Income Tax Repercussions for Employees and Employers Receiving or Paying Salaries or Wages in Cryptocurrency
Published: November 14, 2022
Last updated: October 10, 2023
Introduction: The Point at Which Employment Income Is First Subject to Canadian Tax
Each tax year, every person who resides in Canada is required to pay income tax on their taxable income. Office, employment, businesses, real estate, and capital gains/losses are the five primary sources of income listed in Section 3 of the Canadian Income Tax Act. The implications on Canadian income taxes for an employee who receives salary or wages in cryptocurrencies like bitcoin or ETH are covered in this article.
What Falls Under Employment Income
Section 5 of the Canadian Income Tax Act, which specifies what must be included in employment for tax purposes and when employment income must be reported for Canadian crypto tax purposes, is the beginning point for the analysis.
According to section 5(1) of the Canadian Income Tax Act, a taxpayer's employment income is defined as salary, wages, and other compensation, including gratuities, that the taxpayer receives within a specific taxation year. The fact that employment earnings may not always come straight from the employer makes this section extremely general. To put it another way, if there is a relationship between employment and a receipt of income, the income must be taken into account when determining one's employment income.
As an instance, imagine that a Canadian tax lawyer working for a Canadian tax law firm invites each of their staff members to the annual retreat for the tax law business. If the retreat costs more than $150 per person in this case, the CRA may classify it as a taxable benefit. Therefore, in general, unless your knowledgeable Canadian tax lawyer indicates otherwise based on taxation case law or the Canadian Tax Act, it is good practice to assume that if a taxpayer receives a sum or benefit that has some connection to his or her employment, it may be a taxable employment benefit.
At What Point does Employment Income Become Included in Income?
According to Canadian Tax Act subsection 5(1), the receipt within the taxation year constitutes the triggering event for tax inclusion. The term "cash basis" of income recognition, used in accounting terminology, is frequently used to describe this timing for recognition. This means that employment income must be recorded in the tax year in which it is received. Contrary to the general accounting recognition rule for business revenue, which requires revenue to be recognized on an "accrual basis" regardless of when money is received, this rule requires revenue to be recorded as soon as the earning process is done or substantially completed.
Non-Cash Benefits Taxation?
What is taxable under Section 5 of the Canadian Tax Act is clearly set out in Section 6. It says that in most cases, incentives related to employment income are likewise taxable as such. The key clause is found in paragraph 6(1)(a), which mandates that the "value of board, lodging and other benefits of any kind whatsoever received or enjoyed by the taxpayer or by a person who does not deal at arm's length with the taxpayer, in the year in respect of, in the course of, or by virtue of the taxpayer's office or employment" must be included in employment income.
Therefore, based on section 6, if an employee obtains benefits while working, any non-cash incentives may need to be included in the employment income. For instance, if a Canadian tax law firm gives a $100 allowance to a Canadian tax lawyer employee so they can join the gym, this is typically considered to be part of their employment income. A general definition of an employment benefit is any economic advantage that can be quantified in monetary terms that is received while working.
As a result, since the employment income sections of the Canadian Tax Act are drafted broadly, the general approach is to assume that, unless specifically indicated differently in the Canadian Tax Act or by tax case law, any benefit associated with a working relationship is taxable as employment income.
Is Cryptocurrency Taxed When Paid or Received as a Wage or Salary?
There is currently no Canadian case law that deals directly with how to tax cryptocurrency wages. On the basis of the application of the employment income sections of the Canadian Income Tax Act, we may, however, confidently predict what would occur. According to subsection 5(1) of the Tax Act, an employee's employment income consists of their pay, wages, and other compensation they earned during the tax year, including gratuities. In this case, the fair market value of the cryptocurrency at the time of receipt should be counted as employment income if it is received as part of the employee's pay, wages, or another form of compensation. The employee will then have a cost base for the cryptocurrency equal to the fair market value at the time of receipt. The employee will get the cryptocurrency as part of their pay, wages, and other compensation. The future proceeds of token disposition of the employee's cryptocurrency less the cost base will be the employee's taxable income or capital gain when the cryptocurrency is disposed of. Even if it was not converted to fiat money at that point, the initial fair market value at the time of receipt is still taxable as employment income.
Employers are responsible for withholding and transferring source deductions from employees' wages. These deductions consist of withholding income tax, paying into the Canada Pension Plan, and paying into the Employment Insurance system. Of course, this sum will vary according to the employee's salary. As a result, whenever an employer pays an employee using cryptocurrency as a component of the employee's salary, wage, or other compensation, the employer must perform a proper valuation by figuring out the cryptocurrency's fair market value at the time of payment. Cryptocurrency remittances cannot be done since CRA does not accept cryptocurrencies; instead, Canadian dollars must be used for all required payroll remittances.
Pro Tax Advice: Unless specifically stated otherwise, assume that if a sum is connected to employment, it is subject to taxation.
The general norm is to assume that, unless specifically specified otherwise in the Income Tax Act or income tax case law, every payment received that is related to someone's employment is taxable as employment income. Due to the fact that the Canadian Tax Act does not specifically address employment characterization, determining whether an employment relationship exists or there is an independent contractor relationship can occasionally be difficult. It necessitates analyzing all relevant factual information and understanding numerous tax law case rulings. Contact one of our Canadian crypto tax lawyers if you're not sure if the money you received, including any cryptocurrency or other assets, needs to be recorded as an employment source income.
Frequently Asked Questions
Question: Why Is It Important to Define a Business or Employment Relationship?
Answer: For tax purposes, it's crucial to distinguish between employment relationships and independent contractor relationships. The range of possible deductions, for instance, differs greatly. An employee's ability to claim tax deductions is typically severely constrained. On the other hand, if a person is running a business, they will have a wider range of expenses that may be claimed. Another instance relates to tax withholding. The task of withholding and remitting source deductions from employment income is on the employer. Contrarily, there are typically no withholding obligations attached to independent contractor income.
Question: Are there any exceptions to the general rule where an employee won't be taxed on an employment benefit?
Answer: The Canadian Tax Act specifies a small number of circumstances in which an employee won't be taxed on an employment incentive. A common law test known as the major beneficiary test has been created by courts to determine whether an employee has received a taxable employment benefit in addition to statutory exclusions. Consider speaking to one of our knowledgeable Canadian crypto tax lawyers if you want to find out if your income qualifies for one of the exclusions.