Proposed Amendment Addressing Mining Activities in respect of Cryptoassets

GST/HST Notices - Notice 324
February 2023

Except as otherwise noted, all statutory references in this publication are to the provisions of the Excise Tax Act (ETA). The information in this publication does not replace the law found in the ETA and its regulations.

If this information does not completely address your particular situation, you may wish to refer to the ETA or relevant regulation, or call GST/HST Rulings at 1‑800‑959‑8287 for additional information. If you require certainty with respect to any particular GST/HST matter, you may request a ruling. GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service, explains how to obtain a ruling or an interpretation and lists the GST/HST rulings centres.

If you are located in Quebec and wish to request a ruling related to the GST/HST, please call Revenu Québec at 1‑800‑567‑4692. You may also visit the Revenu Québec website at revenuquebec.ca to obtain general information.

For listed financial institutions that are selected listed financial institutions (SLFIs) for GST/HST or Quebec sales tax (QST) purposes or both, whether or not they are located in Quebec, the CRA administers the GST/HST and the QST. If you wish to make a technical GST/HST or QST enquiry related to SLFIs, please call 1‑855‑666‑5166.

GST/HST rates

Reference in this publication is made to supplies that are subject to the GST or the HST. The HST applies in the participating provinces at the following rates: 13% in Ontario and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%. If you are uncertain as to whether a supply is made in a participating province, refer to GST/HST Technical Information Bulletin B-103, Harmonized Sales Tax – Place of Supply Rules for Determining Whether a Supply is Made in a Province.

Table of Contents

• Background
• Mining activities in respect of cryptoassets
  • What is a cryptoasset?
  • What is a mining activity?
• Mining activities in respect of cryptoassets ‑ Proposed section 188.2
  • What are the implications of the proposed amendment for a person that performs a mining activity?
    • Collection of tax
    • Eligibility for ITCs
    • Self-assessments
  • What are the implications of the proposed amendment for a person that provides a mining payment?
    • Collection of tax
    • Eligibility for ITCs
  • What are the implications of the proposed amendment in circumstances where proposed subsection 188.2(5) would apply?
• Mining activities in respect of cryptoassets prior to February 5, 2022
  • Solo miners
    • Collection of tax
    • ITCs where virtual payment instruments are payable in respect of mining activities
    • ITCs in other circumstances
    • Self-assessments
  • Mining with others

Background

In the cryptoasset industry, most cryptoasset networks that operate through the use of a publicly distributed ledger will utilize the services of persons for validating transactions and adding those transactions to the ledger. Such persons may be awarded remuneration for their activities when they are the person that validates the transactions and adds them to the ledger. The remuneration awarded usually includes a block subsidy from the network and a transaction fee, both in the form of cryptoassets. In these circumstances, there is generally no owner of the software or of the cryptoasset network, and no particular person that is responsible for its operation.

On February 4, 2022, the Department of Finance released proposed section 188.2 to address the application of the GST/HST to these activities (and other related activities) in respect of cryptoassets.

Mining activities in respect of cryptoassets

What is a cryptoasset?

A cryptoasset is defined in proposed subsection 188.2(1) to mean “property (other than prescribed property) that is a digital representation of value and that only exists at a digital address of a publicly distributed ledger.” There is currently no prescribed property for the purpose of the proposed cryptoasset definition.

A cryptoasset includes any property that is a virtual payment instrument as defined in subsection 123(1).

A virtual payment instrument is defined as “property that is a digital representation of value, that functions as a medium of exchange and that only exists at a digital address of a publicly distributed ledger, other than property that

1. confers a right, whether immediate or future and whether absolute or contingent, to be exchanged or redeemed for money or specific property or services or to be converted into money or specific property or services,
2. is primarily for use within, or as part of, a gaming platform, an affinity or rewards program or a similar platform or program, or
3. is prescribed property”.

There is currently no prescribed property for the purpose of this definition.

This definition is deemed to have come into force on May 18, 2019. The financial instrument definition in subsection 123(1) was amended with effect from May 18, 2019, to include virtual payment instruments. The impact is that supplies of virtual payment instruments made on or after May 18, 2019, would be financial services under the ETA. Supplies of these types of cryptoassets made before May 18, 2019, are supplies of intangible personal property and are subject to the GST/HST.

The cryptoasset definition in proposed subsection 188.2(1) includes virtual payment instruments as well as property that may be excluded from the virtual payment instrument definition such as, utility tokens or non-fungible tokens.

What is a mining activity?

A mining activity is defined in proposed subsection 188.2(1) to mean “an activity in respect of a cryptoasset that is

1. validating transactions and adding them to the publicly distributed ledger on which the cryptoasset exists at a digital address;
2. maintaining and permitting access to the publicly distributed ledger on which the cryptoasset exists at a digital address; or
3. allowing computing resources to be used for the purpose of, or in connection with, performing activities described in paragraph (a) or (b) in respect of the cryptoasset.”

The definition includes under paragraph (a) validating transactions and adding them to the publicly distributed ledger. The validating of transactions may be performed by any one of the various methods that cryptoasset networks use such as those that are commonly referred to as proof-of-work or proof-of-stake protocols. In addition, paragraph (c) of the definition would include, for example, a person that allows another person to use their equipment to carry out the validating of transactions and adding them to the publicly distributed ledger. In this case, both persons would be performing mining activities.

Mining activities in respect of cryptoassets ‑ Proposed section 188.2

What are the implications of the proposed amendment for a person that performs a mining activity?

Collection of tax

Subject to the exclusion in proposed subsection 188.2(5), which is discussed later, where a person receives money, property or a service as a fee, reward or payment, or any other form of remuneration, as a consequence of performing a mining activity, the provision of the mining activity is deemed not to be a supply for GST/HST purposes under proposed subsection 188.2(4). Accordingly, the person would not be required to charge any GST/HST in respect of the provision of the mining activity. This would apply in respect of the receipt of any remuneration as a consequence of performing a mining activity that is received after February 4, 2022.

Eligibility for ITCs

Subject to the exclusion in proposed subsection 188.2(5), to the extent that a person acquires, imports or brings into a participating province property or a service for consumption, use or supply in the course of, or in connection with, mining activities of the person, the person is deemed to have acquired, imported or brought into the participating province, as the case may be, the property or service for consumption, use or supply otherwise than in the course of commercial activities of the person. This is set out in proposed subsection 188.2(2). Accordingly, the person would not be eligible to claim input tax credits (ITCs) with respect to such property or services acquired, imported or brought into a participating province after February 4, 2022. This treatment applies even if the person does not receive any remuneration as a consequence of performing a mining activity, for example, in circumstances where acquisitions are used in a mining activity however the person is not successful in earning any remuneration.

In addition, if a person at any time consumes, uses or supplies property or a service in the course of, or in connection with, mining activities of the person, that consumption, use or supply is deemed to be otherwise than in the course of commercial activities of the person in accordance with proposed subsection 188.2(3). This would apply if the consumption, use or supply of the property or a service occurs after February 4, 2022.

Self-assessments

The person will also need to consider the requirement to self-assess tax under Division IV with regard to imported taxable supplies as the exclusion from the definition of imported taxable supply for property or services acquired for consumption, use or supply exclusively in the course of commercial activities would not generally apply for property or services acquired for consumption, use or supply in whole or in part in mining activities. In addition, the person would also need to consider the requirement to self-assess tax under Division IV.1 with respect to any property or services that are brought into a participating province.

What are the implications of the proposed amendment for a person that provides a mining payment?

Collection of tax

A mining payment means any money, property or service that is a fee, a reward or payment, or any other remuneration, that a person receives as a consequence of performing a mining activity. Subject to the exclusion in proposed subsection 188.2(5), if all or part of the mining payment is property or a service, the provision of a mining payment from a person making the mining payment to the miner is deemed not to be a supply in accordance with proposed subsection 188.2(4). This would apply in respect of mining payments received after February 4, 2022.

Eligibility for ITCs

Subject to the exclusion in proposed subsection 188.2(5), in determining an ITC of a person, proposed paragraph 188.2(4)(c) sets out that no amount is to be included in respect of the GST/HST that becomes payable, or is paid without having become payable, by the person in respect of any property or service acquired, imported or brought into a participating province for consumption, use or supply in the course of the provision of the mining payment by the person. Proposed paragraph 188.2(4)(c) would apply in respect of any property or service acquired, imported or brought into a participating province after February 5, 2022.

What are the implications of the proposed amendment in circumstances where proposed subsection 188.2(5) would apply?

Proposed subsection 188.2(5) provides an exclusion to the rules set out in proposed subsection 188.2(2) to (4). Proposed subsection 188.2(5) applies where the mining activity is performed by a particular person for another person that is not a mining group operator in respect of a group of persons that includes the particular person; and whose identity is known to the particular person.

A mining group operator is defined in proposed subsection 188.2(1) in respect of a group of persons, to mean “a particular person that coordinates the performance of mining activities by the group for the purposes of

1. enabling the particular person or any other member of the group to perform a mining activity; and
2. sharing with all or part of the group all or part of any fee, reward or payment, or any other form of remuneration, received or generated as a consequence of performing that mining activity.”

If proposed subsection 188.2(5) applies, the rules in proposed subsections 188.2(2), (3) and (4) do not apply. In these circumstances, the provision of the mining activity is subject to the general GST/HST rules.

Mining activities in respect of cryptoassets prior to February 5, 2022

The GST/HST treatment of mining activities conducted before February 5, 2022 (the effective date of proposed section 188.2) is based on the GST/HST provisions under the ETA that were in effect before that date. 

There are two ways of performing mining activities in respect of cryptoassets; persons can engage in mining activities on their own (solo miners) or, alternatively, persons can conduct their activities collectively with others (mining with others).

Solo miners

On a publicly distributed ledger, such as a public blockchain, anyone can join and participate in the network which operates through the collective effort of each of the participants on the network. In these cases, there is typically not an agreement that sets out a legally enforceable obligation for any one person to pay the blockchain rewards or transaction fees or an enforceable right for the person that performs a mining activity of validating transactions and adding them to a publicly distributed ledger to receive these payments. There is no corresponding liability on any particular person to make any payment to the person in respect of the supply made to the cryptoasset network and there is no person to whom the service is rendered. Therefore, there is no identifiable recipient, as that term is defined in the ETA, of the mining activities supplied to the cryptoasset network.

Collection of tax

Prior to February 5, 2022, where a person performs a mining activity of validating transactions and adding them to a publicly distributed ledger as a solo miner that is engaged in a commercial activity, the provision of those activities would be considered a taxable supply for GST/HST purposes. However, since there is typically no identifiable recipient of this taxable supply, and no identifiable liability for payment in respect of the supply, there is generally no consideration for such a supply and therefore no obligation to collect and remit the GST/HST. Accordingly, no GST/HST is applicable in respect of the taxable supply made by a solo miner that performs a mining activity and receives a mining payment before February 5, 2022.

ITCs where virtual payment instruments are payable in respect of mining activities

Any person making taxable supplies in Canada may be eligible to claim ITCs on their inputs if they meet certain conditions. For example, in order for a person to be eligible to claim an ITC, a person must generally be making taxable supplies for consideration in the course of the endeavour of the person.

Subsection 141.01(4) can apply in certain circumstances where acquisitions relate to making taxable supplies for no consideration and it can reasonably be regarded that the supply for no consideration is made for the purpose of facilitating, furthering or promoting an endeavour of any person. In these cases, the ITC entitlement is based on the commercial activity of that other endeavour. Based on the application of subsections 141.01(2) and (4), ITCs may be available, subject to the conditions in section 169, to the extent that a person performs a mining activity of validating transactions and adding them to a publicly distributed ledger and:

• the person acquired, imported, or brought into a participating province property or services before May 18, 2019
• that property or those services were consumed, used or supplied by the person in the course of validating transactions and adding them to a publicly distributed ledger
• the rewards and transaction fees that would be paid to the person upon success for those mining activities were cryptoassets that would meet the virtual payment instrument definition in subsection 123(1)
• the person intended, at the time of acquiring, importing or bringing into a participating province the property or service, to acquire the virtual payment instruments as a result of its mining activities for the purpose of supplying those instruments as a commercial activity

Any capital property that the person held as of May 18, 2019, is subject to the change-in-use provisions in the ETA where supplies made after May 17, 2019, of the virtual payment instruments, acquired as a result of this mining activity, were not supplies made in the course of the person’s commercial activities.

Where after May 17, 2019, the person acquires, imports or brings into a participating province property or services that are consumed, used or supplied by the person in the course of validating transactions and adding them to a publicly distributed ledger, the person would not be eligible to claim ITCs in respect of that property or those services where the supply of a virtual payment instrument, acquired as a result of this mining activity, was not a commercial activity.

ITCs in other circumstances

Where a person acquires, imports or brings into a participating province property or services that are consumed, used or supplied by the person in the course of validating transactions and adding them to a publicly distributed ledger, ITCs may be available, subject to the conditions in section 169, to the extent that:

• the rewards and transaction fees that would be paid to the person upon success are cryptoassets that would not meet the virtual payment instrument definition; and
• at the time of acquiring, importing or bringing into a participating province the property or service, any supply of the cryptoasset that would be earned upon success would be a commercial activity.

In circumstances, whereby the supply of the cryptoasset that would be earned upon success would not be a commercial activity, no ITC entitlement would arise.

Self-assessments

The person would need to consider the requirements to self-assess tax under Divisions IV and IV.1 where the supply of the cryptoasset by the person was not a commercial activity.

Mining with others

Where a person is involved in mining with others prior to February 5, 2022, the nature of the arrangements determines the GST/HST application. This requires an analysis of the arrangements on a case-by-case basis.

Where a person is mining with others under an arrangement that is a mining pool or mining group, the arrangements generally have the characteristics of a joint venture arrangement. In these types of mining arrangements, the person is generally making a supply of its mining activities of validating transactions and adding them to a publicly distributed ledger to the cryptoasset network and not to any mining pool or mining group operator of the arrangement. Each particular person within the pool or group is considered to perform these mining activities in a similar fashion as a solo miner. Accordingly, the GST/HST treatment applied to solo miners would also apply in these circumstances. The supply would not be subject to the GST/HST as there is no recipient of the supply of the mining activity and the person would generally only be eligible to claim ITCs to the extent set out previously for solo miners. The requirements to self-assess tax under Divisions IV and IV.1, as set out previously for solo miners, may also need to be considered.

Alternatively, there may be other arrangements where a supplier performs mining activities under a structure whereby the supplier makes the supply to a person and that person uses those mining activities to make a supply to either another person or to the cryptoasset network. In these cases, there is generally a supply of mining activities made to an identifiable recipient of the supply and these supplies would be subject to the general GST/HST rules under the ETA. In these circumstances, the supply of the mining activity would ordinarily be a taxable supply and the person may be eligible to claim ITCs for property and services acquired, imported or brought into a participating province that are consumed, used or supplied in the course of the mining activity.

Further information