Making or Accepting Payment in Crypto: A GST/HST Risk?

Can bitcoin and other cryptocurrencies (collectively, "crypto") be used as a medium of exchange to purchase goods and services without creating a potential GST/HST liability? Judging by the lack of client calls, taxpayers seem to be treating payment by crypto in the same way as payment in official government currency—that is, as though there are no GST/HST implications. However, one must consider the implications of the CRA's position that "using Bitcoins to purchase goods or services would be treated as a form of barter transaction" (CRA document no. 2013-0514701I7, December 23, 2013): vendors accepting crypto for payment are at minimal risk, but purchasers paying with crypto are at risk of incurring potential GST/HST liability (at least until there is a clarification of the law).

Suppose that X Co buys a photocopier from, say, Staples using crypto. X Co is the recipient of the photocopier and a supplier of crypto, and Staples is the recipient of crypto and the supplier of the photocopier (see ETA subsection 153(1) and the CRA's statement in RITS no. 32293, "Barter Transactions," August 20, 2000). Although the photocopier is clearly a taxable supply on the part of Staples and is subject to GST/HST, the crypto potentially is a taxable supply as well (this point remains open to debate; see the discussion below).

The general theory of GST/HST is that the party that makes a taxable supply must collect the tax and remit it to the government (ETA subsection 221(1)), but the tax is levied on the recipient of a taxable supply (ETA subsection 165(1)). Furthermore, the CRA has the right under ETA paragraph 296(1)(b) to assess the recipient of a supply directly (Carlson & Associates Advertising Ltd. v. Canada, [1997] GSTC 32 (TCC), and Royal Bank of Canada v. R, [2007] GSTC 122 (TCC)). However, the CRA's administrative policy, as articulated in GST/HST Policy Statement P-112R ("Assessment of Tax Payable Where a Purchaser Is Insolvent"), is to pursue the supplier, not the recipient, except in rare cases. Thus, in the example above where Staples is the recipient of the (possibly) taxable supply of crypto, there is minimal risk that Staples would be pursued for GST/HST owing. Staples can accept crypto as payment without much concern.

Now consider the position of X Co, which has supplied the crypto (through using it as a method of payment). Could it be required to collect and remit GST/HST? First, consider two arguments against GST/HST liability that are not persuasive:
  1. Perhaps the place of supply is outside Canada (on the basis, for example, that the crypto is to be converted into Canadian currency using a foreign crypto exchange). However, to the extent that crypto supplies are intangible personal property, the place of supply is in Canada if the crypto can be used in Canada—not whether it is actually used in Canada (ETA section 142).

  2. Perhaps crypto is a financial instrument, and supplies of crypto are therefore exempt from GST/HST as financial services. To date, however, crypto has not been recognized as a security, and it is not a precious metal, an insurance policy, an interest in a partnership, or an option or contract for the future supply of a commodity traded on a recognized commodity exchange—items that are recognized as financial instruments in ETA subsection 123(1).

The best argument for X Co's not being required to collect and remit GST/HST is that crypto is "money" for the purposes of the ETA. If that is so, supplies of crypto are financial services and thus are exempt from GST/HST (which will also relieve Staples from any GST/HST obligation in respect of the crypto supply). Although crypto is not money issued by a government of a country (Income Tax Folio S3-F10-C1), the definition of "money" in the ETA is broad (it includes currency, cheques, promissory notes, letters of credit, and bills of exchange) and is not limited to financial instruments issued by governments. Economists conceive of money as a medium of exchange, which crypto certainly is. (For a further discussion of this argument, see "Rebooting Money: The Canadian Tax Treatment of Bitcoin and Other Cryptocurrencies," 2014 Conference Report.)

Other potential reasons for not having to collect and remit GST/HST, which probably do not apply in the photocopier example given above, are that the crypto supplier is a small supplier (that is, it has less than $30,000 of supplies of both crypto and normal goods and services); the crypto supplier is not engaged in a commercial activity; or the recipient of the crypto is a non-resident.

Kathryn Walker
Thorsteinssons LLP, Toronto

Canadian Tax Focus
Volume 8, Number 1, February 2018
©2018, Canadian Tax Foundation