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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
Ms. Erskine: Thank you, Mr. Chairman.
The Chair: Thank you very much for being before us. This meeting
(The committee adjourned.)