Canadian tax authorities’ approach to crypto-assets might discourage the country’s citizens from using digital assets, as things like double taxation remain an issue.

While the US still struggles to bring regulatory clarity to the world of cryptocurrencies, its neighbor, Canada, currently faces taxation issues. The country was quick to introduce crypto taxes as early as in 2013. However, the country’s CPAs are concerned that tax rules might scare away future entrepreneurs.

The crypto and blockchain industries saw a lot of interest from Canada over the years, especially in 2017 and 2018, when the adoption rate surged by 25%. Meanwhile, the authorities were struggling to find a way to regulate and tax the industry. Canadian Revenue Agency (CRA) was quick to introduce taxes six years ago, as mentioned, and it recently issued audits to identify potential tax evaders.

But, as the crypto industry evolves, the same is true for the tax rules — something that Finance Canada recognized, and it recently started addressing the issue. It recently started classifying some cryptos as financial instruments, which is a problem by itself, as the CRA views crypto as investment commodities.

In other words, the CRA does not see crypto as money, which means that purchasing goods and services with them is viewed as a barter transaction. This might lead to double taxation, which could easily become too big of a problem for Canada’s crypto users.

A New Category for Crypto: VPI

The issue lies with the cryptos’ status for the goods-and-services tax and harmonized sales tax (GST/HST). and the issue becomes even more complex as GST/HST rates are different, depending on the place of supply. This is why Finance Canada believes that crypto should be classified as financial instruments in a new category. They proposed to create this category and name it virtual payment instruments (VPI), which would exempt cryptos from GST/HST.

However, this solution has its own challenges, such as the necessity to have businesses dealing with crypto to be registered as financial institutions. This would be too troublesome for businesses and individuals alike. Meanwhile, PwC’s Canadian arm, stated that financial institutions for GST/HST purposes have to follow the rules for financial institutions.

As for the VPI, this designation would only apply to some select cryptos, with the list of specific coins still being in the works. However, the VPI definition would ignore cryptos created for a particular goal, including stablecoins, utility tokens, as well as closed blockchains, such as Libra project.

The new draft also has a lot of holes to fill, as it doesn’t even mention crypto mining, which is a major part of the crypto world.

While Canada is trying to deal with crypto, the country’s regulators seem to mostly be concerned with taxing crypto users at all costs. While tax evasion is a big and complex issue, the current tax rules might mean the death of crypto in Canada.

Do you think that Canada’s tax laws can be resolved? Let us know your thoughts.

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