Transactions involving cryptocurrency may be exempt from GST/HST. This depends on whether the transaction involving crypto constitutes a supply of financial services or if it is simply used as payment for a good or service.
If a taxpayer receives cryptocurrency as payment for selling a taxable supply of goods or services, the taxpayer is still required to remit the GST/HST based on the fair market value (FMV) of the cryptocurrency at the time of the supply.1 For example, Starbucks would still be obligated to collect and remit GST/HST even if it begins to accept Bitcoin as payment. 2 There are 3 issues which flow from this rule. First, the taxpayer must be a GST or HST registrant, second the goods or services sold must be a “taxable supply” and third, the FMV of the cryptocurrency at the time of the supply must be determined. Determining the FMV of crypto is challenging. The CRA has provided some guidance on the proper valuation of crypto in the income tax context but not for excise tax purposes. For more details on what the CRA determines to be reasonable methods of determining the proper valuation of crypto, see Guide for cryptocurrency users and tax professionals. See also Blue J’s blog on the income tax implications of crypto transactions, linked below.
Lending or trading of cryptocurrency may fall within the broad category of “financial services” under subs. 123(1) of the ETA. Financial services are generally considered an “exempt supply”. This means that taxpayers who provide financial services do not need to collect and remit GST/HST on those services.
On June 29, 2021, ETA s. 123(1) “financial instrument” was amended to include a “virtual payment instrument”, para. (f.1), which includes cryptocurrencies such as Bitcoin.3 Consequently, certain transactions involving cryptocurrencies are now exempt from GST/HST. The amendment came into effect retroactively on May 18, 2019. Given the recent change, there is little authoritative guidance on the effect of the amendment, and much of the content available is outdated. CRA commentary on the proposed amendment is limited to a statement that GST/HST need not be charged and collected on supplies of virtual currency.4
In order to determine whether a cryptocurrency transaction is a financial service, three distinct steps must be taken:
1. It must be determined whether there was a single or multiple supply of services. If the latter, each supply will need to be treated separately. A bundle of different services can be considered a single supply under the common law, pursuant to ETA s. 138, or pursuant to ETA s. 139. Blue J's “Single vs. Multiple Supply” module can assist in determining whether a bundle of different services can be considered a single compound supply.
2. The second step is to determine exactly what service the supplier provided for the consideration received. This will of course depend on the individual facts of each case.
3. Following that, it needs to be determined whether the service provided, or in the case of a single compound supply of services, the predominant element or substance of that supply, fits into the definition of a “financial service” at ETA paras. 123(1) “financial service” (a) to (m).
It is the last step where the legislative amendment to subs. 123(1) “financial instrument” is relevant. The effect of the amendment is that those financial services listed in paras. 123(1) “financial services” (a) to (m) that make reference to “financial instruments” now include services involving cryptocurrencies. These services are GST/HST exempt unless they are excluded from the definition of financial services by paras. (p) to (t). Examples of supplies of cryptocurrencies that are now likely GST/HST exempt are the lending or borrowing of cryptocurrency, as well as providing broker services for crypto traders.
Note that the Department of Finance issued a News Release on February 4, 2022, in which it requests public comment on a set of draft legislative proposals, including the following tax measure:
“To clarify the GST/HST treatment of crypto asset mining, draft proposals would specify that crypto asset mining would generally not be considered a “supply” for GST/HST purposes. This would mean that the GST/HST would not apply to the provision of crypto asset mining and input tax credits would not be available to the person providing the mining.”
Blue J has assembled all the ETA provisions that are affected by the legislated amendment as well as the (sparse) available guidance by the CRA to date. Aside from subs. 123(1), the amendment also affects subs. 149(1) as cryptocurrency traders may now be “financial institutions”. To learn why that is the case and what else has changed, come take a look at our platform. If you are interested to learn what has changed for Income Tax Act purposes in the cryptocurrency context, Blue J’s blog “Crypto Tax: What taxes must be paid on cryptocurrency transactions under the ITA?”
Footnotes
1CRA Internal Technical Interpretation 2013-0514701I7 - Bitcoins
3The amendment was implemented by the Budget Implementation Act, 2021, No. 1 (S.C. 2021, c. 23), assented to on June 29, 2021.
4 CRA News, Excise and GST/HST News - No. 107, February, 2020
5 Department of Finance Canada, News release, February 4, 2022 - Ottawa, Ontario.
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