29 November 2022 CTF Roundtable Q. 7, 2022-0951051C6 - Permanent Establishment and Mining Activities

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: In a particular situation, whether CRA will consider that UKco has a permanent establishment in Canada under Article 5 of the Canada – U.K. Tax Convention (“Treaty”).

Position: Question of fact.

2022 CTF Annual Tax Conference
CRA Roundtable

Question 7 – Permanent Establishment and Crypto-asset Mining Equipment

Crypto-asset mining can generally be described as the process of using computing power, often called “hash power”, to verify and record transactions on a blockchain. In order to generate such computing power, most crypto-asset “miners” rely on the use of application specific integrated circuit (“ASIC”) miners or graphics processing units (“GPUs”). In many cases, this equipment is housed and operated in large datacentres capable of providing the significant electricity and internet connections required for their use.

Consider the following situation:

1. UKco is a company incorporated under the laws of the United Kingdom (U.K.).

2. Hostco is incorporated under the Canada Business Corporations Act and is a resident of Canada.

3. UKco owns a significant number of ASICs and GPUs that it uses in the process of mining crypto-assets in Canada (the “Mining Equipment”).

4. Hostco owns real estate located in Canada that is used to provide “hosting services” to UKco with respect to the Mining Equipment. The hosting services include the supply of housing, security, electricity, internet access and maintenance/management services to ensure the proper operation of the Mining Equipment. The Mining Equipment will be hosted in Hostco’s premises and will remain at the same location throughout its useful life.

5. UKco does not have any employees or a physical presence in Canada otherwise than through the use of the Mining Equipment.

6. UKco employees located in the U.K. have the capacity to direct the use of the Mining Equipment remotely through the use of software. However, the employees do not have the ability to alter the physical state of the Mining Equipment.

In the situation described above, will the CRA consider that UKco has a permanent establishment in Canada under Article 5 of the Canada – U.K. Tax Convention (the “Treaty”) ?

CRA Response

Generally, when a person (a “miner”) that operates Mining Equipment creates a valid block, they will receive an amount of the mined crypto-asset. CRA document 2018-0776661I7 indicates that a miner who receives a bitcoin for validating transactions will be considered as having rendered a service.

Subparagraph 115(1)(a)(ii) and paragraph 2(3)(b) of the Income Tax Act (the Act) provide that a non-resident is taxable in Canada on its income from a business carried on by it in Canada. Because the phrase “carrying on business” is not defined in the Act, that determination is a question of mixed fact and law. According to paragraph 1.53 of Income Tax Folio S5-F2-C1 “Foreign Tax Credit”, the place where a particular business (or a part of the business) is carried on is generally the place where the operations in substance, or profit generating activities, actually take place. The same paragraph indicates that for a service business, the place where the services are performed should be given consideration. When the service requires little or no human intervention, such as when the service is provided by automated equipment, the location of the Mining Equipment will be a significant factor in determining where the business is carried on.

When a non-resident carries on a business in Canada, a bilateral tax treaty may provide relief from Canadian income tax. In this particular scenario, paragraph 1 of Article 7 of the Treaty, like most of Canada’s bilateral tax treaties, states that the business profits of a resident of a contracting state shall be taxable only in that state unless the resident carries on business in the other contracting state through a permanent establishment situated therein. Pursuant to paragraph 1 of Article 5 of the Treaty, the term “permanent establishment” generally means a fixed place of business in which the business of the enterprise is wholly or partly carried on. A permanent establishment could also be found to exist for other reasons. Indeed, paragraphs 2 to 6 of Article 5 of the Treaty provide specific rules pertaining to the determination of the existence of a permanent establishment.

Consistent with the commentaries on the OECD Model Tax Convention, a non-resident miner will generally be considered to carry on business in Canada through a permanent establishment where:

(1) the crypto mining business is carried on, wholly or in part, through the operation of crypto-mining equipment,

(2) the crypto-mining equipment is at the non-resident’s disposal (whether the taxpayer owns or leases the crypto-mining equipment), and

(3) the crypto-mining equipment is used in an identifiable fixed geographic location within Canada.

Whether or not crypto-mining equipment would constitute a permanent establishment of a non-resident taxpayer, such as UKco, is to be determined upon a review of the relevant facts and circumstances.

Non-resident miners seeking certainty with respect to Canadian taxes on proposed crypto-mining operations can request a pre-ruling consultation for preliminary views on whether the CRA would consider the issue further in the context of an advance income tax ruling request. The pre-ruling consultation and advance income tax ruling request processes are described in Information Circular IC70-6R12, “Advance Income Tax Rulings and Technical Interpretations”.

Sophie Larochelle
2022-095105
November 29, 2022