Cryptocurrency trading is legal in Canada. You can buy, sell and trade crypto on many platforms. Indeed, in some areas, the country was at the forefront of regulation, beating neighboring USA to launch North America’s first Bitcoin ETF. However, regulation has restricted where you can trade cryptocurrencies and it determines how they’re taxed.
Canada’s cryptocurrency regulation
Although crypto trading is legal in Canada, crypto is not considered legal tender—as it is in El Salvador. In Canada, there is no official government cryptocurrency, although the Royal Bank of Canada is considering whether to mint a form of digital cash called a central bank digital currency that could function as an equivalent to, and an eventual replacement of, regular Canadian dollars.
What about cryptocurrencies like Bitcoin, Ethereum, and Dogecoin? Well, they’re decentralized digital assets and you can speculate on their value. You can also use them to buy goods or services — usually other digital assets.
A driving force: Canadian securities law
So, are coins like Bitcoin legal in Canada? Yes. Because of their speculative potential, cryptocurrencies in Canada are regulated under securities legislation. A security is an asset that constitutes an investment, defined by Canadian securities law as something that has, among other things, the expectation of future profits that arise from some common enterprise.
Determining whether a cryptocurrency is a security is a big problem within the crypto industry. Particularly in the United States, securities regulators have chased after cryptocurrency companies that held Initial Coin Offerings, claiming that they were forms of unregistered securities offerings.
In the US, the test to determine whether a cryptocurrency is a security is called the Howey Test. It’s a reference to a 1946 Supreme Court case about investments in citrus groves. In Canada, the closest equivalent is the Pacific Coin test, which derives its name from a 1977 case about a company that let public investors speculate in silver coins.
In Canada, as in the US, regulators generally agree that Bitcoin is not a security. Although the price of Bitcoin has increased astronomically since its launch in 2009, its development is decentralized and there is no expectation of a profit “derived in significant measure from the efforts of others.”
Some “utility” coins claim that their functionality transcends mere speculative purposes. But newer cryptocurrencies may constitute securities, and Canadian regulators have said that a lot of these utility tokens were likely securities. Any unregistered cryptocurrency exchanges that offer securities to Canadian investors may be breaking Canadian securities law.
In Canada, the umbrella organization that handles this stuff is called the Canadian Securities Administrators. The CSA comprises securities regulators from Canadian provinces—although each province is different, the frameworks around crypto are pretty consistent, and one province’s security regulators can grant a company the right to operate in others.
While the CSA hasn’t introduced specific rules around crypto, it has issued guidance and clarifications that outline its official interpretations of existing laws. This helps crypto developers determine whether a token sale is likely to constitute a securities offering. Some of these notes are issued in tandem with the Canadian Investment Regulatory Organization (CIRO), a self-regulating industry body that keeps the country’s sprawling network of 174 investment dealers in line by setting out and enforcing codes of conduct.
Within crypto, CIRO works together with regulators to shape policy and oversee crypto asset dealers.
Some crypto fundraisers, like those from Impak and Token Funder, were conducted under the oversight of securities regulators; in those instances, the OSC granted exemptive relief to hold Initial Coin Offerings, a kind of token sale where crypto developers sell cryptocurrencies for a crypto project that they’re about to build. There are examples of other state-registered crypto operations, too. Over-the-counter desk B2C2 received an exemption in Ontario to trade derivatives with a “permitted counterparty” in some Canadian provinces, including Ontario.
Most crypto companies still come from outside of Canada. The broader crypto exchange ecosystem remained largely unregulated. In March 2021, Canadian securities agencies began to clamp down and require exchanges to register with regulators. Only exchanges that implement protections against market manipulation, fraud and more can operate in the country.
In a joint staff notice with the CIRO (formerly IIROC), the CSA advanced a novel view that even though coins like Bitcoin might not constitute securities, exchanges that let users trade them are actually selling a claim on that Bitcoin, and that claim constitutes a security.
This “contractual right,” known as a “crypto contract,” meant that both “dealer platforms” (brokers) and “marketplace platforms” (exchanges) had to register as virtual currency trading platforms (VCTPS). Registration requires a platform to create “internal controls to manage the risks of the business,” according to the OSC.
Dr. Ryan Clements of the University of Calgary Faculty of Law said in an August 2021 paper that this position is “internationally idiosyncratic” among securities regulators. While its aim was to protect Canada’s crypto traders, the tougher regulation threw crypto exchanges for a loop.
On the same day as the staff notice was issued, the OSC said it would chase after crypto exchanges that hadn’t reached out to the OSC to discuss how to bring their operations in line with the new guidance. Grant Vingoe, the OSC’s Chair and CEO, said that he expected “platforms to act swiftly to bring themselves into compliance with Ontario securities law.”
Canadian crypto tax laws
Crypto has not escaped the grasp of the Canada Revenue Agency. The CRA treats crypto like a commodity, meaning that any income from crypto transactions is treated as business income or a capital gain. Likewise, if you sell Bitcoin for a loss, Canadian tax revenue is treated as a business or capital loss.
Working out if crypto income is business income depends on whether you are running your crypto trading operation like a business. Tax law is often about principles rather than thresholds, and an inspector might look for commercial strategies, undertakings in a businesslike manner, marketing promotions or intentions of profit.
Legal crypto mining, trading and exchange operations are examples of businesses. Trading or mining small amounts of crypto here and there is unlikely to amount to business income, and you can probably treat profits or losses under capital gains or losses—speak to an accountant if you’re not sure.
In most trading and payment scenarios, barter rules apply. But some forms of income, like crypto earned through mining or staking, may be treated differently under tax purposes — again, it depends if it looks like you’re conducting a business, or just trading or earning crypto as a hobby. Specialist crypto tax software can help you calculate your taxable income or capital gains, which can be helpful when reporting on complicated financial events, like DeFi yield farms.
Bitcoin ETFs
Canada was the first country in North America (and one of the only countries in the world) to greenlight a Bitcoin ETF. An ETF is an exchange-traded fund, and a Bitcoin ETF is a financial investment vehicle that lets you trade Bitcoin on the stock market. With a Bitcoin ETF, you can trade an asset that is tied to the price of Bitcoin from tax-sheltered accounts, without having to custody the Bitcoin itself.
Canada’s Bitcoin ETFs launched in February 2021 with much success. After its first week, the Purpose Bitcoin ETF garnered more than $470 million of investment one of the most explosive launches of any ETF. Bloomberg’s senior ETF analyst, Eric Balchunas, tweeted that its launch was “just wild.” He said, “The Canada Bitcoin ETF was the most traded ETF in the country on its FIRST DAY. I’ve never seen that. It would be like an ETF here trading more than $SPY on its first day. And this is just the CAD class, USD class was 11th most traded.”
