Bitcoin and cryptocurrency trading in Canada
Crypto alignment
Fidelity Clearing Canada, an IIROC member, is now able to trade crypto assets. Five CTPs have also obtained registration as restricted dealers, subject to terms and conditions of the CSA to address consumer protection issues in the custody of crypto assets held in hot and cold wallets.
Canada continues to take steady but progressive measures towards crypto – and broadly follows the same moves being taken in the USA. A federal bill is being proposed to promote the crypto-economy which will lead to the development of a national framework to encourage the growth of the crypto economy along with new and appropriate legislation following on. As of January 2022, on the Toronto Stock Exchange, there are come 56 Bitcoin and crypto listings (including corporate listings, ETFs, and closed-end funds). Public markets and retail investors are able to invest in Bitcoin mining and blockchain technology companies including those active in decentralized finance, the metaverse, NFT platforms, and payment infrastructure platforms.
Like many countries, Canada is wrestling with complex aspects of regulating crypto exchanges to enable them to function as part of the existing financial system. This often means protecting consumers who use them and examining all aspects of the custodianship obligations of exchanges and wallets holding investors’ money. The moves do not mean Canada is generally anti-crypto, but like Germany, shows a willingness to bring crypto investment at the individual and organizational level within the rules and regulations of existing financial systems.
Early on in the Bitcoin phenomenon, Canada defined cryptocurrency platforms as a ‘money service’ enterprise for the purposes of regulation and within the country, there is a strong sense that clear and cautious regulation is the way forward. Brane, for example, a leading independent cryptocurrency custody solutions provider was ranked as high as 5th on the 2022 Canadian Business New Innovators List.
More positive regulatory legislation is under discussion and Canada is well-placed to be amongst the most active of the western economies in defining and implementing more considered and necessary crypto regulations. Canada has a very high number of ATMs and an above-average percentage of the population owning crypto. Additionally, the country has also a positive stance towards the wider use of ‘stable coins’ – linked to the Canadian Dollar – to provide stability to approved digital currencies. Canada moves up a place to 4 from 5 in continuing with its slow but steady positive progress in engaging with crypto and digital currencies.
Canada’s CBDC efforst
Cryptocurrency transactions are acceptable and taxable under the Canadian Income Tax law and crypto platforms can register as investment dealers or marketplaces, according to their exact function and volumes of transactions. In addition to the above, the Bank of Canada is actively assessing the outcomes of introducing a central bank-regulated digital currency (CBDC). Compared to conventional cryptocurrencies, the bank recommends that stablecoins, crypto linked to fiat currency are more suitable for mainstream usage within the world of money and payments.
Looking ahead, it is likely that Canada will continue to be among the leading countries in terms of framing and implementing crypto regulations. Additionally, as the country has also taken the lead in terms of accepting stable coins as a widespread currency, it is likely that the country will continue its regulatory work in this direction by refining its laws even further.
Major world economies like Canada and the United States have constantly looked to develop regulations that help categorize cryptocurrency platforms within well-defined legal brackets. These regulations aim to track and manage cryptocurrency transactions better as they become an essential part of modern business operations, providing more positive steps towards understanding the crypto economy and giving it validity.
Earlier this year the world’s first directly backed Bitcoin Exchange Traded Fund (ETF) was approved in Canada, enhancing the ability to access cryptocurrencies for all investors. The launch of this first crypto ETF led the way for similar ETF products in Canada.
Canada has many progressive advocates for crypto and blockchain technology. The central bank has involvement in a digital currency and there is firm regulation and a healthy crypto investment framework.
Law and crypto trading in Canada
Legal - existing crypto legislationThe good news is that investing or trading in cryptocurrencies such as bitcoin in Canada is legal and regulated. Just remember to keep clear and extensive records of your crypto transactions.
The Canadian Revenue Agency (CRA) places crypto assets in the category of foreign property and you’ll also have to complete a Foreign Income Verification Statement if your holding rises above a certain amount (check $100k). Lucky you!
If you want to trade bitcoin, there are a number of well-established crypto exchanges that make it easy and straightforward to buy, sell and invest in bitcoin (BTC) and other cryptocurrencies.
In February 2020, the Virtual Currency Travel Rule came into effect in Canada, requiring all financial institutions and money services businesses (MSBs) to keep a record of all cross-border cryptocurrency transactions (along with all electronic fund transfers). This change also effectively means that crypto-asset deals, and persons that undertake cross-border transactions, are subject to the country’s enhanced due diligence requirements.
Legal - forthcoming crypto legislationTaxing cryptocurrencies in Canada
Income Tax
There is no specific strategy for crypto and this extends to taxation policy which is probably in need of a clearer direction. Whether the acquisition of crypto is a taxable event in itself is open to the circumstances of it being acquired and the tax implication arises when it is sold or exchanged (yes, it’s wordy but you can bet your body parts any gains are going to be taxable). Taxation policy is clearer on mining because mining is seen as a service for which the end product is rewarded for that service – in this case, the crypto you get is income taxable. As with the UK and many other countries, there are no taxes on buying or holding crypto in Canada. However, in line with many other countries when you sell, trade, gift or convert your bitcoins it will be deemed to be a ‘disposal’ and subject to the prevailing Income Tax or Capital Gains Tax. This applies to lending out your coins and getting interest on them. Capital gains from the sale of crypt form part of your yearly income for the year, with only half of the pure capital gain subject to tax. So, whatever your income tax bill, only 50% of your crypto gains will be taxable.
Tax relief
Your cryptocurrency will be taxed as either capital gains or as income tax depending on whether you are investing as a business, in which case 100% of your business income is taxable, whereas only 50% of capital gains are taxable.
Tax when moving residency
As with any income, your bitcoin will come under the tax laws of the country you become legally resident in. If you set up a business to trade bitcoin, that business will come under the tax laws of the country it operates from.
Tax on mining
It’s highly technical and beyond the scope of most individuals, but mining for bitcoins falls within standard Canadian tax law. As we all now know – mining does consume vast amounts of energy which most governments are unhappy with, but mining is left to its own devices in Canada with a hands-off approach by the government. However, one energy utility did restrict energy allocation for users undertaking crypto mining which may lead to more miners using private sources of energy. Mining has different tax treatments depending on whether the mining is a hobby or a business activity, but if your hobby is making money regularly the taxman will want to know. On the plus side, the huge cost of mining in energy is allowable against gains.
Crypto financial services in Canada
Yes. There are funds becoming available in Canada that allow accredited investors to have exposure to the bitcoin market. Once again, it’s a higher risk investment and carries potentially higher fees. As yet most retirement schemes are for high net worth types, rather than the average consumer.
Several leading Canadian banks have trialled and run mobile apps for identity verification, using blockchain technology to give their customers the ability to prove their identity digitally. While many Canadian banks and institutions have been supportive of the concept of open banking and the advantages of blockchain technology. Though the banks’ trading platforms include exchange-traded funds (ETFs) that may have exposure to cryptos, Canadian banks are cooler than a Magnum ice cream about being directly involved with investing in bitcoin or other crypto assets, or providing custodial services – the reason often given is price volatility and fraud.
Many banks are adopting a wait and see approach (which broadly means doing nothing). They are also not mad about the fact that crypto is not considered a cash asset.
Decentralized Finance is on a roll and has been trialed successfully by some finance organisations for remittances, loans, stablecoins, and other core elements of the fiat world although it is not adopted by nearly all governments as a means of running the country’s finances. That said, Canada is supportive of crypto and offers support to startups looking to harness some aspects of digital asset technology. The Canadian Security Association’s (CSA) sandbox initiative supports financial technology businesses seeking to offer innovative products and the Ontario Securities Commission (OSC) LaunchPad works with financial service businesses to keep regulation aligned with any development of products, services and applications – assuming they meet stringent compliance laws.
Using crypto in Canada
Canada has plenty of places that accept bitcoin with outlets ranging across retail, software and gambling including the famous world brands such as Microsoft and Starbucks, as well as a growing number of online retailers. There is a healthy spread of Bitcoin ATMs across the country to do your crypto business and a whole lot of participating outlets that accept crypto ranging from restaurants, coffee bars and cinemas, to bookstores, food retailers and travel companies. In most cases it is possible to use one of the many ATMs, but you can also buy vouchers with your crypto that may then be indirectly used with participating outlets.
You can’t avoid being eligible for tax on your bitcoin by gifting it to someone and the CRA will treat it as a disposition of property and any gain or loss reported. However, you can provide it as a gift to a registered charity for example and receive a valid tax receipt from the done. If you’re feeling generous, cryptocurrencies are becoming a popular gift and any established crypto exchange will be able to advise you on gifting your investment coin or coins to a third party.
Crypto regulation in Canada
There is some form of redress for cryptocurrency theft in Canada but any loss you suffer is calculated according to a complex set of rules that take into account prices and circumstances. If you want to go into detail the CRA has published a policy to explain these principles – but you’ll need plenty of black coffee while you read it.
Canada was one of the first countries anywhere to subject crypto to Anti Money Laundering AML compliance laws. All crypto transactions are subject to stringent record-keeping and Know Your Client verification processes. In 2020 all cryptocurrency exchanges were required to register with the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC) and, where applicable, comply with margin and market valuation requirements. There are strict regulation and compliance requirements, including for personal identification and tax declaration, but when it comes to the security of your hard-earned cash you need to do your homework. Many exchanges carry insurance against security breaches and potential loss (of your assets) so it’s a good idea to check these out if you are investing big time. Redress through the state could be quite complex.
