Cryptocurrency Regulations in Canada

With the explosion of the digital assets industry and an exponential increase in using and investing in cryptocurrencies, having a clear understanding of the current and evolving cryptocurrency regulations in Canada is paramount to ensuring safe transactions.

A cryptocurrency is a digital or virtual currency that is decentralized and is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. While most people are familiar with Bitcoin and Ethereum, there are more than 5,000 different cryptocurrencies in circulation.

Some of the most well-known cryptocurrency exchanges in Canada are Coinbase, Netcoins, Newton, Coinberry and Binance Canada.

Main regulatory facts everyone involved in cryptocurrency trading in Canada should know:

1. Cryptocurrency is not a legal tender in Canada
2. The Canada Revenue Agency has been taxing cryptocurrencies since 2013 under Canadian tax laws.
3. Cryptocurrencies are regulated under provincial securities law and are characterized as a commodity for income tax purposes.
4. Cryptocurrency service providers are regulated under provincial securities laws as money service businesses (MSBs) 
5. Starting 2014 anyone dealing in virtual currencies falls under the regulations of Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) in Canada
6. The British Columbia Securities Commission registered the first cryptocurrency-only investment fund in 2017.
7. Starting June 2020 all cryptocurrency exchanges need to be registered with the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC) and comply with margin and market valuation requirements.
8. Starting February 2020, the Virtual Currency Travel Rule requires all financial institutions and money services businesses (MSB) to keep a record of all cross-border cryptocurrency transactions and EFTs.
9. In February 2022 a private member’s bill on cryptocurrencies was introduced to the House of Commons, Bill C-249 aimed at encouraging growth of the crypto-asset sector. The bill is in its Second reading (House) as of April 5, 2022.

The basic framework for the regulation of digital assets in Canada is laid out in the Consultation Paper 21-402 - Proposed Framework for Crypto-Asset Trading Platforms – issued jointly by the Canadian Securities Administrators and the Investment Industry Regulatroy Organization of Canada in 2019.

While there is no definitive position whether a certain crypto or digital asset is a security, a derivative, or a crypto asset - bitcoin, ether, bitcoin cash and litecoin are not considered to be securities and/or derivatives, and instead are treated as commodities under securities and tax legislation, for the time being.

A user’s contractual right to a “Crypto Asset” is referred to as a “Crypto Contract” unique to Canada, outlined in Staff Notice 21-327 Guidance on the Application of Securities Legislation to Entities Facilitating the Trading of Crypto-Assets (SN 21-327). whereas securities regulators take jurisdiction over the trading of crypto assets that are not securities or derivatives.

According to this Notice, a “Crypto Contract” does not apply in the trading of a “Crypto Asset” if said asset is immediately delivered to the end user, and the occurrence of the delivery will be determined by a number of factors such as the economical context of the transaction and the intention of the parties to the contract or instrument.

Another Notice dealing with compliance issues to regulatory measures has been issued in March 2021 outlining the steps platform operators need to take to comply with securities legislation. Staff Notice 21-329 Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements .

Disclosure requirements for reporting are set out in Staff Notice 51-363 Observations on Disclosure by Crypto Assets Reporting Issuers and advertising and marketing related regulations are outlined in Staff Notice 21-330 Guidance for Crypto Trading Platforms: Requirements relating to Advertising, Marketing and Social Media Use

While this is a lot of new, changing or evolving information to process, it is only the start to the era of digital currencies trading, and related tax and regulatory requirements.

For more information on cryptocurrency trading and their tax implications in Canada, contact us!

Written by: Christa Lazar