Canada: Obligations and Opportunity - Budget 2024’s Impact on the Blockchain Industry

As crypto-assets become subject to further regulation both domestically and globally, industry players find themselves presented not only with new obligations but also with new opportunities. Canada’s 2024 federal budget (“Budget 2024”) is no exception to this trend.

Although the headline news coming from Budget 2024 was the proposed increase to the capital gains inclusion rate, companies operating in the blockchain space have more targeted changes to contend with. In particular, Budget 2024 proposes new reporting requirements for transactions in crypto-assets while also raising the possibility that “crypto-backed assets” could become qualified investments for registered plans. We explain these two developments in more depth below.

New Obligations: Canada to Adopt OECD’s Crypto-Asset Reporting Framework

Budget 2024 proposes to impose new annual reporting requirements on entities and individuals that are resident in Canada, or that carry on business in Canada, and that provide business services effectuating exchange transactions in crypto-assets. These measures would apply to the 2026 and subsequent calendar years.

These reporting requirements would be implemented through the Common Reporting Standard (CRS). Under the CRS, participating countries exchange financial account information with each other to provide tax authorities with comprehensive data to identify and address tax evasion and non-compliance. The CRS is developed by the Organization for Economic Cooperation and Development (OECD) and applied in Canada through the Income Tax Act (Canada) (the “Tax Act”).

The CRS, as implemented by the Tax Act, requires traditional financial institutions to report financial account information to the Canada Revenue Agency. However, unlike traditional financial instruments, crypto-assets can often be transferred and held without reliance on conventional financial intermediaries and thus fall outside the scope of CRS reporting requirements. The OECD has introduced the Crypto-Asset Reporting Framework to enable the automatic exchange of tax-related information concerning transactions involving crypto-assets.

As noted above, Canada’s proposed implementation of this framework will apply to entities and individuals (referred to as “crypto-asset service providers”) that are resident in Canada, or that carry on business in Canada, and that provide business services effectuating exchange transactions in crypto-assets. Budget 2024 specifically identifies crypto exchanges, crypto-asset brokers and dealers and operators of crypto-asset automated teller machines as being caught by the new requirements.

Crypto-asset service providers will need to report, in respect of each customer and each crypto-asset, the annual value of various transactions, including conversions between crypto-assets and fiat currencies, exchanges involving different types of crypto-assets and transfers of crypto-assets. Additional reporting obligations may arise where a customer, conducting transactions exceeding US$50,000, transfers crypto-assets to a merchant in exchange for goods or services, with the crypto-asset service provider facilitating the payment process on behalf of the merchant. Notably, central bank digital currencies and fiat-backed stablecoins are not intended to be subject to such annual reporting requirements, as they are dealt with in separate CRS amendments discussed below.

In addition to transaction details, crypto-asset service providers must gather and disclose comprehensive information about each customer, including the customer’s name, address, date of birth, country of residence and taxpayer identification number(s). In cases where the customer is a corporation or other legal entity, this information must be reported regarding the natural persons exercising control over the entity.

Budget 2024 also proposes amendments to expand the CRS’s scope to encompass fiat-backed stablecoins and central bank digital currencies, areas not covered by the Crypto-Asset Reporting Framework. These changes are meant to ensure effective synchronization, minimizing redundant reporting requirements across both frameworks.

New Opportunity: Canada to Modernize Qualified Investment Rules

Budget 2024 solicits comments from industry stakeholders on whether “crypto-backed assets are appropriate as qualified investments for registered savings plans”. Registered savings plans include tax advantaged investment vehicles such as Registered Retirement Savings Plans and Tax-Free Savings Accounts.

Budget 2024 notes that the qualified investment rules for registered savings plans have been incrementally expanded to include more than 40 types of assets and to reflect the introduction of new types of registered plans (including First Home Savings Accounts in 2023). Budget 2024 also notes that this incremental approach has resulted in qualified investment rules that can be inconsistent or difficult to understand in some cases, including because different registered plans have slightly different rules for making investments.

While it is unclear what the term “crypto-backed assets” is intended to capture, the inclusion of crypto-assets in registered savings plans would likely be a huge boon to the blockchain industry in Canada. As of now, the only exposure to crypto-assets that Canadian residents can obtain through their registered savings plans is through investment funds that invest in crypto-assets (usually more established assets, like bitcoin or ether) or indirectly through public companies that operate in the industry. Direct exposure to crypto-assets in registered savings plan would likely drive more engagement with Canada’s highly regulated crypto exchanges, driving further development and growth in an area in which Canada stands as a world leader.

Conclusion

While industry stakeholders in Canada may bristle at the idea of the additional regulatory obligations represented by the proposed CRS amendments included in Budget 2024, a new opportunity awaits in the potential inclusion of crypto-assets in tax advantaged investment vehicles. Only time will tell how these developments affect Canada’s blockchain industry in the long term.

For further information concerning the Budget 2024 initiatives discussed in this update, please contact Colin Romano or Francesca Guolo.