Blockchain was first theorized as a concept in the early 1990s; however, it took 20 years before it was utilized to create Bitcoin, the first cryptocurrency, in early 2009, after which its popularity exploded.
Despite the meteoric rise of cryptocurrencies, the first tax legislation to specifically address them was proposed at the beginning of 2022, over a decade after the creation of Bitcoin. Specifically, the legislature proposed the addition of section 188.2 to the Excise Tax Act. Section 188.2 is drafted specifically to address crypto mining’s GST/HST treatment.
While this is a good first step, crypto mining is only one aspect of cryptocurrencies and there is still significant uncertainty as to their proper treatment in other situations – uncertainty is only going to become a larger problem as blockchain, and cryptocurrencies are used in new and novel ways.
Like the internet, which was initially used to send emails and host rudimentary websites but quickly grew to impact how we shop, how we consume entertainment and how we work, the first uses for blockchain are only the tip of the iceberg. Unless the legislature begins to move forward and provide clear rules on the taxation of cryptocurrencies and other aspects of blockchain specifically, the Court will be given the impossible task of interpreting legislation that may not be designed for the new world we may soon be operating in.
A specific example of an aspect of blockchain likely to create uncertainty is smart contracts. One can think of a smart contract as a contract that will automatically complete several agreed upon steps once certain requirements are met.
For example, assume I were to create an animated movie that I want to sell on a digital marketplace. In this hypothetical marketplace, I can buy characters, voices, music and even the software to animate the movie (the “Inputs”) for $10 per Input, per sale of my movie, using a smart contract.
Using the smart contract, if I were to sell my movie for $60, I would only receive $20 on each sale with $40 automatically being paid to the creators of the Inputs. I would never receive the $40 for the inputs as the smart contract would automatically pay out each party. From a business perspective, this is incredibly efficient and fosters creation, but it creates numerous questions from a tax perspective:
• Who is responsible for charging, collecting and remitting GST/HST?
• How are input tax credits treated?
• What is the relationship between each of the creators and me? Are we partners? Are they suppliers?
• What happens if the customer and the creators of the Inputs are not located in Canada?
As you can see, smart contracts could create situations where the relationships between parties are not clear and the responsibility to collect and remit GST/HST is uncertain. This is but one example of blockchain and how it can be used. As the technology develops and becomes more refined, novel uses and corresponding questions regarding the proper tax treatment are likely to arise.
Therefore, the legislature will need to address these new situations more quickly and work with other countries to ensure there is consistent and clear tax treatment of the novel situations blockchain is likely to create.
About the author
Matt Boyd is an associate at Farber Tax Law. In this role, he primarily assists owner-managers at all stages of the tax dispute resolution process.
A version of this article originally appeared on the OBA’s Taxation Law Section’s articles page.