[kwlug-disc] Accepting bitcoin (and other cryptos) as a Canadian business (Bob Jonkman)

[Tom Fahey]

Replying to the thread regarding the tax treatment of a sale of C$100
services in exchange for BitCoin, followed by a gain on the BitCoin.

It appears that the discussion has not yet taken into consideration the two
different taxation issues arising from the example transaction - GST/HST
and income tax are two separate issues. The tax treatment of any gain or
loss from "holding" BitCoin will be determined based on the nature of the
underlying transaction that gave rise to the acquisition of the BitCoin.

The first tax issue relates to GST/HST.

Assuming the seller is a GST/HST registrant, the seller will need to first
determine if the "supply" is a supply in Canada.
If the supply is not in Canada, it is an export supply, the transaction and
is normally zero-rated, and no GST need be applied.
If the supply is in Canada, the seller will then need to determine if the
supply is made in our outside of a participating province.
This will determine the applicable GST/HST tax rate to apply to the supply.

The GST/HST to be charged and collected will be the fair market value (FMV)
of the supply multiplied by the applicable GST/HST tax rate.

The FMV is to be denoted / calculated in Canadian dollars(C$).  If the
supply is denoted in a foreign currency, it must be converted to C$.
The Canada Revenue Agency (CRA), as a general rule, requires the conversion
to be made using the relevant currency exchange rate quoted by the Bank of
Canada at noon on the date of the transaction.

Based on the example, a GST/HST registrant supplying services with a FMV of
C$100 will charge 13% HST (if the place of supply is Ontario, a
participating province where the HST rate is 13%).  The registrant will
report the taxable supply and tax collected, and any GST/HST ITCs on its
GST/HST return for the period.  If the tax collected is greater then the
ITCs paid in the period, the registrant must remit the net tax payable to
the Receiver General for Canada.  If the ITCs paid are greater than the tax
collected, the registrant can claim a refund.

The second issue relates to income tax.

The taxpayer is required to determine "income" base on the Income Tax Act
(ITA).  In the example transaction, the supply of services gives rise to
C$100 of taxable revenue, and this revenue will be included in the
taxpayers calculation of "income".

The final issue, the tax treatment of any exchange gain or loss on holding
a "currency" (BitCoin).

The ITA does not contain any definitions of the nature of foreign exchange
gains or losses.  Instead, the taxpayer must look to the underlying nature
of the original transaction.  A foreign exchange gain or loss as a result
of a purchase or sale of goods or services will be treated as a revenue
item, while a foreign exchange gain or loss on the purchase or sale of a
capital property will be treated as a capital gain or loss.

The question of BitCoin (and other cryptocurrencies) being "money" is yet
to be answered.  The Bank of Canada has ongoing research on the topic, and
at this point BitCoin does not yet qualify as "money".

So in summary, the example transaction, a sale of C$100 services in
exchange for BitCoin valued at C$100 is a barter transaction.
It is a taxable "supply" for GST/HST purposes, and if supplied by a GST/HST
registrant, would be taxed at 13%, if the place of supply is Ontario.  For
income tax purposes, the transaction will be treated as C$100 of revenue to
be included in the taxpayer's calculation of income from a business.  Any
gain or loss (realized or unrealized) on a change in value of the medium of
exchange, the BitCoin, would be treated as adjustment to business income.

References:

GST/HST and place of supply rules
https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses/charge-gst/gst-hst-place-supply-rules.html

Review of tax treatment of foreign exchange gains and losses and recent
amendments to subsection 39(2) ITA
http://www.rcgt.com/en/experts-opinions/review-tax-treatment-foreign-exchange-gains-losses-recent-amendments-to-subsection-392-ita/

Canadian Taxation of Foreign Exchange Gains and Losses
http://miningtaxcanada.com/bibliography/Canadian%20Taxation%20of%20Foreign%20Exchange%20Gains%20and%20Losses.pdf

ARCHIVED - Foreign exchange gains and losses - Canada.ca
https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/it95r-archived-foreign-exchange-gains-losses/archived-foreign-exchange-gains-losses.html

Decentralized E-Money (Bitcoin)
http://www.bankofcanada.ca/wp-content/uploads/2014/04/Decentralize-E-Money.pdf

Briefing on Digital Currencies
http://www.bankofcanada.ca/wp-content/uploads/2014/04/Senate_statement.pdf

Tom Fahey
Elmira, ON

On Fri, Oct 20, 2017 at 1:42 PM, <kwlug-disc-request at kwlug.org> wrote:

>
> Message: 1
> Date: Fri, 20 Oct 2017 12:37:00 -0400
> From: Bob Jonkman <bjonkman at sobac.com>
> To: KWLUG discussion <kwlug-disc at kwlug.org>
> Subject: Re: [kwlug-disc] Accepting bitcoin (and other cryptos) as a
>         Canadian business
> Message-ID: <51855378-cd31-24a5-02fd-2bc914a896c5 at sobac.com>
> Content-Type: text/plain; charset=utf-8
>
> -----BEGIN PGP SIGNED MESSAGE-----
> Hash: SHA1
>
> Chamunks wrote:
> > So @Bob you're saying it's better to just cash out the 13% out of
> > BTC and bank that for tax day?
>
> I don't know if it's "better", but it's certainly more straightforward.
>
> Until CRA starts accepting BTC as a payment method it needs to be
> handled as a foreign currency. And I'm not sure if BTC is recognized
> as a foreign currency, so then it may need to be dealt with as barter.
> IANAA, YMMV, ETC.
>
> Joel wrote:
> > Your thinking is on the right track but I wouldn't record it that
> > way.
>
> Thanx Joel! As you point out, there are different ways of recording
> the transaction, and different payment schedules to CRA. Retaining a
> tax accountant for a small business is a prudent move.
>
> - --Bob.
>
>
>
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