digital currency in Canada. This initiative lays the groundwork for subsequent policy adjustments in cryptocurrency regulation. In December 2022, the bankruptcy of cryptocurrency exchange FTX continued to cause market turmoil, leading to the collapse of several related companies and significant investor losses. The collapse of FTX triggered global attention to cryptocurrency regulation, including from the Canadian government. On February 22, 2023, the 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 operating in the country. Against this backdrop, the operational threshold for cryptocurrency exchanges was raised, prompting some large exchanges like Binance to exit the Canadian market. Although digital assets and cryptocurrencies have been used to evade sanctions and engage in illegal activities in the past, the government has expressed an "open attitude towards projects that can bring greater benefits" while continuously strengthening regulatory measures.

On April 18, 2024, the Canadian government announced plans to implement the international cryptocurrency reporting framework (CARF) established by the Organisation for Economic Co-operation and Development (OECD) starting in 2026, requiring cryptocurrency service providers located in Canada or conducting business in Canada to submit annual reports to the CRA. According to the budget provisions, these service providers must disclose information about each customer and each cryptocurrency, including exchanges between cryptocurrencies and government-issued currencies like CAD, exchanges between other cryptocurrencies, and transfers of cryptocurrency assets. Canadian cryptocurrency service providers are also obligated to provide the CRA with information about each customer, such as name, address, date of birth, and jurisdiction of residence. This requirement will apply to transactions after 2026, with the first information exchange between Canada and other countries scheduled for 2027. The introduction of this policy is a response to the growth of new economic sectors, updating Canada's domestic and international tax and reporting frameworks, enhancing compliance and transparency for cryptocurrency service providers, and promoting the international compliance of the cryptocurrency market. In September 2024, the CSA also updated the regulations for stablecoins on cryptocurrency trading platforms, extending the compliance deadline for cryptocurrency trading platforms to the end of 2024, providing more time for trading platforms to meet new regulatory requirements to ensure a smooth market transition.

In recent years, the evolution of the Canadian government's cryptocurrency regulation has shown that since the establishment of the regulatory framework, cryptocurrency trading in Canada has faced increasingly stringent and comprehensive regulatory scrutiny. However, while curbing potential financial risks, the Canadian government maintains a relatively open attitude towards the development of cryptocurrency, seeking a dynamic balance between promoting innovation and protecting investors. But as Lucas Matheson, the Canadian director of Coinbase, stated at the Blockchain Futurist Conference in August 2024, "Frankly, Canada has a lot of work to do in changing the laws, with the goal of changing 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 its cryptocurrency regulation.

4. Summary and Outlook

In summary, the Canadian government's attitude towards the cryptocurrency market is relatively open. The Canadian government recognizes the potential of cryptocurrencies and blockchain technology, encouraging innovation and technological development while also being aware of the risks posed by the cryptocurrency market, particularly in terms of anti-money laundering, investor protection, and maintaining market order. In the future, Canada may further strengthen international cooperation in cryptocurrency regulation, implement stricter and more specific regulatory measures, and introduce more specific provisions for investor protection on cryptocurrency trading platforms, such as enhancing information disclosure and severely punishing cryptocurrency-related fraud, to ensure the healthy development of this emerging industry under compliance.

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