Canadian Lawyer

30 J u n e 2 0 1 4 w w w . C A N A D I A N L a w y e r m a g . c o m 2373161911579216195423573731619542357098500868790785326998640007913129639936 2373161911579216195423573731619542357098500868790785326998640007913129639936 head of a major Canadian bank reportedly said the Bank of Montreal would be open to dealing in bitcoin transactions as long as the virtual currency becomes regulated. The Canadian Bankers Association, though it has taken no official position on bitcoins as they operate outside of the banking system, echoed that stance. Before the banking committee, Darren Hannah, acting vice president of policy and operations, testified users, consumers, and firms that "deal in bitcoin or any other payment form" would benefit from a robust regulatory framework so "that everybody understood the rights, responsibilities, safety, soundness, and secu- rity associated with the payment mechanism." Long-time banking committee member Senator Pierrette Ringuette replied, "This is the first time that the Canadian Bankers Association has appeared before us asking for regulations." The Office of the Superintendent of Financial Institutions, an independent agency of the Government of Canada that regulates and supervises financial institutions and private pension plans subject to federal oversight, has not issued guidance related to dealing in virtual currencies. While it does not prohibit the use of virtual currencies, it does expect federally regulated financial institutions to be aware of the risks and consequences of engaging in any financial activity, including activity that may be linked to virtual currencies, said OSFI in an e-mail message. S cant official guidance is available so far to bitcoin entities from Canadian policy mak- ers, regulators, and overseers, with the possible exception of the Canadian tax authority. But that doesn't mean people transacting in bitcoins are not subject to regulation, says Hoegner. Securities regulators such as the Autorité des marchés financiers have by and large limited themselves so far to issuing warnings to consumers about the dangers of becoming involved with virtual currencies. The Ontario Securities Commission followed suit. All virtual currencies should be approached with "extra caution," warns the OSC. Recent events — from software glitches, hackings, and exchange shutdowns to cases of outright fraud — "highlight the speculative and risky nature" of virtual currency, adds the OSC. "At this point securities regulators in Canada have been less instructive than tax authorities have been," observes Elliot Greenstone, a partner with Davies Ward Phillips & Vineberg LLP. "That's partly because it really depends on the instrument and how the instrument is being used, the purpose for which it is being used, and is it really an investment. At this point it's really a case- by-case basis of the particular investment." The taxman had no such hesitation. The Canada Revenue Agency issued a fact sheet plainly stating tax rules apply when digital currencies are used. In fact, two separate tax rules apply to the virtual currencies, depending on whether they were merely bought and sold for speculative purposes or were used as money to buy things. When bitcoins are bought or sold like a commodity, any resulting gains or losses could be income or capital for the tax- payer depending on the specific facts; a position that did not take tax lawyer Fournier by surprise even though it could be problem- atic given the volatility of bitcoins. "Because of the high volatility, the valuation of bitcoins may not be as simple as taking the price at the exchange that day because there are quite a high number of exchanges and they have different prices for the same bitcoin at the same time every day," says Fournier. He suggests a proper valua- tion of the bitcoin may be to take the average price of the virtual currency over a number of days as opposed to the spot rate. The CRA's application of barter transaction rules when bitcoins are used to purchase goods or services makes little sense to tax litigator Citrome. Barter is the exchange of one good for another good without the use of cash. Under Paragraph 3 of the CRA's Interpretation Bulletin IT-490, in a barter transaction between arm's-length persons, "we generally consider that the value of whatever is received is at least equal to the value of whatever is given up." Says Citrome: "Commercially this is a problem because if the purpose of a bitcoin is to allow frictionless transfers of money over the Internet, and you have to account and pay taxes every time you use a bitcoin, then it makes it very complicated." He says the CRA would do well to emulate the lead set by the United Kingdom, which announced value-added taxes do not apply to bitcoin transactions. Under the Excise Tax Act, the legislation that governs the GST and provincial sales taxes, supplies, and financial services are exempt. In other words, the CRA could easily adopt a liberal interpretation and consider bitcoins as a financial instru- ment "because it is just not appropriate to tax bitcoin transfers for sales tax purposes," adds Citrome. Recent hearings at the Senate banking committee yielded tell- tale glimpses on how institutions like the Department of Finance and the Bank of Canada view digital currency. Testimony from Finance at the committee should quell fears it was going to take a heavy-handed approach and stifle the virtual currency sector with onerous legislation. Au contraire. "We would aim, in these regula- tions, to cover virtual currency exchanges, but not individuals or businesses," testified Murchison. "We think this approach will allow for financial innovation, which we see to be one of the interesting markers behind this." Jason believes it will be "super important" for Ottawa to be mindful of international legislation and regulations on virtual currencies. "The world as we know it is super connected and linked, and you really need to have con- sistent regulation, particularly since these virtual currencies are primarily designed to facilitate international payments," he says. "So there's no point in passing a bunch of laws in Canada that I would love for the legal community in Canada to understand that bitcoin is not some sketchy digital currency that is used to launder money — it is much more than that. Jillian Friedman 2373161911579216195423573731619542357098500868790785326998640007913129639936 Jillian Friedman

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