Crypto regulation in Canada

Canada has been working on developing a regulatory framework for crypto assets and trading platforms since 2014. Cryptocurrencies are not legal tender in Canada, but the country allows its residents to trade in these digital assets. The local financial watchdog - the Canadian Securities Administrators (CSA), has been strengthening its oversight of crypto trading platforms, which impacts some of the large global exchanges operating in the country.

The CSA has also issued guidance about the application of securities legislation and regulatory requirements to crypto assets. In addition, the Office of the Superintendent of Financial Institutions (OSFI) has proposed changes to its capital and liquidity approach to crypto-assets, citing a risky environment and in response to international banking standards. The new guidelines will replace the interim advisory on the regulatory treatment of crypto-asset exposures, published in August 2022, and are expected to come into effect in early 2025.

Cryptocurrencies status

In 2014, Canada became the first nation to establish laws addressing cryptocurrency by amending the Proceeds of Crime and Terrorist Financing Act (PCMLTFA) to cover them. All entities dealing with virtual assets were also brought under the PCMLTFA as early as 2014, while in 2017, the British Columbia Securities Commission registered the first cryptocurrency-only investment fund. The Canada Revenue Agency has taxed cryptocurrencies since 2013 and Canadian tax laws apply to cryptocurrency transactions. As far as cryptocurrencies are not a legal tender in the country the legal framework mainly covers the process of their exchange on the fiat money. However, there is a specific regulation for stablecoins that is provided by the CSA. First of all, stablecoins must be fiat-backed, and their distributions in Canada must be made in compliance with applicable country’s securities laws. The stablecoin regulations has been recently updated and by present contains one of the world’s most robust rules for stablecoin issuers.

The stablecoin must be fiat-backed and the issuers must comply with the prospectus requirement of the securities regulation, or find an applicable exemption. To issue a stablecoin the issuer must maintain a sufficient reserve of assets with a qualified custodian for the benefit of cryptoasset holders. The custodian should not be a foreign one.

The reserve of assets must have a market value at least equal to the value of outstanding units of the stablecoin at the end of each day. The stablecoin issuer itself and the crypto asset trading platforms that provide these stablecoins must disclose information regarding their governance, operations, and asset reserves to the public.

Algorithmic stablecoins are prohibited in Canada and all licensed crypto exchanges cannot carry out operations involving such assets. This rule is common for many countries, including South Korea, Japan and Hong Kong as algorithmic stablecoins are associated with major risks for users’ wealth and financial stability.

Crypto exchanges

All virtual assets service providers (VASPs) are subject to registration within the CSA. The new rules came into effect in February 2023 while all unregistered cryptocurrency trading companies operating in the country received a 30 days deadline to commit to a pre-registration undertaking with the CSA. The tougher regulations, which mirror the recent uptick in U.S. regulatory action, require companies to segregate customer asset classes and stop companies from offering margin or leverage to users. Crypto platforms that were «unable or unwilling» to follow the new process had to stop Canadian users from accessing their services.

Due to the updated regulatory framework some major crypto exchanges have announced their exodus from the Canadian market. Binance, the largest crypto exchange by volume traded, in May 2023 decided to leave Canada due to new guidance related to stablecoins and investor limits provided to crypto exchanges that made the Canadian market no longer tenable for the exchange.

A bit earlier, in March 2023 same announcement was made by OKX and Bybit. Both exchanges cited the need to operate their business in compliance with all relevant rules and regulations as its primary objective, but it made the difficult but necessary decision to pause the availability of its products and services.

It is worth noting that other crypto exchanges, especially local ones, such as Coinsquare or BitBuy may benefit from the departure of Binance and other international competitors.

Taxation

As cryptocurrency is treated as a commodity by the Canada Revenue Agency (CRA) and is subject to either income tax or capital gains tax. The tax treatment depends on whether the cryptocurrency activity results in income or capital, which affects how the revenue is treated for income tax purposes. If the transactions are part of a business, 100% of the income is taxable, while 50% of capital gains are taxable.

Canadian taxpayers are not obligated to pay taxes for buying or holding cryptocurrency but are subject to capital gains or business income taxes for crypto sales, mining, or other crypto-related proceeds. The CRA treats the use of cryptocurrency to purchase goods or services as a barter transaction, and the person will have a capital gain or loss on the spent asset's change in value since they acquired it.

Penalties for rules violation

If a legal or natural person found to have breached a securities law the Capital Markets Tribunal may order to pay up to $1 million for each failure to comply. The Capital Markets Tribunal will consider the amount of monetary sanctions to impose as is appropriate in the circumstances and based on several factors. These factors may include the seriousness of the misconduct, the impact on investors, and the message of deterrence it may send, irrespective of a respondent’s ability to pay.

Failure to comply with applicable requirements of the PCMLTFA may result in criminal charges for non-compliance offences or administrative monetary penalties. The penalty for crypto tax evasion in Canada is also severe and can even result in a fine equivalent to 200% of the taxes evaded and the amount evaded on top, and up to five years in jail.