CANADA CRYPTOCURRENCY LEGAL REGULATION

What is “cryptocurrency”? How is it regulated in Canada? Where did it come from? In this article, our civil litigation lawyer in Toronto addresses these questions and to provide you with guidance on legal aspects of cryptocurrency in Canada.

What is Cryptocurrency?

Cryptocurrency can be defined as any form of currency that may exist digitally and which uses something known as cryptography to secure transactions. Cryptocurrency does not involve bank verification but can rather be exchanged digitally without having to carry around any physical money. There are digital wallets that store cryptocurrency, and such transactions are recorded in a public ledger. This public ledger is known as the “blockchain.” A process known as “mining” is used to create cryptocurrency, which involves solving complicated mathematical problems to generate coins. Cryptocurrency can also be purchased from brokers and then used using cryptographic wallets. Because it is all digital, owning cryptocurrency is not owning something tangible, rather it allows you the ability to move a unit of measure between people without a third party involved such as a bank. Some commonly known cryptocurrencies are Bitcoin and Ethereum.

Currently, Canada regulates cryptocurrency as a security and legal commodity. In essence, cryptocurrency is treated like a tradable financial asset such as EFT, shares, stocks, bonds, and hedge fund investments. It is important to note that while cryptocurrency is considered a security and legal commodity, it is not recognized as a legal tender in Canada. The only legal tender in Canada consists of banknotes or coins issued by the Bank of Canada and the Royal Canadian Mint Act.

The Need for Legal Regulation

As it is still a developing field, laws concerning cryptocurrency in Canada continue to change and evolve. Currently, there is a need for legal regulation of cryptocurrency in Canada. There is a growing number of fake websites, Ponzi schemes, and other methods of crime that can be dangerous when using cryptocurrency. Additionally, with the elimination of a third party during the transactions, cryptocurrency transactions may carry more risk.

Regulation Development on Cryptocurrency in Canada

A recent study indicated that as of 2023, there is an average of 420 million crypto users worldwide. While cryptocurrency seems to be very popular today, many countries were hesitant to legalize and regulate it in their respective countries. Canada was one of the very first countries to adopt and accept cryptocurrency as a security and because of that, it is regulated under various provincial laws enacted by securities regulators in the country. Although the laws are provincial, they are almost universal throughout all of the provinces and territories. Canada launched North America’s first bitcoin ETF, “Purpose”. In 2014, Canada became the first country to create new laws addressing cryptocurrency by amending the Proceeds of Crime and Terrorist Financing Act (“PCA”).

Proceeds of Crime and Terrorist Financing Act

The Canadian government amended the PCA to apply to “virtual currency” and “foreign money services businesses” beginning June 1, 2020. In 2014, the PCA was amended to apply to cryptocurrency by way of “dealers in virtual currency,” but its coming into force was delayed. “Virtual currency” is defined as a digital asset that can be used to buy and sell goods or service. The PCA requires foreign cryptocurrency exchanges to be registered with the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”). Amongst other things, the PCA provides regulatory and compliance standards for cryptocurrency transactions in Canada.

Not Legal Tenders

The implications of cryptocurrency being not legal tenders means that financial institutions in Canada do not oversee or manage them. In other words, there is no central guiding body, such as a bank, authorizing cryptocurrency transactions. As a result, limited transactions can be made with cryptocurrency because not everyone is required to accept it as legal tenders. Additionally, there is less protection in terms of provincial or federal insurance.

Taxing Cryptocurrency

The taxing of cryptocurrency is treated like any other investment. The gains and losses are recorded in the yearly tax return and the Income Tax Act, and other tax rules apply to digital currencies as well. Cryptocurrency may be considered as taxable income for the taxpayer.

The disposition of cryptocurrency needs to be reported and is treated like an investment. Disposition can be the sale or even a gift of cryptocurrency. “Disposition” refers to the way you get rid of something. Generally holding or possessing cryptocurrency is not taxable.

There are two ways to report cryptocurrency: either as business income or a capital gain.

Business income concerns transactions that fall within the course of some business activity. Looking at the circumstances, does the cryptocurrency transaction mimic a business transaction? If it does mimic a business transaction, then it is possible the cryptocurrency may constitute business income.

On the other hand, cryptocurrency may be reported as a capital gain, for example following the sale of an appreciated asset. It is notable that only 50% of capital gains are subject to tax in Canada. Essentially, less tax is charged on capital gains in comparison to business income. It is important to consider these factors when reporting cryptocurrency for tax purposes. Further, if in doubt, it is encouraged that you speak with a tax lawyer or accountant regarding your rights and reporting obligations with cryptocurrency.

Canadian Securities Administrators

The Canadian Securities Administrators (“CSA”) regulates Canada’s capital markets. Further, the CSA sets expectations that a cryptocurrency trading platform must meet in order to operate in Canada. The CSA prohibits platforms from offering margin, credit, or other forms of leverage to its clients. These platforms are also prohibited from allowing the purchase of stablecoins without prior written consent from the CSA. Nevertheless, such platforms will generally be considered qualified if regulated by a financial regulator, and where the regulator has a supervisory regime for conduct and financial regulation. Such requirements impose an enhanced pre-registration undertaking on cryptocurrency users.

Cryptocurrency is Still Emerging

Cryptocurrency is a field of law that is relatively new and still emerging. As such, the laws and regulations concerning cryptocurrency continue to evolve. Cryptocurrency is a nontangible digital unit that is not a legal tender in Canada. It is treated as an investment of sorts and thus has similar tax implications as that of a security. Both the PCA and CSA provide regulations on cryptocurrency use in Canada. Laws on cryptocurrency in Canada will continue to evolve with time, as new discoveries are made.

If you would like to discuss the legal implications of cryptocurrency in Canada or if you have a dispute concerning cryptocurrency that you wish to discuss, feel free to contact our law office for a consultation at 416-583-2377 or admin@chandlitigation.com.

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