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,  GSTC 32 (TCC), and Royal Bank of Canada v. R,  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:
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.)
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).
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).
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.
Thorsteinssons LLP, Toronto