On May 27, 2019, the Department of Finance issued draft legislation and explanatory notes relating to the Excise Tax Act that would add a "virtual payment instrument" to the definition of a financial instrument for GST/HST purposes.
As such, a virtual payment instrument (such as a Bitcoin) would be treated as a property (and therefore, not money) that would be considered a financial instrument for GST/HST purposes after May 27, 2019.
Before that date, there was (and still is) uncertainty as to how to consider Bitcoins and other similar instruments in the context of purchase and sale transactions. The Canada Revenue Agency (the "CRA") had previously only provided a limited view stating that when a GST/HST registrant was accepting cryptocurrency (including Bitcoins) as mode of payment on the sale of goods or services, the registrant was to charge GST/HST calculated on a sale price equal to the fair market value of the cryptocurrency at the time of the transaction.
However, the CRA did not comment on whether the actual transfer of cryptocurrency from the buyer to the seller was also another sale of property subject to GST/HST taking place simultaneously (i.e., a barter transaction). The CRA was likely of the view that cryptocurrency was not money, as it asked to refer to paragraph 153(1)(b) of the Excise Tax Act for more information on the GST/HST implications of when a consideration other than money is received for payment.
Regardless of the view taken by the CRA, it is still unclear whether a person who made a payment by way of cryptocurrency before May 28, 2019 was effectively making a sale of a financial instrument (exempt from GST/HST) or the sale of another type of property, which could have been subject to GST/HST. Therefore, anyone who was making significant payments by way of cryptocurrency in Canada could potentially have been exposed to a GST/HST liability for having failed to charge and remit GST/HST on such payments, if such payment was to be viewed as the sale of property other than a financial instrument.
With this proposed change, there would now be certainty that any payment made by way of a virtual payment instrument, such as a Bitcoin, made after May 27, 2019 would not be taxable for GST/HST purposes.
The term "virtual payment instrument" would be defined as property that:
- Is a digital representation of value that functions as a medium or exchange (i.e., like money, it is an instrument that is accepted as payment in transactions for property and services and is recognized as a measure of value); and
- Exists only at a digital address of a publicly distributed ledger (e.g., blockchain).
It would specifically exclude any of the following properties:
- Property that confers a right of any kind to be exchanged or redeemed for money or specific property or services or to be converted into money or specific property or services (for example, a security token that confers the future contingent right to be exchanged for a common share of a corporation would be excluded from the definition of "virtual payment instrument".
- Property that is primarily for use within, or as part of, a gaming platform, an affinity or rewards program or a similar platform or program.
- Property that is prescribed property (currently, no property is proposed to be prescribed).
Based on the above definition, and considering that various types of cryptocurrency or other form of digital payment instrument exist, it would be imperative to ensure that instrument qualifies as virtual payment instrument before treating it as such for GST/HST purposes.
One last point to consider is that service providers that process virtual payment instruments may now be considered to be providing GST/HST financial services (depending on the facts) which may have significant implications on their ability to claim input tax credits to recover GST/HST payable on their business costs.
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