Miners Be Aware: New GST/HST Measures Announced for Cryptoasset Mining
The Department of Finance (“Finance”) announced draft legislation on February 4, 2022 that would remove most cryptoasset mining activities from the general goods and services tax / harmonized sales tax ("GST/HST") regime. The draft legislation introduces the new defined terms “cryptoasset”, “mining activity”, and “mining group operator”. The proposed amendments will substantially restrict the availability of input tax credits (“ITCs”) for cryptoasset mining activities and generally remove the application of GST/HST from the provision of mining activities and “barter” payments made in exchange for the performance of mining activities. These new rules will not apply to the extent that the mining activities are performed for a person whose identity is known, provided that person is someone other than the mining group operator.
Once enacted, the rules will generally be deemed to have come into force on February 5, 2022. The existing rules for virtual payment instruments, which were first announced in May 2019 and came into force in summer 2021, will continue to apply. As a result, cryptocurrency will continue to be considered a GST/HST-exempt “financial instrument” provided that the cryptocurrency meets the definition of “virtual payment instrument”, which includes the requirement that the cryptocurrency function as a medium of exchange and exist on a publicly distributed ledger. Prior to the introduction of the legislation for “virtual payment instruments” it was generally understood that providing cryptocurrency, including to buy goods or services, would be a taxable supply of intangible personal property. The proposed legislation for cryptoasset mining activities goes even further to deny ITCs and to deem mining activities not to be supplies when the rules apply, as discussed below.
At a high level, a mining group operator is defined as a person that coordinates mining activities by a group of persons for the purposes of sharing the reward or remuneration from the mining activity. The definition of cryptoasset is restricted to property “that is a digital representation of value and that only exists at a digital address of a publicly distributed ledger”. This proposed definition of cryptoasset is broader than the definition of virtual payment instrument and can include instruments that extend beyond instruments traditionally perceived as “cryptocurrencies”. For example, a cryptoasset (unlike a virtual payment instrument) could potentially exist without functioning as a medium of exchange, such as non-fungible tokens (NFTs) used to represent specific assets (such as digital art). Cryptoassets could also potentially include tokens used on gaming platforms even though gaming tokens are excluded from the definition of “virtual payment instrument”.
The definition of “mining activity” is also defined broadly to include activities that would not typically be considered “mining”. In addition to traditional mining activity such as “validating transactions and adding them to the publicly distributed ledger on which the cryptoasset exists at a digital address”, the definition of mining activity contemplates “allowing computing resources to be used” if the computing resources will be “used for the purpose of, or in connection with,” performing mining activities, which may, for example, include the rental of computer servers. Other activities such as “staking” may be more difficult to categorize as mining activity depending on exactly what the person is doing (e.g., is the person actually validating transactions and adding them to the publicly distributed ledger or is the person simply transferring or delegating their stake to a different person who is the block validator?).
Once the proposed rules are implemented and if a given activity is a mining activity, then generally any acquisition, importation, use, or consumption of property or services by a person in the course of or in connection with that activity will be deemed to occur otherwise than in the course of commercial activities, which effectively prohibits the person from claiming ITCs to recover GST/HST paid on inputs to the mining activity. Furthermore, if a person receives payment (i.e., property, a service or money) as remuneration or a reward for performing mining activity, the provision of the mining activity and the provision of any property or service provided in return will generally be deemed not to be supplies. This is contrary to the normal GST/HST regime which would apply tax to both sides of a transaction where one registrant is paid by another with property or a service. Under the draft legislation, the person making in-kind payments for the mining activity is also precluded from claiming ITCs in respect of inputs to the in-kind payments (i.e., on the property or services acquired or imported for consumption, use or supply in the course of making the in-kind payment for the mining activity).
As noted above, the proposals introduced by Finance will effectively exclude most mining activity from the GST/HST regime, thereby simplifying GST/HST compliance for many players in the industry. However, the exceptions to the general application of the draft legislation and effective date of thereof mean that persons with potential mining activity should seek legal advice to ensure they understand whether and how the new rules apply to their activities. Finance has asked interested parties to provide comments regarding the legislative proposals by April 5, 2022. As cryptoasset industries evolve and different activities become more prominent, Canada might also determine that further legislation is necessary.