CRA Publishes Compliance Guides on Digital Currency
Apr 2019 Charity & NFP Law Update
On March 8, 2019, the Canada Revenue Agency (“CRA”) published an information website on Digital Currency, which defines “digital currency” by way of reference to Bitcoin stating that “Bitcoins are not controlled by central banks or any country, […] can be traded anonymously, […] can be bought and sold in return for traditional currency, and can also be transferred from one person to another.” The information website further states that transactions involving digital currency are governed, for tax purposes, by the rules for barter, which are described in the CRA’s Interpretation Bulletin IT-490, Barter Transactions. The information website also states that gains or losses resulting from buying and selling digital currency like a commodity may constitute taxable income or capital, as determined in accordance with Interpretation Bulletin IT-479R, Transactions in Securities. Finally, the information website states that the CRA is very active in pursuing cases of non-compliance.
On the same date, the CRA also released its Guide for cryptocurrency users and tax professionals (the “Cryptocurrency Guide”) which defines “cryptocurrency” as a type of “alternative currency” such as Bitcoin, and as a “digital asset” (also referred to as a “crypto asset” or “altcoin”), that works as a medium of exchange but that is not legal tender. This suggests that the CRA considers the terms “digital currency”, “digital asset” “cryptocurrency”, “crypto asset”, “alternative currency”, and “altcoin”, at least to some extent, interchangeable.
The Cryptocurrency Guide states that the CRA “generally” treats cryptocurrency like a commodity for purposes of the ITA and that transactions involving cryptocurrencies are “generally” treated as either business income or capital gain, depending on the circumstances. In this regard, the Cryptocurrency Guide describes when earnings or losses from a disposition of cryptocurrency may be considered either business income/losses or capital gains/losses, including a number of examples involving cryptocurrency trading and cryptocurrency mining, and when cryptocurrency should be considered capital property or inventory.
The Cryptocurrency Guide further states that “in general” possessing or holding a cryptocurrency is not taxable and that only a disposition “could” have tax consequences, such as with regard to: i) the sale or gift of cryptocurrency; ii) a trade or exchange of cryptocurrency, including the exchange of one type of cryptocurrency for another; iii) the conversion of cryptocurrency into government-issued currency, such as Canadian dollars; and iv) the use of cryptocurrency to buy goods or services.
Regarding gifts of cryptocurrency, and of interest to charities and not-for-profits, CRA document 2013-0514701I7 provides that the fair market value of Bitcoin at the time of the transfer to a qualified donee must be used to determine the eligible amount of the gift for tax purposes and, subject to the deeming rule applicable to gifts in kind, the eligible amount of the gift may be less than its fair market value. The CRA website Determining fair market value of non-cash gifts provides additional information on gifts in kind.
As such, the Cryptocurrency Guide recommends that reasonable methods be used in order to value all transactions for each type of cryptocurrency or separate digital asset, for example, by consistently choosing an exchange rate taken from the same exchange broker or an average of midday values across a number of high-volume exchange brokers. The Cryptocurrency Guide also requires that adequate books and records be kept for all cryptocurrency transactions for at least 6 years, including the date of the transactions, the receipts of purchase or transfer of cryptocurrency, the value of the cryptocurrency in Canadian dollars at the time of the transaction, the digital wallet records and cryptocurrency addresses, a description of the transaction and the other party (even if it is just their cryptocurrency address), the exchange records, accounting and legal costs, and the software costs related to managing tax affairs.
Neither the Cryptocurrency Guide nor the webpage on Digital Currency address issues related to cryptocurrency and registered charities. However, reference to these documents will be important in the context of registered charities receiving gifts of and receipting cryptocurrency. In this regard, the reaffirmation that cryptocurrency is considered by the CRA to generally be a commodity and subject to the deeming rules applicable for gifts in kind will be significant in issuing receipts, as well as the books and records that should be kept related to transactions in order to support any valuation given.