On May 17, 2019, the Department of Finance ("Finance") released proposals (the "Proposals") to amend the Excise Tax Act (Canada) (the "ETA") to treat certain virtual currency as a financial instrument for GST/HST purposes. If the Proposals become law, they will have a significant impact on whether certain participants in the virtual currency industry will be able to claim input tax credits ("ITCs") on expenses incurred in the course of making supplies of and processing transactions involving such virtual currency.

The Proposals would enact this change by introducing the new definition of "virtual payment instrument" into the ETA and by amending the definition of "financial instrument" in subsection 123(1) to include a reference to such definition. Based on the foregoing, sales of virtual payment instruments, use of virtual payment instruments as a payment medium, and a number of other common transactions using virtual payment instruments would either be exempt from tax under the ETA or zero-rated if provided to a non-resident.

This also raises certain considerations with respect to the recovery of input costs for participants in the blockchain and virtual currency industries.

The capability of a person to claim ITCs in respect of a particular expense is dependent on whether the expense is incurred in order to make taxable supplies (including zero-rated supplies) as opposed to exempt supplies (including financial services). If the Proposals become law, depending on their circumstances, participants in the blockchain industry who incur expenses subject to GST/HST, in order to supply virtual payment instruments, may be denied ITCs in respect of their costs and GST/HST incurred. In this respect, the Proposals may have a particular impact on miners who incur significant infrastructure (e.g. ASICs, GPUs, servers) and operational costs (e.g. electricity) in order to allow miners to supply hashing power to a network or a mining pool.

In addition to the above, the Proposals will classify supplies of financial services that are exported as zero-rated, as opposed to being exempt. Accordingly, if a miner can determine that the recipient of a supply of hashing power is a non-resident of Canada, the miner may be entitled to claim ITCs in respect of input costs. Miners will have to determine and document the status of the recipient as a non-resident of Canada and whether the supply of hashing power is exported. In the context of the blockchain and virtual currency industries, determining the status of a recipient may be a challenge.

The government of Québec has not confirmed yet whether it will adopt the same approach for Québec sales tax purposes. 

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