Tax Insights: Finance releases draft legislative proposals ─ GST/HST measures for cryptoasset mining

Issue 2022-07

In brief

On February 4, 2022, the Department of Finance released draft legislative proposals (the proposals) relating to the Excise Tax Act (ETA) that impact cryptoasset mining activities. The proposals would, in most cases, preclude:

• claiming input tax credits on activities relating to cryptoasset mining

• GST/HST from applying to the remuneration received from cryptoasset mining activities

These new rules are proposed to generally come into force on February 5, 2022. Interested parties are asked to provide comments to the Department of Finance by April 5, 2022.

In detail

New subsection 188.2(1) – definitions 

The proposals introduce new ETA subsection 188.2(1), which defines a “cryptoasset,” a “mining activity” and a “mining group operator.” A “cryptoasset” will be defined as “property … that is a digital representation of value and that only exists at a digital address of a publicly distributed ledger.” This definition is broader than the current definition of a “virtual payment instrument” in the ETA, which requires the instrument to function as a medium of exchange (e.g. Bitcoin) and from which a number of exclusions apply (e.g. property that is primarily for use within a gaming platform or certain asset based tokens). This means that the proposed rules would apply to virtual payment instruments and other digital assets such as non-fungible tokens and security tokens. 

The proposals define a “mining activity” as an activity in respect of a cryptoasset that is:

• validating transactions and adding them to a publicly distributed ledger (i.e. blockchain)

• maintaining and permitting access to a publicly distributed ledger (i.e. blockchain), or

• allowing computing resources to be used for the purpose of, or in connection with, performing the activities described above

For example, a person leasing servers to miners for the purpose of validating the transactions and adding them to the blockchain may be considered to be engaged in a mining activity.

New subsections 188.2(2) and (3) – acquisition and use

Proposed new subsections 188.2(2) and (3) generally preclude a person from claiming an input tax credit on any property or service acquired for consumption, use or supply in the course of, or in connection with, the cryptoasset mining activities of the person. Further, the person will not be required to charge GST/HST for the supplies of property and services in the course of, or in connection with, the mining activities of the person. 

New subsection 188.2(4) – remuneration provision

Proposed new subsection 188.2(4) generally deems the provision of the cryptoasset mining activity not to be a supply, therefore no GST/HST will apply to any remuneration, fee or reward that the person receives as a consequence of that mining activity.     

It also deems any person providing property or services as a fee, reward or payment (the mining payment) to another person, as a consequence of the mining activity of the other person, not to have made a supply to the other person. This provision eliminates any requirement to collect GST/HST on the mining payment but also precludes that person from claiming any input tax credits in respect of property or services acquired for consumption, use or supply in the course of providing the mining payment. This restriction on claiming input tax credits does not apply to any property or service acquired, imported or brought into a participating province (i.e. provinces that have harmonized with the federal government for GST/HST purposes) before February 5, 2022.

New subsection 188.2(5) – exception to the rules

Proposed subsection 188.2(5) provides an exception to the above rules in respect of a cryptoasset mining activity, the extent to which it is performed by a particular person for another person: 

• that is not a mining group operator (i.e. a person who coordinates the mining activities of a group of persons and then shares any fees, reward or payment it receives for the mining activity with the group), and

• whose identity is known to the particular person

This may then require the particular person to collect GST/HST on the remuneration it receives for the mining activity and may allow it to claim input tax credits, provided that all the conditions for claiming an input tax credit are met. 

For example, this exception may apply when a particular person makes computers available for a fee to a miner in a mining pool who is not a mining group operator, provided the particular person obtains the identity of the miner. In this case, the supply of the computers would remain taxable, and the particular person should be able to claim input tax credits.  

PwC observes

The proposed amendments would provide more certainty in respect of the application of the GST/HST to cryptoasset mining activities. While the proposed rules may disallow a miner to claim input tax credits to recover the GST/HST on inputs, they will also provide certainty that their reward and remuneration would also be free of GST/HST in most circumstances.

Since these new rules are proposed to come into effect on February 5, 2022, it is unclear whether the input tax credits that have been claimed before that time, and remain unpaid by the CRA, will now be paid. 

The takeaway

Any person involved in a cryptoasset mining activity (whether it relates to cryptocurrency mining or mining for other cryptoassets), for which it receives remuneration, should review these draft legislative proposals and consider how they will impact them and their operations. If you have particular concerns on the drafting of these proposals, you should consider providing comments to the Department of Finance by April 5, 2022.