GST/HST Notice No. 324, Proposed Amendment Addressing Mining Activities in respect of Cryptoassets, February 2023

Supplies of virtual payment instruments ceased to be taxable on or after May 18, 2019 (under “What is a cryptoasset?)

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.

Utility tokens and non-fungible tokens are cryptoassets but not virtual payment instruments (under “What is a cryptoasset?)

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.

Utility tokens and non-fungible tokens are cryptoassets but not virtual payment instruments (under “What is a cryptoasset?)

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.

Mining activity includes executing proof-of-stake protocols and use of mining equipment (under “What is a mining activity?”)

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.

No GST collectible re mining activity (under “Collection of tax”)

Subject to the exclusion in proposed subsection 188.2(5) … 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.

Denial of ITCs by virtue of ss. 188.2(2) and (3) (under “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.

Imported taxable supply by virtue of ss. 188.2(2) and (3) (under “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.

Two examples of the implications of not joining or joining a mining group (under “What are the implications of the proposed amendment in circumstances where proposed subsection 188.2(5) would apply?)

Example 1

Corporation A owns computing equipment for use in mining activities. Corporation B wishes to conduct mining activities and requires equipment which will allow Corporation B to validate cryptoasset transactions and add them to a publicly distributed ledger. Corporation B engages Corporation A for the supply of the use of Corporation A’s mining equipment. Corporation B is not a mining group operator for a group that includes Corporation A. Proposed subsection 188.2(5) would apply to Corporation A’s supply to Corporation B given that Corporation B’s identity is known to Corporation A. Therefore, proposed subsections 188.2(2) to (4) would not apply and the supply would be subject to the general GST/HST rules.

Example 2

Corporation C owns computing equipment and wishes to conduct mining activities. Corporation D operates a mining group and offers interested persons to join a mining group to conduct mining activities. Corporation C joins Corporation D’s mining group. Any supplies that Corporation C makes to Corporation D that are mining activities are subject to the provisions of proposed subsections 188.2(2) to (4) given that proposed subsection 188.2(5) does not apply. However, any supply of mining activities made by Corporation D to Corporation C would not be subject to the provisions of proposed subsections 188.2(2) to (4) as proposed subsection 188.2(5) does apply. Corporation C is not a mining group operator and Corporation C’s identity is known to Corporation D. The supply would be subject to the general GST/HST rules and Corporation C would not be entitled to claim ITCs related to this acquisition in accordance with proposed subsection 188.2(2).

Prior to s. 188.2(2), mining was commercial activity with no recipient of the supply (under “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.

… 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.

Application of s. 141.01(4) to crypto mining (which is not a taxable supply because no recipient) where there is a view to sale of the crypto (under “ITCs where virtual payment instruments are payable in respect of mining activities”)

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

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

Application of change-in-use rules as a result of virtual payment instruments becoming financial instruments on May 18, 2019

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.

Example 3

Corporation E is a GST/HST registrant that has been involved in the mining of Bitcoin as a solo miner since January 2017. When Corporation E is successful in validating Bitcoin transactions and adding them to the Bitcoin ledger, Corporation E earns a reward and a transaction fee in the form of Bitcoin. It is Corporation E’s intention to sell the Bitcoins that it earns. Corporation E makes acquisitions of equipment and electricity to conduct its mining activities.

Bitcoin meets the virtual payment instrument definition. Sales of Bitcoin made by Corporation E prior to May 18, 2019, are taxable supplies made in the course of a commercial activity. Accordingly, there may be an ITC entitlement for the equipment and electricity acquired by Corporation E before May 18, 2019, that are consumed, used or supplied by Corporation E in validating the Bitcoin transactions and adding them to the Bitcoin ledger subject to the requirements of section 169 being met

Sales of Bitcoin made by Corporation E after May 17, 2019, are not made in the course of a commercial activity. Accordingly, there is no eligibility for Corporation E to claim ITCs in respect of the equipment and electricity acquired by Corporation E after May 17, 2019, that are consumed, used or supplied by Corporation E in validating the Bitcoin transactions and adding them to the Bitcoin ledger. Corporation E will need to apply the change-in-use provisions in the ETA concerning the equipment that is capital property that Corporation E held on May 18, 2019.