Cryptocurrency Taxation in Canada & Barter Transactions Taxation
Published: February 21, 2023
How Cryptocurrency Taxes Work: An Overview
The use of cryptocurrency in online transactions is becoming increasingly common. Popular cryptocurrency tokens like Binance, Coinbase, Kraken, Ethereum, and Bitcoin have evolved into accepted payment methods for some international e-commerce merchants. It is crucial for Canadian businesses considering accepting cryptocurrency payments for their products and services to be aware of any potential tax compliance problems, as well as the ensuing potential tax liabilities and tax fines.
This article will define barter transactions and explain why the CRA views exchanges of cryptocurrencies for goods and services as barter transactions. We'll analyze the effects of recognizing these transactions as barter transactions on income tax and excise tax (GST/HST). We will also go over what to do if your cryptocurrency transactions haven't been properly reported. We will conclude by providing Pro tax tips by our knowledgeable Toronto crypto tax lawyers.
Neither the Income Tax Act nor the Excise Tax Act defines a barter transaction. However, barter transactions will always result in GST/HST and Canadian income tax obligations. According to the CRA, a barter transaction is carried out when any two parties agree to a reciprocal trade of products or services and carry it out in most cases without the use of money. It is a key tenet of barter that each party believes that the value of whatever is obtained in a transaction between parties who are dealing with one another at arm's length is at least equal to the value of whatever is given up in exchange therefor. However, this does not imply that the items being traded in a barter transaction have an identical fair market value for taxation.
In the case of cryptocurrencies, they are now regarded by the CRA as commodities rather than currencies under the Income Tax Act and Excise Tax Act. If the CRA's view is true, it has not been determined by Canadian courts.
As things stand, the CRA regards any exchange of cryptocurrency for goods, services, or another commodity as a barter transaction for the purposes of the Excise Tax Act and the Income Tax Act. When compared to cash transactions, the usage of cryptocurrencies as a form of payment has significant tax implications for Canadian businesses, Canadian crypto taxes and cryptocurrency users in terms of the transaction and how to disclose their tax liabilities.
Barter Transactions Involving Cryptocurrency and the Income Tax Act
The proceeds of the transaction for the seller will be the fair market value of the cryptocurrency received at the time of the transaction when a cryptocurrency payment is accepted in return for goods and services.
It's crucial to remember that even if the seller does not immediately dispose of the cryptocurrency, the Income Tax Act considers the proceeds of the transaction to be the fair market value of the cryptocurrency received at the time of the transaction, and subject to taxation at that time. Any subsequent increase or decrease in the price of the cryptocurrency tokens received by the seller in the initial barter transaction will result in taxable gains or losses separate from the original barter transaction if the seller holds the tokens and later sells them for cash or in another barter transaction.
Furthermore, depending on the current elements from Happy Valley Farm, a barter transaction including cryptocurrency can still result in capital gains as opposed to income. For further information on the income tax distinction between income and capital gains, please check our article at https://taxpage.com/articles-and-tips/a-guide-to-adventure-or-concern-in-nature-of-trade/.
Barter Transactions Involving Cryptocurrency and the Excise Tax Act (GST/HST)
The Excise Tax Act's requirement to collect and remit GST/HST may also apply to cryptocurrency barter transactions. Remember that a supplier who has provided goods or services totaling less than $30,000 for four consecutive calendar quarters is regarded as a small supplier under the Excise Tax Act and is not required to open a GST/HST account with the CRA or collect GST/HST.
In barter transactions involving cryptocurrencies, non-barter transactions, the seller is responsible for collecting and remitting GST/HST based on the fair market value of the cryptocurrency at the time of the transaction, unless the seller is exempt from this requirement. Based on the fair market value of the goods or services sold in these barter transactions, the seller in this situation should not collect, remit, and report GST/HST. Despite the fact that no Canadian dollars were received as part of the cryptocurrency transaction, it should be noted that the duty to remit GST/HST is in Canadian dollars.
When a buyer uses cryptocurrencies as payment and meets the requirements set forth in the Excise Tax Act for claiming input tax credits, the buyer may also be eligible. An input tax credit is available to registrants in an amount equivalent to the tax that was actually paid. Therefore, the buyer is eligible for an input tax credit for that sum if 13% HST was paid.
Cryptocurrency and Voluntary Disclosure
Barter transactions involving cryptocurrencies will make Canadian taxpayers' tax reporting and compliance duties more complicated. The absence of statutory direction in either the Excise Tax Act or the Income Tax Act makes it more difficult for Canadian taxpayers to declare their taxes.
The Income Tax Act and Excise Tax Act must still be followed by Canadian taxpayers for all barter transactions, including those involving cryptocurrency. Potentially costly interest and penalties could be assessed by the CRA in the future for noncompliant Canadian taxpayers. These taxpayers might think about using the CRA's program for voluntary disclosure.
The following are the general eligibility requirements to avail the CRA's voluntary disclosure program (VDP):
- Voluntary: The CRA must be completely unaware of the taxpayer's outstanding tax debt.
- Complete: The taxpayer is required to provide tax information for all years for which their filings were incorrect.
- Tax Owing: As a result of erroneous filings, the taxpayer must owe tax to the CRA.
- One Year Past Due: The taxpayer may only reveal information with respect to tax years for which the filing deadline has passed by at least one year.
Even if the CRA is not currently investigating or auditing the taxpayer, the taxpayer may not meet the "Voluntary" criteria of the VDP if the CRA was successful in obtaining the taxpayer's tax information from a third party while looking into the potential noncompliance of another taxpayer.
Tax Pro Tip -Tax Guidance - Exercise Due Diligence When Engaging with Cryptocurrency Barter Transactions
If you are out of compliance with your cryptocurrency tax filing obligations, such as failing to declare income arising as a result of crypto barter transactions or the requirement to file a form T 1135 identifying your cryptocurrency holdings, our expert Toronto tax crypto lawyers can offer tax guidance on the complicated issues relating to your cryptocurrency transactions. Our team member and our certified Specialist in Taxation Canadian tax lawyer have a wealth of experience defending taxpayers in crypto tax audits, objections, and tax court appeals. In every interaction you have with the CRA, we will defend your rights. Whether you decide to hire us or not, all consultations with our students and seasoned Canadian crypto tax lawyers are private and confidential.
Can I Use Cryptocurrency to Pay My Taxes to the CRA?
Cryptocurrency cannot be used to pay Canadian taxes. Any third party requesting payments in cryptocurrencies and posing as the CRA is a scammer.
Do I Need to Explicitly State on My Canadian Taxes Whether I Hold Cryptocurrency?
No such reporting obligation was in place by the Canadian government as of January 2022. However, given that the US government has mandated cryptocurrency reporting for all US taxpayers, such reporting requirements may soon be in question. However, if the total cost of your specified foreign property reaches $100,000, cryptocurrency will typically qualify as specified foreign property and you must report it on your form T1135.