Canada is among the countries that not only lack a negative attitude toward digital currencies but view them as an opportunity. This perspective has earned Canada the reputation of being a haven for digital currencies today.
Canada’s government policy towards cryptocurrencies is one of encouragement balanced with caution. In other words, the country’s government is well aware of the opportunities that digital currencies can create in financial markets, while also understanding their risks. Therefore, alongside advocating caution, it seeks to encourage people and investors to engage in this sector.
Canada was one of the first countries to recognize digital currencies officially and launched ETF funds for its citizens to facilitate the exchange, transfer, and conversion of these innovative currencies.
In 2014, the country’s President passed Bill C-31 into law, categorizing digital currencies, including Bitcoin, under “businesses dealing in financial services” and necessitating compliance with anti-money laundering laws. This was one of the earliest official governmental steps worldwide to regulate digital currencies, positioning Canada as welcoming yet cautious towards embracing cryptocurrencies.
In this article from Hafez Exchange, we aim to comprehensively cover all aspects of digital currency regulations in Canada. Stay tuned with us
The legal framework and regulations for digital currencies
In Canada, buying and selling various types of digital currencies pose no legal issues for users. The Canada Revenue Agency (CRA) recognizes digital currencies and does not deem their exchange for goods as illegal. Moreover, some banks in Canada acknowledge these currencies and accept transactions through them.
However, the Canadian government maintains a comprehensive awareness and control over this sector, placing it under the framework of securities legislation to support the public. This entails specific legal frameworks for trading and exchanging digital currencies to ensure their lawful and secure use in transactions.
To prevent common scams in this field, Canada has implemented stringent laws and exercises complete oversight over digital currencies. These regulations are robust enough that some international exchanges, such as Binance, have ceased operations in the country, citing restrictions on people’s access to a wide range of digital assets.
This comes in contrast to a few years ago when Binance was fined $4.4 million by the Federal Court of Canada for not registering as a foreign money services business and failing to report digital currency transactions over $10,000 in Canada.
The CRA in Canada regards digital currencies as digital commodities and considers their use for daily payments entirely legal. However, cryptocurrencies are not accepted as legal tender in Canada, meaning they lack official support from federal or provincial governments, and no one is obliged to accept them. In other words, cryptocurrencies are treated as digital commodities rather than conventional currencies
Also read: Money transfer tax in Canada
Registering and licensing digital currency exchanges in Canada.
In Canada, regulations for the digital currency industry are established to ensure safety, transparency, and security of transactions involving digital assets. To operate legally as a digital currency exchange, obtaining necessary licenses from regulatory authorities is essential. The key licenses and documents required for registering and operating a digital currency exchange in Canada include:
Registration as a Money Services Business (MSB)
Businesses in Canada that exchange digital currencies for fiat currency, transmit funds, or provide encrypted wallet services must register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) as a Money Services Business (MSB). The registration process involves providing detailed information about the business, owners, and managers, as well as developing and implementing AML/CFT compliance programs
Request for Securities Trading License
If the activities of a digital currency exchange involve offering, selling, or trading products that may be considered securities (such as tokenized assets, digital coins ICO), it is necessary to obtain the required license from the Canadian Securities Administrators (CSA) or the relevant provincial authority. This requires demonstrating compliance of exchange programs with Canada’s investor protection laws and regulatory requirements
Application for Registration as a Virtual Currency Seller
Recent regulatory changes in Canada require companies engaged in the exchange or transmission of virtual currencies to register as virtual currency sellers. This process involves stricter compliance requirements compared to MSB registration, emphasizing increased responsibility for adhering to AML/CFT programs and enhancing consumer protection
Specialized Statements for Regulatory Sandboxes
Companies developing innovative digital currency products or services can utilize regulatory sandboxes as an opportunity to pilot their projects. This entails presenting a specialized operational plan that highlights the project’s innovative nature and potential benefits for consumers or the market. Sandboxes provide a unique opportunity for close collaboration with regulators to enhance the quality of services and products, aiming to meet regulatory requirements effectively
Application for Special Licenses
For certain unique digital currency transactions that do not fit into general categories (such as transactions utilizing new blockchain technologies or offering unique financial products), companies may require special license applications. The requirements for issuing these special licenses may significantly differ from standard licenses
Anti-Money Laundering and Counter-Terrorist Financing Laws
Among all countries worldwide, Canada was the first to enact specific regulations in 2014 under amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, which also include provisions for digital currencies.
Under these amendments, the Canadian government regulates businesses involved in any way with digital currencies, such as financial services businesses. They are required to maintain records of transactions involving these currencies, undergo formal verification and validation processes, report relevant transaction activities and suspicious transactions, and obtain necessary licenses for exchanging these currencies.
These laws and regulations recognize digital currencies as essentially a decentralized monetary unit that can be used outside the formal oversight of governments for various transactions. Historically, cryptocurrencies have been utilized for illicit activities, underground dealings, and terrorist financing. Therefore, it is natural for the Canadian government to establish stringent regulations to combat money laundering and prevent unofficial support for terrorism while acknowledging the value of these cryptocurrencies
Taxation on Income and Transactions of Digital Currencies
As mentioned, in Canada, digital currencies are not considered official currency but are more akin to valuable digital commodities (such as gold). Therefore, the government does not impose taxes based on the possession of digital currencies as they are not classified as cash assets. Instead, they are treated like non-cash assets in terms of taxation.
However, recognizing the existence and value of these cryptocurrencies, Canada taxes income derived from trading or mining them. For instance, if you mine a new digital currency over the internet, the government considers it as income and taxes the equivalent amount (which is your net income).
Similarly, if you trade your digital asset or convert it into fiat currency on an exchange, any profit made from the price difference is taxable income. For example, if you invest capital into Bitcoin and later decide to sell it at a profit, the government will tax that price difference as income.
Therefore, Canadian citizens are required to report any gains or losses from converting digital currencies to the tax authority to avoid incorrect or unfair taxation. Failure to report may result in the government levying taxes on the entire capital due to lack of reporting.
Note: Businesses engaged in trading and exchanging digital currencies are also obligated to pay taxes
Also read: Guide to transferring money to Canada via cryptocurrency
Consumer Protection and User Support in Digital Currencies
The world of cryptocurrency is vast, expansive, and relatively new. Despite its advantages and appeal, many people are unfamiliar with this space and unsure how to protect their assets. Beyond cyberattacks and emptying digital wallets, there are numerous risks associated with fraud in digital currencies—from scams involving sale of illegitimate currencies to fraudulent transactions.
In 2021, the Canadian government apprehended a 30-year-old who managed to defraud nearly $30 million in the digital currency market, using educational prepayments as a pretext to collect this amount. This example vividly illustrates the threats consumers face in this market.
It is due to these risks that the Canadian government, despite recognizing the benefits of digital currencies and supporting this technology, approaches it cautiously and imposes stringent control policies. These measures ultimately aim to provide greater protection for the rights of consumers and users of digital currencies, ensuring they can engage in safer transactions and exchanges of these digital assets with peace of mind regarding their security
The Role of Regulatory Agencies in the Digital Currency Market
We can consider 2023 as a year of classification and implementation in the digital currency space worldwide. With significant local and international developments impacting digital currency markets and their regulations in Canada (including the bankruptcy of many cryptocurrency-based companies in 2022 and the substantial financial consequences for investors in this sector), it is not surprising that the role of regulatory agencies in Canada’s digital currency market has increased.
Since late 2022 and throughout the past year, efforts to formalize digital assets under the law, formulate enforceable regulations, and enforce current laws have intensified. The Canadian Securities Administrators (CSA) have issued various statements towards providing a more precise legal framework for cryptocurrencies. Overall, regulatory agencies in Canada have focused on transparency and enforcement of existing laws, while courts have concentrated more on implementing existing securities laws on cryptocurrencies
Laws Related to Initial Coin Offerings (ICO) and Tokens
In Canada, the governing law for digital currencies is the Securities Act. Some Canadian officials have issued various notices regarding the application of this law on Initial Coin Offerings (ICO) and tokens. These announcements clearly demonstrate that the Canadian government, despite widespread acceptance of digital currencies, continues to seek ways to increase control and oversight over this market.
One of the regulations under the Securities Act in Canada is the “Investment Contract Test,” which must be applied to new digital currencies. Accordingly, legislators assess whether a new ICO can be considered a security on a case-by-case basis.
If tokens or ICOs are deemed securities and identified as such under the law, they must comply with legal requirements and, upon registration, can publish prospectuses for share offerings. If a token is traded on digital exchanges after its initial sale, it will face restrictions on offering, and failure to comply with these regulations may result in legal action or financial penalties against its creators
Cybersecurity and Data Protection in Digital Currencies
Even if governments fully support and regulate digital currency technology, there is always the risk of cyber attacks and theft of digital assets. Therefore, the Canadian government advises citizens who invest in this capital market to observe safety precautions and protect their investments.
To ensure cybersecurity and protect data in digital currencies, it is advisable to:
- Use a hardware wallet or vault and avoid leaving your digital currencies in exchange wallets. Remember that exchanges are vulnerable to cyber attacks, and there is a risk of your cryptocurrencies being stolen in these publicized attacks. Hence, obtaining a hardware wallet for storing your digital assets is preferable.
- Always use two-factor authentication for accessing your wallet to prevent hackers from easily accessing your account.
- Find a reputable digital currency exchange with proper licenses and conduct all your transactions through it. Avoid falling for unreliable exchanges promising low or zero commission rates.
- Do not access your digital currency wallet through public internet networks. Connecting to public Wi-Fi or unknown networks puts individuals at risk of theft.
- Use complex passwords with random and unpredictable characters when accessing your digital currency wallet.
These practices help mitigate risks and ensure a safer environment for managing and exchanging digital assets
Future Regulations of Digital Currencies in Canada
It is inevitable that modern life developments will lead not only Canada but all countries worldwide to increasingly utilize digital currency technologies. In the future, we can expect a rise in the volume of transactions involving these currencies, broader acceptance by the public as a common currency, and the emergence of new innovations and initiatives in this field.
Canada has demonstrated its ability to adapt to these changes and is prepared to embrace them. As mentioned, Canada plans to not only adhere to existing laws regarding digital currency trading but also consider new regulations and positions in light of technological advancements. Specific regulatory laws tailored to this emerging phenomenon are expected to be enacted
Challenges and Opportunities in Legislating Digital Currencies
In the realm of legislating digital currencies, Canadian lawmakers face several challenges and opportunities.
Opportunities include the potential for digital currencies to become a large stock and capital market, enhancing financial circulation and bolstering Canada’s overall economic prosperity. If the government can actively participate in this market without stifling it, while ensuring robust oversight and creating a secure framework, it stands to benefit significantly. Digital currencies could then be leveraged to strengthen the economic power of Canada’s official currencies.
On the other hand, legislating for digital currencies poses significant challenges. These currencies are typically designed to operate outside the control of any specific government, functioning as decentralized and people-powered currencies. Therefore, regulating them inherently conflicts with their nature. Moreover, the high volatility inherent in the crypto market requires flexible regulations to address instability.
Furthermore, the rapid evolution of this technology introduces new tokens into the market daily, each requiring thorough legal scrutiny and evaluation. This aspect alone can pose a major challenge for lawmakers
Impact of International Laws on Canada’s Digital Currency Market
Canada has only embraced certain international laws recognizing digital currencies. It’s important to note that digital currencies have an inherently international nature and are designed for global transactions. Users can use these currencies to purchase goods or services from anywhere in the world without needing to convert currencies.
It is natural that international laws can significantly impact Canada’s digital currency market, as the actions and influences of foreign individuals can heavily influence the value of many currencies. Consider, for example, Elon Musk’s support of Dogecoin and its valuation over the past few years!
While the digital currency market is entirely influenced by global events and international laws, Canada can still establish its own specific laws for regulating and licensing activities in this field
Also read: Paying Canadian university tuition fees through exchange offices
Final Words
In this article, we have endeavored to provide sufficient explanations regarding digital currency laws in Canada. We hope this information has been useful to you.
Frequently Asked Questions about Digital Currency Laws in Canada
- Is the use of digital currencies legal in Canada? Yes, the use of digital currencies such as Bitcoin and Ethereum is legal in Canada. Digital currencies are recognized as digital assets, and people can use them for transactions and investments.
- Are digital currencies taxable in Canada? Yes, digital currencies are taxable in Canada. Income from transactions involving digital currencies, such as profits or losses from buying and selling, is considered financial income and must be reported in tax filings.
- Do exchanges of digital currencies in Canada require a license? Yes, individuals or companies engaged in the exchange of digital currencies in Canada must obtain the appropriate licenses from Canadian financial and regulatory authorities. These licenses are issued to mitigate financial risks and prevent money laundering.
- What changes have been made to digital currency laws in Canada? Digital currency laws in Canada are regularly updated to align with market and technological advancements. Changes may involve amendments to financial, regulatory, and security regulations
