The Canadian Government recently launched a consultation on various changes to the goods and services tax/harmonised sales tax (GST/HST) regime.
Virtual Currency Reforms
The Government has proposed treating virtual currency, such as Bitcoin, as a financial instrument for GST/HST purposes. Those selling virtual currencies would not, therefore, be required to charge and collect GST/HST on those supplies.
Internationally there have been varying approaches taken by tax agencies to the taxation of virtual currencies. By removing GST/HST on transfers of virtual currencies, Canada will lift the compliance headache for those investing in virtual currencies and using them as a form of payment and ensure double tax is avoided.
Trading in virtual currencies will continue to potentially give rise to capital gains tax liability.
The change will enable businesses to more easily accept virtual currencies in payment for their supplies, with the receipt of the "currency" not being a taxable supply. Goods supplied and services rendered in return for virtual currency as "consideration" will be subject to GST in the normal way.
This approach is in line with a ruling from Europe's top court. The European Court of Justice (ECJ) helped to clarify the VAT treatment of bitcoin in the European Union in a key ruling issued in October 2015, which said that taxpayers that exchange traditional currencies for units of the "bitcoin" virtual currency should be exempt from VAT. The ECJ said that "purchases" of bitcoin should fall under provisions in the EU VAT Directive that provide that member states must exempt, among other things, transactions relating to "currency, bank notes, and coins used as legal tender."
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Drop Shipment Rules
In addition, the Government wants to extend the application of the drop-shipment rules, which allow non-residents to obtain tax relief on certain goods and services acquired in Canada. As a result, the relief available under these rules would be applicable to commercially interchangeable or fungible goods.
The drop shipment rules generally allow a non-resident person who is not registered for GST/HST to acquire Canadian goods, or commercial services in respect of goods, tax-free.
For the exemption to apply, the goods must ultimately be exported or retained in Canada by a registrant that agrees to accept a potential tax liability from a subsequent transfer or if the goods are used for non-commercial purposes.
The provisions are to be amended to add a new interpretative rule that generally ensures that the drop-shipment rules found in Section 179 apply to most commercial services that involve fungible goods, with the exception of certain continuous transmission commodities.
GST/HST Holding Corporation Rules
Finally, under the proposed legislative amendments, the GST/HST holding corporation rules would be extended to holding partnerships and trusts, and the Government's existing legislative proposals with respect to these rules would be modified.
These provisions, included in Section 186 of the Act, set out rules designed to enable registrants investing in related corporations that are engaged in commercial activities to claim input tax credits in respect of the shares or indebtedness of those corporations or related holding corporations.
The changes to this section are intended to improve the functioning of the rules, in particular by adding new definitions for terms concerning eligibility.
The consultation on the changes will close on 17 June.