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Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 13 - Evidence - June 5, 2014

OTTAWA, Thursday, June 5, 2014

The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:35 a.m. to study the use of digital currency.

Senator Irving Gerstein (Chair) in the chair.


The Chair: Good morning, and welcome to this meeting of the Standing Senate Committee on Banking, Trade and Commerce. Today, we resume our special study on digital currency, including the potential risks, threats and advantages of these electronic forms of exchange.

Still in the early or learning stages of our study, the committee has received presentations from government departments and agencies, such as the Department of Finance and the Bank of Canada. We have heard testimony from academics in the fields of economic and monetary history, and cryptography. The committee also heard from the Bitcoin Strategy Group, the bitcoin exchange CAVirtEX, and Bit Access, makers of the bitcoin ATM, who gave a live demonstration and purchase of some bitcoin using the ATM here at committee.

As chair, I want to give full disclosure. As you know, at that committee for the first time on television I purchased a bitcoin for $100. On that date, April 9, it was purchased at 0.18 bitcoin for $100. I am pleased to advise you that according to CAVirtEX, at 9:35 a.m. today it is worth $124.56, an unrealized gain of $24.56.

Now you realize the importance of disclosing this because as we continue our hearings today we are welcoming two witnesses from the Canada Revenue Agency.

Senator Massicotte: I hope they made a note of your profit.

The Chair: Not only have I voluntarily disclosed, but I've also emphasized that it is unrealized.

It truly is a great pleasure to have you here, which I am not sure everyone always says about a visit from the CRA. We appreciate the input you will be able to bring to our study. It's my pleasure to introduce Eliza Erskine, Director, Business and Employment Division; and Michael Cooke, Manager, Business Income and Capital Transaction Section, Business and Employment Division.

I turn the floor over to you, Ms. Erskine.

Eliza Erskine, Director, Income Tax Rulings Directorate, Canada Revenue Agency: Thank you, chair and committee members. We appreciate this opportunity to contribute to these proceedings about the regulatory and policy issues surrounding digital currency. You have asked us to describe how the Canada Revenue Agency views digital currency.


I would like to explain up front that my colleague and I work in the technical and policy area of the CRA. While my overview this morning will touch on the goods and services tax and, very briefly, on compliance matters, the CRA is still reviewing issues in these areas, so the information we have to share will be rather limited. As previous witnesses have noted, the research in this area is still a work in progress.


To date, most of the questions received by the CRA from the media and from taxpayers have related to income tax issues, although requests for information have now increased in the GST area and include internal referrals from audit. Over the past year, there have been several inquiries from the media about the CRA's views on digital currency and how it is taxed. Almost all of these inquiries have asked about bitcoin, which, as you have heard from others, is currently the best known of the convertible, decentralized digital currencies. As you have discussed with other presenters at these proceedings, these digital currencies can be converted directly to fiat currencies, such as Canadian dollars, and generally are considered the ones of most interest to regulators as they are the most similar to fiat currencies.

The first questions received by the CRA in the spring and summer of 2013 were: Will the CRA treat bitcoin like foreign currency? Are transactions with bitcoin taxable? In response to these inquiries, the CRA put basic income tax information about digital currency on its website in November 2013. A copy of this fact sheet has been provided to the clerk for your information. I will now take you through what the CRA has said about digital currency.

The CRA does not view or treat digital currency as a currency. Instead, the CRA views digital currency as a commodity, i.e., a thing that can be bought and sold and traded for other things. As you've heard, while digital currency may one day be a currency, it isn't there yet. So is digital currency taxable? How and when?

There are two main uses of digital currency that bring in tax implications. First, digital currency can be used to buy goods and services. Because the CRA doesn't view digital currency as money, these transactions are treated like barter transactions. Instead of trading two chickens for a bicycle, you are trading two bitcoins for a bicycle. Or you could offer somebody half a bitcoin to repair your shoes. These are all barter transactions. Are barter transactions taxable in Canada?

Canada's income tax system taxes income from a source, usually a business or property or employment. So if you are in the business of selling bicycles, then the two bitcoins you received represent business income to you, and the value of the bitcoins in Canadian dollars is included in your business income for the year. There are no special tax forms for barter transactions. The regular tax forms for individuals and businesses apply. In this bicycle example, GST could also apply. If sales tax does apply, which would usually be the case for a retailer, the value of the two bitcoins in Canadian dollars would determine the GST payable on the purchase of the bicycle.

The second broad category of transactions involving digital currency that can lead to income tax implications is where digital currency is bought and sold as a commodity. The CRA treats buying and selling bitcoin in the same way as buying and selling iron or copper or any other commodity. The usual tax rules apply.

Very generally, first you have to decide if you are in the business of buying and selling digital currency or whether this is strictly an investment for you. In tax terminology, is this an income transaction or a capital transaction? If this is a business for you, then your gain is business income, and it's fully taxable. If this is an investment for you, only half of your gain is included in your income and subject to tax. On the other hand, business losses are fully deductible against any income. Only half of your capital losses are deductible, and the deduction only applies against any capital gains.

In summary, a digital currency, such as bitcoin, is treated as a commodity for income tax purposes. You can trade it for goods or services, but the vendor of the goods or the supplier of the services may have taxable income. Also, the GST may apply. You can also trade digital currency itself, in which case you will have business income or loss or a capital gain or loss.


The CRA has received other questions about digital currencies and tax. For example: "Can I donate bitcoins to a registered charity and get a donation receipt?" The answer is, yes, you can donate bitcoins to a registered charity. As you would expect, the amount of the donation receipt would be equal to the value of the bitcoins donated in Canadian dollars.

This concludes my opening remarks, which I hope have given you an idea of the issues the CRA has considered and is considering, especially in the area of income tax. I would be happy to answer any questions that you may have.


The Chair: Thank you very much, Ms. Erskine, for your opening comments. I took a look at the fact sheet that you sent out and also related it to the sheet that the IRS had provided, and one seemed to mirror the other fairly well when it came to capital gains and retail operations. There was one area in the Canadian fact sheet that seemed to be absent that was talked about in the U.S., that was if bitcoin was used as paying a method of salary, which raised, in my mind, the question: How would that work? In other words, if I were receiving payment for services — a salary, in effect — in bitcoin, as distinct from Canadian dollars, would I need to fill out a tax return? Would I be expected to receive a T4? If so, how would you establish a value on it?

Ms. Erskine: Thank you for the question, Mr. Chair.

The Chair: We didn't rehearse this. I never rehearse anything with Revenue Canada.

Ms. Erskine: Fortunately for us, employment income is also actually within the division that we look at.

The Chair: Right.

Ms. Erskine: So this question has come up, although, so far, hypothetically. In Canadian income tax, any amount received by virtue of or with respect to employment must be included in your employment income. The terms in the Income Tax Act for employment income are very broad and, in fact, the courts have said that these are words of the broadest application. With a few very limited exceptions, anything that you receive in connection with your employment income is included in your employment income, and a T4 has to be issued to you for the value in Canadian dollars. That's something that is worth emphasizing, and I believe my colleagues at the Department of Finance mentioned it as well.

The Income Tax Act requires most transactions to be recorded for tax purposes in Canadian dollars. So that would include things like employment income.

The more challenging question, perhaps, is the one that you've asked: How do you value it? This is a question we have been asked several times over the past year, and the answer is, like so many things dealing with bitcoin and tax, you value it like you value anything else.

What does the value of bitcoins derive from? To a large extent — and I know that you have canvassed this issue with other witnesses — it derives from what people agree that it is. In other words, if we were trading gold, if I was paying my employee with gold, and we said, "Okay, gold is currently worth $200 an ounce," and someone gave me an ounce of gold, I think we would all conclude that I should have $200 included on my T4 as employment income.

Bitcoins are the same. What is interesting about comparing gold to bitcoins is that we treat it like a commodity. We have to remember that we don't eat gold; we don't breathe gold. Gold really has value to us because we have decided it has value to us. The CRA would view a bitcoin the same way. So what is the current value on the market that a person could reasonably establish? It's an evidentiary issue, and, if a taxpayer came to us and said, "You've told me you think that bitcoin was worth $400, but I actually think it's only worth $350," we would require reasonable evidence as to why they picked 350. It's a valuation issue.

The Chair: Thank you very much. I have a number of questions, which I'm going to go to immediately, starting with Senator Black.

Senator Black: Thank you both for being here. I found your presentation incredibly articulate and clear, so you're either a lawyer or a teacher.

Ms. Erskine: I'm a lawyer, sir.

Senator Black: There, this is very encouraging. Wonderful. So am I. I knew it. Thank you very much.

Now, my question for you: I am working from the premise, through my questioning of the various witnesses, that digital currencies are an innovation that we will continue to see developed through time. Maybe not, but let's assume that we will see digital currencies develop through time. One would then expect to see expanded use of digital currencies.

Do you believe that the regime that you have so articulately described today could accommodate enhanced use of digital currencies or changes as you would anticipate they might evolve?

Ms. Erskine: Thank you for your question.

Certainly, based on what we have seen so far, the use of digital currency such as bitcoin is increasing, despite the fact that we have all seen terrific fluctuations, as well as, of course, some serious security concerns with theft of bitcoin.

I would anticipate, based on my experience with the Income Tax Act, that what we have developed so far, because it is fundamentally the same basis as anything else in the Canadian market, should be able to accommodate increased use of digital currency.

I think there are still going to be issues to explore.

The Income Tax Act, in 1917, was a few pages long. It's now over 2,000 pages long. There may be nuances that need to be looked at, but, for the present, I think the structure we have in place is probably sufficient because we treat it like a commodity. Innovative though it is because of the transaction nature of it, from a tax perspective, I think our structure is probably able to accommodate it at the present time.

Senator Black: Thank you very much.

Senator Ringuette: This is certainly most intriguing, and I welcome your presentation. As a follow-up to Senator Gerstein's question with regard to income, in order to have bitcoin recognized as income, you need to have an employer that provides that transfer of the bitcoin with regard to revenue.

But there are also all the other aspects of the employer/employee responsibility, and that is contribution to the CPP, EI and so forth. So what happens in regard to the employer's obligation? From your perspective, you look at the bitcoin as a possible source of revenue from the workplace; you will look at it only once a year, per se, at income tax time and so forth. However, the contribution to CPP and EI is on a weekly, biweekly or monthly transfer. So how do you handle that portion of the issue, if it comes to that?

Ms. Erskine: CPP and EI are generally based on the value of the employment income received. From a tax point of view — and the CRA does administer that portion of the CPP and EI — this is not greatly different from what we have been dealing with for the past century in tax, which is what happens when your employer gives you goods in kind instead of currency.

Senator Ringuette: So you would have to value on a weekly basis what the corresponding amount was in Canadian dollars of the required CPP and EI contribution.

Ms. Erskine: That is possible. I would suggest an analogy. Well, it's not completely analogous, because the Income Tax Act, for example, has specific rules about what happens when employees get shares, but we have all heard of employment situations with stock options, and we are all familiar with situations where someone gets room and board.

It is fair to say that, with something like bitcoin or digital currency that fluctuates wildly at times, it is a much more challenging valuation issue. The fundamental issues of collection and ensuring that those amounts are in trust and safe, which is what CPP and EI has to do — those are still the same.

When I said there are nuances and when I said our system — and by which I mean our income tax, potentially our goods and sales tax, and CPP and EI, as you've mentioned — there are probably nuances that need to be looked at over time. From the fundamentals and the basics, bitcoins for us is like looking at someone being given gold or chickens. For some reason, chickens have a tendency to come up a lot in barter transactions. You've raised an excellent question on the valuation —

Senator Ringuette: You mentioned gold. Everyone has access to the daily value in Canadian dollars of gold. However, as far as I know, there is no public access to the value of bitcoin in Canadian dollars for yesterday — your example, chair, of the dates that you've purchased and the value today. But this is not public information. Would you see the Bank of Canada having a public site stating that, yesterday in Canada, this is the information we got, and a bitcoin was valued at "X"?

The Chair: Could we have a clarification? I believe it is public. It may vary in terms of what exchange rate you get it at, but I think you can access the value of the bitcoin.

Senator Massicotte: There are many reference points.

Senator Ringuette: Many Canadian reference points?

Senator Massicotte: Yes.

Senator Ringuette: So you would use that, then, I guess.

Ms. Erskine: Yes, that would be what we would do.

Coming back to my initial point, it is always up to, in this case, the employer to demonstrate that they have valued it appropriately but, to the best of my knowledge, there is publicly available information on what a bitcoin is worth on any given day.

The CRA would have to accommodate, as it has had to accommodate as an administrator the situation of small businesses and employers, these valuations. This is something the CRA has had to do, as I said, for many years with every new innovation in terms of how people are paid.

Senator Ringuette: This is a value.

Ms. Erskine: That's right.

Senator Ringuette: In your summary, you say you can trade the bitcoin for goods and services, but the vendor of the goods or the supplier of the services may have taxable income and the GST may apply.

If I were selling something — I'm looking at your statement, and you're saying "may" and "may." How can you define that it will be "shall"?

Ms. Erskine: That is an excellent question, and I confess that's one we did expect.

I will address the GST question first. It is not my area of expertise, but very broadly, for GST to apply, the vendor or the provider of the services would be a GST registrant. My knowledge isn't up to date, but I can tell you that even as recent as a couple of years ago, the threshold to be a GST registrant would be $30,000 of gross income.

So the first point is that if you are not a GST registrant, it doesn't apply. The broader point, which applies both effectively in the GST context and definitely in the income tax context, is whether this income is from a source.

We use the term "may" because if you have a business, then you will be taxable on business income, but if you do not have a business, then there is no source, in which case you are not taxable.

I will give an example of when you would not have a "source," as that term is used in the Income Tax Act; for example, personal property. It's not being used for business; it's being used for your own personal use and pleasure. For example, you buy yourself an iPad. You buy the iPad for $500, and a few months later, for whatever reason, you decide to sell it. So you go ahead, you put your iPad up on eBay, on Kijiji or on one of these electronic sites. Unlike most personal property, which I would point out we usually sell at a loss — a car is going to depreciate in value; most things that you use up for personal use are going to go down in value.

But let's assume that your iPad was signed by Steve Jobs, okay? So people really want your iPad, and someone agrees to pay you $750 for it. Instead of giving you $750, they decide to pay you a bitcoin. So now, under the rules we've discussed, you have gained $250. But under income tax rules, there is no amount to be included in income. This is personal property. You are deemed to have acquired it for $1,000. You are deemed to have sold it for $1,000 or, in both these cases, the greater of your actual proceeds and $1,000.

Taking my example, then, you bought it for $500. One thousand dollars is more than that, so we're going to use $1,000 as our base point. You've sold it for $750, but again, $1,000 is more than that, so we take $1,000 as our base point. We take $1,000 minus $1,000, and as you can see, your gain, which is to say your amount to include in income, is nil.

In very general terms, when you have personal property the Income Tax Act says that you have no loss. You are almost never in a situation where you are allowed to claim a loss for personal property. The assumption in the Income Tax Act is that normally your gain is also less than $1,000, and therefore you don't have any tax implications there. The reason we use "may" is that every person has to make a decision, a determination as to whether they have a business. If you don't, then you don't have taxable income.


Senator Bellemare: Ms. Erskine, my question is along the same lines as the points raised by our chair about using bitcoins as a method of paying salaries.

We know that, in terms of income, you consider the bitcoin as a commodity. But, at the same time, the bitcoin is a way to retain value, it is a capital asset in a way. My question is also related to Senator Ringuette's question.

Let us assume that the salary of an individual is paid in bitcoins. For income tax purposes, the conversion has to be done when the person gets paid, I suspect, not at the end of the year, and we would have to use the value of the bitcoin at that time and in the place closest to where the employee worked, because the bitcoin can have a number of values.

My understanding is that, at the end of the year, if the bitcoin has gained a lot of value and individuals resell it, they will be taxed on the added value, correct? Conversely, if people exchange it at the end of the year, but for less, because the value had gone done, could they deduct it as a loss on their employment income? Is there also a capital aspect that will also be considered for tax purposes? Or, for tax purposes, do you just consider the value of the bitcoin when the people received their salaries?

Ms. Erskine: Thank you for the great question. When employees receive the bitcoin, yes, the value must be determined based on the time and day when they were paid. They receive something that they probably see as a capital asset. So what is the value for the employees? It is probably the amount that appears on their income for the year. Let us say that an employee receives a bitcoin of $1,000, to take a very simple example, and he receives it at the end of April. The employee therefore has an asset. He acquired it in April. In December, he sees that the bitcoin is now worth, let us say, CAN$1,200. He decides to sell it. I think you are asking whether he has a capital gain of $200. Yes, probably.

Our questions in terms of income tax would be: What is the cost? I think it would be $1,000. And how much did he sell it for? Twelve hundred dollars. Yes, for him, that would actually be an investment at that point. My colleague, Mr. Cooke, often gets these types of questions. If a person receives an asset as part of a job, as part of a transaction and then the person sells it, what does that fall under? The only distinction I would make is that this happens to us on occasion, and when we talk about personal assets, the term we use is "enjoy."

Senator Bellemare: A commodity.

Ms. Erskine: That is how the bitcoins are slightly different, but they are sort of like money. We are not there yet. For us, at this point, it is likely that, in the example that you gave, there would be a capital gain of $200. However, it must be said that the CRA has not yet addressed this issue in particular.

Senator Bellemare: So, if you are telling me that this could be a gain, it could also be a loss on the individual's income at that time. Or perhaps, we might be able to compare this exchange to someone who uses his salary of CAD $1,000 and exchanges it for American dollars at the end of the year, making a profit compared to when he received his $1,000. The value of the salary in American dollars when the transaction takes place compared to the value of the salary in American dollars when he exchanges it can result in a gain or loss for the individual in time.

It could also be compared in that way. At that point, I do not think it is taxable. Unless I am mistaken, no gain or loss needs to be recorded, if we compare that to international currency. However, if we compare it to a capital gain, then there is a gain or loss. So, if we define the bitcoin as a medium of exchange only or as a commodity that can retain its value, the rules may be different. If you would like to make any comments on this, please go ahead.

Ms. Erskine: I have two comments about what you said. The first thing that must be noted is that, as I said before, when you sell a personal asset, you are not entitled, when you incur losses, to deduct those losses against your general income. Let us assume that you received a bitcoin of $1,000, and that it is worth only $500 now; you lost $500. But if it is a capital loss, as we have assumed, you cannot deduct that capital loss against your employment income. That is what you were talking about.

So, clearly, there is a difference. However, for us, in terms of income, when you receive bitcoins, the only thing that concerns us, at the CRA, is that you received $1,000. For us, at that time, you have $1,000 in your hands. It is up to you to decide what you will do with the bitcoin later. There are gray areas; I will not claim that there are not.

When an employee receives shares, for instance, from a company, there are rules that apply. There have been questions in the past with Nortel, for instance, and other companies, here in Canada, and even in Ottawa. People have received shares or stock options in lieu of salary and they later realized that their shares were worth nothing. There were serious problems with that.

That was my first point. I think that at that time, we will probably consider transactions in bitcoin as transactions in capital after the employee receives the bitcoins. That means that you cannot deduct the amount from your employment income.

Second, you mentioned the possibility of exchanging bitcoins later for U.S. dollars, I think it was.

Senator Bellemare: No. Actually, we are not even talking about bitcoins. When individuals use their Canadian salary to make transactions — by buying foreign currency, for example — and there can be a gain or a loss, I do not even think they need to declare it to the CRA.

Ms. Erskine: Mr. Chair, I would like to make a clarification.

The Chair: Go ahead.

Ms. Erskine: We need to know whether it is a personal gain or not. When talking about money, for example, it is important to make the difference with the commodity, and that is where the problem lies. In the future, the issues might be different. If I may, I would like to refer to my colleague.


Mike, if someone has currency and buys and sells for an exchange gain, could they have a gain?

Michael Cooke, Manager, Income Tax Rulings Directorate, Canada Revenue Agency: Yes, I think they can.


Ms. Erskine: So, it is not a matter of never having a loss or gain; it depends whether there is a source of taxable income. Even if there is not a business, as I said, quite simply, there is this amount of $1,000 that makes a difference. If personal property is involved, we must always look at the rules for personal property.

Senator Massicotte: I would like to congratulate you on your very clear explanations. To summarize a bit, the answer we are looking for concerns personal property and capital property in the tax act. I believe that, in both cases, we are taxed on any increase in value, but in a different way. In both cases, the losses are deductible only as a gain of the same type, so a personal loss would be deductible as a personal gain and a capital loss would only be deductible against a capital gain. Have I summarized it correctly?

Ms. Erskine: Almost. The problem is that personal gains are still capital gains. When we talk about the Income Tax Act, we are talking about two types of income: capital income and business income.

When you have a personal gain, generally it is a capital gain. In this case, you have some property. First, before talking about the issue of capital, you need to first know whether it is personal property or property that is being used in your business. We always start there, whether it concerns your business.

Senator Massicotte: Let us say that it is only personal.

Ms. Erskine: If it is personal, the gains are almost always capital gains.

Senator Massicotte: I thought it was possible to have property. For example, if I buy an old car that is increasing in value, I do not have any interests in business profits. If I sell the car a week later because it increased in value, I thought it would be personal property, but not a capital asset, taxed at 100 per cent, not at 50 per cent.

Ms. Erskine: No, it is a capital gain.

Senator Massicotte: So at 50 per cent. That is the difference.

Ms. Erskine: It is just — there is the question of the $1,000.

Senator Massicotte: However, with the $1,000, the bitcoin is currency, just like American currency, like gold or anything else. If you have it for a year or two and its value goes up, it is still taxable, if you are not a company, except that it is taxable as a capital gain rather than an income gain that is 100 per cent taxable.


Ms. Erskine: Mike, would you like to comment?

Mr. Cooke: Could you clarify that?

Senator Massicotte: Let's say you have bitcoin, or chickens, and you hold them for a year — it's not a business. You're not transacting the stuff every second day, so the argument for a business is not there; but you hold them for a long time. To use a good example, our chairman bought bitcoin and today it's worth $20 or so more. If he sells it, eventually there is a gain. My understanding of the Income Tax Act is that there will be a taxable gain by somebody. If you transact a business significantly, the income is taxed at 100 per cent. If you hold onto it and don't transact, it becomes capital property taxed at 50 per cent. Is that a good summary?

Mr. Cooke: That's a good question and a pretty good summary. You are talking about the difference between an income property and an investment-type property. You're holding something such as bitcoin for investment purposes rather than for the purpose of a business.

Senator Massicotte: You are just holding it, say you forgot it in your wallet, and there's no intent. It's like holding U.S. currency, if you wish, in your wallet. One year later it's worth more. I think it's taxable.

Mr. Cooke: I would think you're correct on that.

Senator Massicotte: That's good enough.

The chairman imputed his reading of your treatment as similar to the American treatment. He was suggesting that with a small variation in employment income, your position is quite the same. My understanding was different. I understood the Americans made it clear that they're treating it as a property, right from the start. You're treating it like a currency; is that the case?

Ms. Erskine: We are not treating it as a currency.

Senator Massicotte: As a commodity.

Ms. Erskine: Yes. However, to put a gloss on that, we are using it in the following sense: We are using the terms "commodity" and "property" to mean the same thing. We are treating it as a thing, and not as currency. We are treating it as a good, not as money.

Senator Massicotte: Therefore, the onus on the holder of that right, with rare exception, unless he transacts it personally in and out, he has to ask himself the question: If I mean to hold it and make a profit, there will be a lot of accounting involved. I have to prove what price I paid for it; the price I sold it for; and I have to pay GST if it's deemed to be a taxable service or good. That's heavy, but that was the intent.

Ms. Erskine: I think I can clarify this. That's a reasonable summary, but I don't think I can speak to intent. I will defer to my colleagues at the Department of Finance for drafting the Income Tax Act.

That said, let's look at the accounting for purposes of a good that you are holding for investment purposes, or as you say that you have forgotten in your back pocket and decide later to sell, with no intent to generate profit or business income.

We'll take it as read that here is your basic investment. This is just property you've got. The only clear accounting you have to do for that is to know how much you paid for it, and, in the example that was given of someone who received it in the form of salary, how much was included in your income for it is probably a reasonable proxy for what the value was. How much did you get it for? How much did you sell it for? Assuming that you're correct that it's just an investment, then you've got your capital gain, and half of that would be included in your income.

Senator Massicotte: That's a lot of accounting.

Ms. Erskine: But it's two points of data.

Senator Massicotte: I appreciate that.

Let me jump, if I could. Having said all that, we know what the intent is. It's a taxable transaction, but, as you know, the dynamic of this form of currency is that it's confidential. I suspect, as reported by many governments, including the State of Florida, most recently, they are saying that some people are motivated to use this currency to make sure that people like you never hear about it and never tax it. That's their motivation. It remains anonymous, and they can do this without government supervision. How do you deal with that? We know the theory, but how do you apply it?

Ms. Erskine: We are now wandering into the realm of compliance, and, in a sense, away from the theory. As you've said, we are now looking at what we do with it. Certainly, my colleagues in the compliance area have some interest in how bitcoin is being used. Can we trace it? Can we track it? Are we concerned about, for example, money laundering? Are we concerned about being able to hide income from an income tax point of view?

As I believe that you have heard throughout the testimony, it is not, perhaps, as untraceable as it appears. Cash transactions probably give us, at this time, the most difficulty, because, unless there is some register, unless there is some way to trace it, we don't know it happened. When you talk about digital currency as being untraceable, it's not clear, at this time, how untraceable it is.

I can tell you that, on the audit side, there has been a very small, at this point, trickle of files where people are saying, "I never realized I had to keep track of bitcoins. I did stuff in bitcoin. It never occurred to me I had to do something with it. Do I?" That's the side of most taxpayers who do want to comply. We've gone back to them and said, "Yes, you do, and here's our voluntary disclosure procedure. We'd be happy to hear from you."

On the side are the people who are not complying, who are trying to hide it, that is where our compliance side is looking at how we track and how we trace. I think it's still very much up in the air as to how big the problem really is. As has been mentioned, there are ways of tracking. There are ways of tracing.

Senator Tkachuk: This is just to clarify, though I don't know if it can be clarified. On what Senator Massicotte was talking about, a bitcoin can be treated by a consumer who isn't in the business of bitcoin. If I have an antique table, it's something that I possess. I may sell it at some time. Even at increased value, that money disappears into the ether. It is my money. There is no taxable gain there. If I have a cottage, which is my second home, and sell it for a profit, I have a capital gain.

If I have a bitcoin I have to go through all of that stuff that Senator Massicotte was complaining about if I'm in the business of selling something, whether I'm a dentist or whatever. If I take a bitcoin, I have to value it in Canadian dollars, and then I have to deal with it in a taxable way.

If I just have it and I sell my antique table with that bitcoin and it increases in value by 50 per cent and I go and buy a boat, there are no tax consequences. Are there? It just disappears. I'm just asking. Is there a tax consequence? Would it be any different if I took the antique table and traded it for the boat? If you're treating it as a thing, which is what you're doing, you're treating it as a thing, not as an investment. You're treating it as something that I buy for my house.

Senator Massicotte: How much money was involved here?

Senator Tkachuk: I'm just asking. I think I'm correct about that. There're no tax consequences to something like that.

The Chair: That's a question?

Senator Tkachuk: I think so. I'm trying to get at your particular situation where you bought a bitcoin. You take that bitcoin, because it increased in value, and go and buy three packs of smokes with that bitcoin, and it disappears. There is no capital gain there; there's no nothing. You're not in the business of investment.

The Chair: You've asked the question; we are going to get the answer.

Ms. Erskine: I'll try to clarify this point. When you buy and then sell personal property, there would be a capital gain. Therefore, in your case with your antique table — and there are some very limited, specialized rules that I'm not going to go into — but to answer your question generally, yes, you have a capital gain.

However, because, in tax policy terms, we don't want to tax garage sales, we have almost a de minimis rule, the $1,000 rule I keep talking about. If your antique table sold, and you made more than a $1,000 gain, then the difference between the amount you sold it for, say $1,500, and $1,000 would be your capital gain. You would have a $500 capital gain.

Senator Tkachuk: If I sold it for less, would I have a capital loss? I'm just asking.

Ms. Erskine: If I may, in most cases the Income Tax Act does not permit losses for personal property.

Senator Tkachuk: But it permits gain?

Ms. Erskine: Yes.

Senator Tkachuk: That goes against your theory of capital loss and capital gain because, if I have capital loss, I should be able to use it against the stock that I sold where I gained $1,000.

Ms. Erskine: Right, and I did, in that sense, misspeak. You have your capital loss, and you can use it against your capital gains.

Senator Ringuette: I really appreciate that, from your answers, you've given great consideration to this bitcoin issue and the effect that it has and could have on your agency and how you deal with it.

My question now is: What event would be necessary for Canada Revenue Agency to change its treatment of bitcoin from commodity to currency?

Ms. Erskine: Thank you for that question. At the present time, we are still studying the nature of bitcoin, much like our colleagues across the government. This is certainly a study that is best left to, for example, our colleagues at the Bank of Canada, our colleagues at the Department of Finance. We are effectively experts in the Income Tax Act, CPP and EI, Goods and Services Tax.

I think the most straightforward answer to that question is probably when it gets there, when our colleagues who actually have the information and the knowledge to resolve that question come back to us and say, "Okay, this is now a currency."

I have had the great pleasure of reading the proceedings from this committee regarding bitcoins. As I said at the beginning of my remarks, it appears that the general consensus is that we're not there yet. At the present time, I don't have the impression that the CRA is going to be the department that makes the decision that we are there yet.

Senator Ringuette: So you would rely on a decision based on facts from the Bank of Canada and the Department of Finance Canada in order to change your treatment? Basically, you are also saying that the Bank of Canada and the Department of Finance are treating it as a commodity?

Ms. Erskine: I can only speak from what I have read in the proceedings and from the discussions we have had with our colleagues. As I said, this is an impression, and my impression is that the general consensus is that this is still not a currency.

Senator Massicotte: On that issue, though, I'm trying to understand what the relevance of that question is. Whether it's a currency or a box of chickens, it's the same thing. When you own currency, it's the same treatment of a gain. From an income tax point of view, what is the relevance of that question?

Ms. Erskine: That is a very good question. From an income tax point of view, it has limited relevancy for that reason.

That being said, there are valuation issues attached to it. From the perspective of the Income Tax Act — the book — it probably doesn't matter very much. From the perspective of how much it is and how you determine the amounts, it can matter.

Senator Massicotte: But that remains, irrespective.

Ms. Erskine: But it is a valuation issue. The one gloss I would add on that, though, is that there are rules in the Income Tax Act about foreign exchange gains and losses. So if we get to the point of considering this a currency, like a fiat currency, there may be other rules that apply.

The other thing I would add is that, from the goods and services tax point of view, which is completely distinct, different legislation from the Income Tax Act, they are currently looking at whether digital currency is money, because that is a defined term for GST purposes. Also, the GST treatment may end up varying, depending on whether it is currency. A goods and services tax, which is a sales tax or a services tax, may — when you are exchanging cash for cash, it has different goods and services tax implications.

Senator Massicotte: I wanted to allow you a chance to clarify or correct. Let us start off with misevaluation. You said earlier that the value of the receipt of a bitcoin, say for employment purposes, is what the employer and the employee agree to. I suspect what you may want to say — there's an immense caveat to that, assuming that value is reasonable, because otherwise those two parties could agree and basically avoid income tax by misevaluating. So it's an evidence issue, I presume? That's the bottom line?

Ms. Erskine: That's exactly correct.


Senator Bellemare: For the sake of the people watching us, my understanding is that the bitcoin is considered a commodity. If someone carries out transactions with bitcoins — receives bitcoins and exchanges them later or considers that they have value and resells them — and if he resells them at a higher price and makes a profit of less than $1,000, he is not required to report them on his tax return. Is that correct?

However, if companies are conducting transactions, that is a whole different story. If I take my logic further and if bitcoins are being used more and more, they will have to be careful about the profit they make with the bitcoins when they exchange them later, because they will have to report it.

That means that the CRA will have to keep a closer watch on bitcoins, those paper objects. Is that right?

Ms. Erskine: The only distinction I would make is that you are talking about someone who spends a lot of time looking at what happens with the bitcoins. You used the example of personal goods being bought by an individual who does not own a business. The problem is that the definition of a business under the Income Tax Act is very broad.


One of the things I thought might come up for this committee is that the definition of "business" for purposes of the Income Tax Act is very broad. It includes an adventure in the nature of a trade. It includes an undertaking of any kind whatsoever.

Senator Bellemare: So you don't have to be registered?

Ms. Erskine: Right. And that is actually something that can trip people up. In my opening remarks, I noted that you have to make a determination as to whether you were holding it simply as an investment or whether there is more going on that will bring it into that business realm.

This is where it does start to get a bit technical. The concept of business is very broad for the Income Tax Act. We look at — and the Canada Revenue Agency does have guides on when we consider something a business or not — and that is listed in the fact sheet that has been provided to the clerk. Our position on bitcoins is: When do you cross the line from "I've decided to hold a bitcoin as an investment, as a one-off or a very basic sort of personal matter" — when I have devoted the time, the resources, the knowledge and the energy into trading in bitcoins? Because you can cross that line, at which point it will no longer be a capital gain; it will be fully includable in income as something that you are running as a "business" in the very broad sense in the Income Tax Act.

Senator Tkachuk: Like a stock trader.

Ms. Erskine: Correct.

Senator Massicotte: Chair, may I make a point of clarification?

We're talking about Senator Tkachuk's coffee table.

Senator Tkachuk: It's a $1,000 antique table.

Senator Massicotte: You referred to the $1,000. That is an annual deduction, not a per-transaction deduction; is that correct?

Ms. Erskine: No, that would be a per-transaction deduction.

Senator Massicotte: So if he had 10 coffee tables and he sold all of them for a thousand-dollar profit, he's not taxable on all 10?

Senator Tkachuk: Then it's a business.

Senator Massicotte: No, it's in your garage.

Senator Tkachuk: It's cash.

Senator Ringuette: It's a garage sale.

Ms. Erskine: I would be happy to clarify that. When I said it was on a transaction basis, you are quite correct: If the senator had 10 coffee tables —

Senator Campbell: Which he does.

Ms. Erskine: — from a capital gains perspective, we would be looking at each item. It gets a little more complicated when you're talking about something like bitcoins; how does the $1,000 limit apply there?

Again, we do look at this when people buy and sell currency for personal use, and it is considered a collective. In other words, I might say that 25 cents is a quarter — it's one thing. Again, we have not studied this; this question has not been reviewed by us in great depth, but I suspect you are talking about something collective in the way that money is collective. This is where that line between a commodity and a currency becomes more challenging for digital currency than for, you know, a regular commodity.

The Chair: Ms. Erskine, you have anticipated a number of the excellent questions that have been asked by the members of the committee. Is there any question you would like to pose to yourself, and that you would like to be able to express to the committee, which we didn't ask?

Senator Massicotte: That we know the answer to.

The Chair: No, very seriously, are there any other points you would like to be able to make that perhaps we did not raise a question on?

Ms. Erskine: Thank you, Mr. Chair. One of the questions that is exercising our minds right now, which we don't have the answer to and are hoping to get input on or come back later and be able to speak about, is the question of bitcoin mining.

People mine bitcoins and like many people here, based on what I have seen, we have to understand what that means. Is it the same as mining gold? I will tell you what we have said in very general terms, which is that at the moment we are looking at it as an inventory. So if you are someone who actually mines bitcoins as a business, as something you do to generate income, we will say that you have inventory and we have heard previously that you get new bitcoins. We are still at the stage where people are getting new bitcoins or are mining something.

That is the question still exercising my mind and that we have hopes will be resolved. We have had to give an answer to this because part of the reason the CRA had to get there sooner than most people, in fact sooner than our IRS colleagues, is the media asked: "What do you think?" We had to have an answer. Taxpayers have asked us, "I have to file my return, what do you think?"

We have taken the view that it is inventory, which means you don't have to immediately say, "Well, I mined the bitcoin and today it's worth $1,000. I have $1,000 of income." We haven't taken that perspective. We have taken the view that you now have inventory and until you do something with your inventory, there isn't an immediate tax implication right there on that day.

Where we go forward with this, I think, is going to be informed as our understanding evolves on how bitcoins are created.


Senator Bellemare: We know that some people are paid in bitcoins and that there are costs associated with decrypting them. I suppose that someone who works in that sort of company must report the income and costs, and the taxes will be paid on the difference. Is that correct?

Ms. Erskine: Absolutely.

Senator Bellemare: That is a problem for the agency right now. In Canada, there might be bitcoin miners. We know that the more bitcoins there are, the more complicated the computer calculations become and the more energy that takes. I know my question is a theoretical one, but have you noticed whether the difference between income and costs has been relatively stable with bitcoins?

Ms. Erskine: We have not looked at enough cases to be able to answer that question. We are not there yet.


The Chair: Ms. Erskine and Mr. Cooke, the members of the Banking Committee are extremely experienced in asking questions, and I can assure you that each one of them knows when they get a mushy or waffly answer in response. I can also assure you that did not take place today, and I know I speak for everyone on the committee of our great appreciation for your being here. Your answers to our questions were crisp, clear and we greatly appreciate it. This is very helpful in our continuing study.

As you know, this study is going to continue for basically another year, and I am sure there will be some changes over that year in our understanding of bitcoin, and yours as well, and we would welcome you back at some future time.

Ms. Erskine: Thank you, Mr. Chairman.

The Chair: Thank you very much for being before us. This meeting is concluded.

(The committee adjourned.)