Canada: Bitcoins: More Guidance From The CRA

Article by Timothy Fitzsimmons

Tax authorities around the world continue to wrestle with the tax issues arising from the use and sale of Bitcoin currency.Sweden recently announced that it will treat Bitcoin as an asset, and Finland has stated that it will treat Bitcoin as a commodity. China has placed restrictions on the use of Bitcoin. Generally, the price fluctuations and uncertainties around the use and sale of Bitcoins seemed to have generated more questions than answers.

In Canada, the use of Bitcoin currency appears to be gaining popularity – Bitcoin ATMs have popped up in several cities, and various retailers and even some charities are accepting Bitcoins for payments or donations. However, the Canadian government apparently does not consider it a currency. The Canadian tax implications of Bitcoin transactions have beenconsider by the CRA and tax professionals, and now the CRA has published some additional guidance on the subject.

In CRA Document No. 2013-0514701I7 “Bitcoins” (December 23, 2013), the CRA summarized its views on how certain transactions involving the use or sale of Bitcoins may be taxed under the Income Tax Act and Excise Tax Act.

Buying and Selling Goods or Services in Exchange for Bitcoins

The CRA stated that the use of Bitcoins to purchase goods or services would be treated as a form of barter transaction (see, for example, Interpretation Bulletin IT-490 “Barter Transactions” (July 5, 1992)). The CRA’s view is that each party to a barter transaction has received something that is equal to the value of whatever is given up. For Canadian tax purposes, if a business sells goods or services in exchange for Bitcoins, that business must report its income from the transaction in Canadian dollars (i.e., the fair market value of the Bitcoins at the time of the sale). GST/HST would be applicable on the fair market value of the Bitcoins that were used to pay for the goods or services.

Donation of Bitcoins

The CRA stated that, if Bitcoins are transferred to a qualified donee, the fair market value of the Bitcoins at the time of the donation must be used in determining the value of the gift for tax purposes (see also CRA Pamphlet P113 “Gifts and Income Tax”). The determination of the fair market value is a question of fact.

Buying and Selling Bitcoins

The CRA stated that the trading or sale of Bitcoins like a commodity (i.e., speculating on the changes in the value of Bitcoins) may result in a gain or loss on account of income or capital. This determination can only be made on a case-by-case basis and on the specifics facts of each situation (see, for example, Interpretation Bulletin IT-479R “Transactions in Securities” (February 29, 1984)). Generally, the income tax consequences relating to the tax treatment of gains or losses arising from the purchase and sale of Bitcoins would be the same as for transactions involving other types of commodities.

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Accountant’s Role

Many new small business owners take on the role of accountant during their start up efforts. As there are already numerous demands on the owner’s time, this may or may not be a smart move.

An accountant can be an important member of your business team. Not all accountants are created equally, however.

A capable accountant focuses on the relationship. Find an accountant who is interested in your success and in building long-term clients, and he or she will be even more advantageous to your team. Your accountant should be interested in both your personal and professional financial success. Unfortunately, some accountants aren’t interested in this kind of relationship, and their clients are simply numbers in their practice.

Moreover, some accountants have little or no hands-on business experience and, therefore, lack a broad knowledge base. They may be excellent at crunching numbers but very weak in practical application. Even high-priced firms can make the mistake of choosing an accountant with little input toward the success of the business. For example, they may take profit and loss numbers and produce tax returns with no questions asked. There could be glaring mistakes, but someone who doesn’t care about the well-being of your company may plug them in without any thought.

What role do you need your accountant to play in determining the success of your business? Ask yourself the following questions:

  • Do you need assistance determining your business structure – sole proprietorship, partnership, or corporation?
  • Do you need guidance in establishing your accounting systems for quarterly and year-end reports?
  • Would you like to use a software program for accounting and year-end reports?
  • Are you clear about which taxes you need to pay and when you need to pay them?
  • Do you need assistance with payroll?
  • Will your business require year-end paperwork completed, such as W-2 and 1099 forms?
  • Do you understand tax laws well enough to represent yourself if you are audited?
  • Do you know how to depreciate your startup costs?
  • Do you know how to roll personal property into business property for taxation purposes?
  • Will you use your personal home or automobile for business purposes?
  • Do you know what expenses are tax deductible?
  • Do you know how to keep personal and business expenses separate for tax purposes?
  • Will you require assistance in determining how best to equip your new business, whether it be purchasing or leasing?
  • Do you truly understand financial statements?
  • How will you handle retirement for both you and your employees?
  • What health insurance is best for you and your employees?

It’s vital to have not only an accountant on your team but the right accountant. If you are a small business owner who wants to do it on his own, without the involvement of a tax or financial specialist, you may wonder how difficult it is to stay abreast of tax law changes. Moreover, what’s the real cost to the small business owner to do this work on his own?

The longer you’re in business, the easier this gets. However, when a business owner is just beginning, many of the accounting details seem like a foreign language. If you would eventually like to perform accounting functions on your own, find an accountant who’ll teach as he or she smoothes out the financial details.