Bitcoin In Canada: What's The Legal Status?

Bitcoin and other cryptocurrencies are legal in Canada. However, they are not considered legal tender and are subject to securities legislation. This means that they are treated as assets that fall under an investment category. While Canadians can legally buy, sell, trade, and hold cryptocurrencies, they cannot use them to pay taxes or make other government-related payments. The Canada Revenue Agency (CRA) treats crypto as a commodity for tax purposes, and any income generated from cryptocurrency is considered either a capital gain/loss or a business income/loss.

Bitcoin is legal in Canada, but it is not legal tender

While the Canadian government allows the use of cryptocurrency, it is not considered legal tender. This means that financial institutions in Canada do not oversee or manage cryptocurrencies, and they are not supported by any central authority. As a result, no one is required to accept cryptocurrency as payment, and Canadians cannot use it for paying taxes or making other government-related payments.

Despite not being legal tender, Bitcoin can still be used in Canada in several ways. It can be used as a digital way to transfer funds, through Bitcoin ATMs, and even for sports betting. Additionally, some companies act as middlemen, allowing Canadians to use cryptocurrency to pay for everyday things like internet service, cell phone bills, or credit card bills.

The Canadian government is considering whether to mint a form of digital cash called a central bank digital currency (CBDC). This could function as an equivalent to, and an eventual replacement of, regular Canadian dollars. However, it is important to note that even if Canada adopts a CBDC, cryptocurrencies like Bitcoin, Ethereum, or Tether will not replace the Canadian dollar as the official currency.

Cryptocurrency is taxed in Canada

Every time you buy, sell, or trade cryptocurrency, it is a taxable event that needs to be reported on your taxes. There is no way around this, so it is essential to keep detailed records. These records are vital due to the capital gains you make. It is important to keep in mind that capital gains can apply in more than one circumstance. For example, if you bought 1 Bitcoin for $100, but it has a current market value of $15,000, and you decide to make renovations to your home, and the contractor agrees to trade his services, which are normally worth $15,000, for 1 Bitcoin. In this case, both parties are liable for taxes. The original Bitcoin owner would pay capital gains on $7,450 (50% of $14,900), while the contractor would still need to report business income of $15,000.

When determining the value of a crypto-asset for tax reporting purposes, you must consider all relevant facts and attributes on a case-by-case basis. The CRA will accept a crypto-asset's fair market value for tax reporting purposes, which is generally the highest price, expressed in dollars, that a willing buyer and seller would agree to in an open and unrestricted market. It is important to use a reasonable method for determining the value of your crypto-assets and keep a record of how it was calculated.

Additionally, if you are in the business of crypto-asset mining, the value of the crypto-assets you receive for your mining activities must be included in your business income at the time it is earned. You may also be able to claim a deduction for capital cost allowance (CCA) for crypto-asset mining equipment such as application-specific integrated circuit (ASIC) miners or graphics processing unit (GPU) mining rigs.

It is important to note that the CRA treats cryptocurrency like a security, such as stock, rather than cash. Therefore, if you are gifting cryptocurrencies to someone, you are disposing of them at their current value, which triggers a taxable event. However, if the recipient opens an account in their name and gives you the login information, and you make the trades in their account, everything is done under their name, and it is taxable in their names instead.

Crypto is not regulated in Canada, but it is under the purview of securities legislation

Crypto assets are not regulated in Canada, but they are under the purview of securities legislation. The Canadian Securities Administrators (CSA) is the umbrella regulatory body that includes provincial securities commissions. The CSA works to harmonize the securities regulatory framework across Canada. While there is no federal national statutory framework governing securities law in Canada, each province has its own securities regulator that enacts specific legislation.

The CSA has issued various notices to provide a more precise legal framework for crypto assets. Crypto assets such as Bitcoin, Ethereum, and Tether are digital assets that use distributed ledger technology, also known as blockchains. These blockchains are controlled by users through decentralized cryptographic consensus mechanisms, and their functions, structures, governance, and rights vary based on the different crypto products.

The main legal issue with crypto assets is their qualification, specifically whether they constitute securities. The qualification of a crypto asset or crypto contract as a security is key to determining the applicable legal framework. The CSA has stated that determining whether a particular crypto asset is a security would depend on the specific circumstances of that crypto asset. In general, a crypto asset may be considered a security if it meets the criteria of the Pacific Coin test, which identifies four central attributes of an investment contract: (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profit, and (4) where this profit is derived in significant measure from the efforts of others.

The CSA has acknowledged that some well-established crypto assets, such as Bitcoin, are not currently considered securities or derivatives but have features analogous to commodities such as currencies and precious metals. However, the CSA has also confirmed that most crypto asset offerings involve the distribution of securities in the form of investment contracts. This means that the foundations for the application of securities legislation arise in two distinct situations: during the initial coin offering (ICO) of such crypto assets and the trading of these crypto assets on crypto trading platforms (CTPs).

If a crypto asset is deemed to be an investment contract and categorized as a security, any offering of that crypto asset is subject to securities laws. This qualification is particularly important in the context of an ICO since the issuer directly offers the assets to its customers. Courts have applied the Pacific Coin test in these situations. For example, in a 2018 decision, Quebec's Tribunal administratif des marchés financiers (TMF) ruled that the ICO of PlexCoin, a new cryptocurrency, constituted investment contracts subject to the Securities Act in Quebec.

Outside of ICOs, the activity of trading crypto assets on CTPs may also fall under securities legislation. CTPs are financial institutions that offer users the ability to transfer, hold, and exchange various crypto assets. The CSA has stated that securities legislation may apply to CTPs that facilitate the buying and selling of crypto assets if the user's contractual right to the crypto asset traded itself constitutes a derivative or security. Therefore, securities legislation could be considered applicable to CTPs unless:

• The underlying crypto asset itself is not a security or derivative; and
• The contracts or instruments for the purchase, sale, or delivery of a crypto asset result in an obligation to make immediate delivery and are settled by the immediate transfer of the crypto asset to the user according to typical commercial practice.

CTPs that operate in Canada and trade securities or derivatives are required to comply with Canadian securities law requirements, including registering with securities regulators. The CSA has imposed specific regulations on issuers and CTPs involved in trading crypto assets that are designed to maintain a stable value, known as value-referenced crypto assets (VRCAs) or stablecoins. These regulations include requirements for registered CTPs to stop offering certain types of VRCAs and to comply with additional requirements for prescribed disclosures, disclaimers in marketing materials, and updated know-your-product policies and procedures.

In summary, the classification of crypto assets is crucial for both ICOs and trading on CTPs. The investment contract test set out in the Pacific Coin test remains the applicable method for determining whether certain crypto assets are considered securities. This categorization is essential not only for CTPs and issuers but also for investment funds seeking to invest in crypto assets. Regulatory frameworks applicable to crypto assets in Canada are rapidly evolving, and interested participants in crypto markets must conduct careful and exhaustive due diligence before engaging in any activities involving crypto assets.

Crypto exchanges are required to register with regulators in Canada

Crypto trading is legal in Canada, but it is not considered legal tender. Crypto assets are high-risk investments and are very unstable and complex. They are also not legal tender, as they are not issued or overseen by the government or a central bank.

To protect investors, crypto exchanges are required to register with regulators in Canada. The Canadian Securities Administrators (CSA) is the body that coordinates securities regulation across the country. The CSA requires crypto trading platforms to register with provincial or territorial securities regulators and abide by certain conditions. These include implementing controls to protect crypto assets and funds, managing business risks, limiting the types of crypto assets traded, meeting obligations to clients, and providing sufficient information to clients.

The CSA has also issued guidance and clarifications to help crypto developers determine whether a token sale is likely to constitute a securities offering. Crypto exchanges that do not comply with Canadian securities laws present significant risks to customers as their assets may not be adequately safeguarded.

Some of the registered crypto trading platforms in Canada include Bitbuy, VirgoCX, Shakepay, Wealthsimple Crypto, Newton, CoinSmart, and Netcoins. On the other hand, crypto exchanges like Binance and OKX have chosen to exit the Canadian market due to the tightened rules and tougher investor protection guidelines.

The Canadian government has an official page devoted to digital currencies

The government also outlines that cryptocurrencies are not considered legal tender in Canada. This means that financial institutions in Canada do not oversee or manage cryptocurrencies, and there is no central authority that supports them. As a result, no one is required to accept cryptocurrencies as a form of payment, and Canadians cannot use them for paying taxes or making other government-related payments.

Despite not being legal tender, the Canadian government acknowledges that cryptocurrencies can be used for various purposes, including as a digital way to transfer funds, through Bitcoin ATMs, and even for sports betting.

The government also provides guidance on the taxation of cryptocurrencies. It states that the Income Tax Act and tax rules apply to digital currencies, and any losses or gains from buying, selling, or mining cryptocurrencies must be reported when filing taxes. These losses and gains may be considered taxable income or capital gains for the taxpayer.

The Canadian government offers a guide to help taxpayers declare their cryptocurrencies on their taxes, recommending that Canadians pay taxes as capital gains or business income, depending on the situation. To determine the taxable value, cryptocurrency must be converted into dollars, and Canadians can choose their preferred method of conversion or valuation, as long as it is consistent.

Frequently asked questions