Crypto asset mining – A review of recent proposals

Remuneration for mining activities

Money, property, or service received as a fee, reward or payment by a person performing mining activities is deemed not to be a supply under paragraph (a) and (b) of new subsection 188.2(4) of the ETA. Consequently, under paragraph 188.2(4)(c), no ITCs can be claimed on property or services acquired in connection with the provision of the mining services or payments made for such services.

Finance has clarified that these restrictions do not apply to property or services purchased before February 4, 2022. While not conclusive, this could be regarded as an indication that expenses incurred in mining activities prior to February 4, 2022, may be eligible for ITCs.

Exception to general rules

Under subsection 188.2(5), in situations where a mining activity is carried out for a person whose identity is known and who is not a mining group operator, the restrictions found in subsections 188.2(2) to (4) of the ETA do not apply. Accordingly, supplies of such mining activities in this context would be regarded as taxable supplies and expenses incurred to make such supplies may give rise to ITCs.

Under these new rules, a supply made to a known non-resident purchaser who is a mining group operator will be considered a mining activity subject to the new restrictions, thus not a supply. Since the service rendered is not a supply, it will not be possible to claim an ITC on expenses incurred by the supplier in this context.

Uncertainties remain

In the actual state of the legislation, and considering the particulars of crypto asset activities, it would have been difficult or impossible to regulate supplies in a context where it is mostly impossible to identify the recipient. For example, it would have been difficult to comply with the existing rules on the place of supply and regarding documentary requirements, on mining services in a case where the identity of the recipient is not known or where there is no clear determinable recipient of the supply. However, while the proposed measures attempt to offer answers to uncertainties left by the 2019 Amendments, they may be creating more confusion.

The scope of the new rules remains unclear. By way of example, before the changes, using computers was a taxable supply that gave rise to ITCs. After the changes, the same supply of computers could now give rise to a change of use and recapture of ITCs. Further, are the new rules intended to cover the creation and supply of certain digital assets such as non-fungible tokens? There is no certainty on that front either.

In terms of scope and exceptions to the new rules, while supplies made to known non-resident purchasers who are regarded as mining group operators will be subject to the new restrictions, it is not clear what the expression “mining group” refers to as it is not yet defined. There may be unintended results if one simply refers to the common understanding of a mining group in the crypto market or industry.

Conclusion

It may have been simpler to include mining activities in the definition of financial services. However, we can infer from the proposed changes that the mechanics and structure of the new rules may have been intended to avoid the application of zero-rating measures in the ETA, where a financial service is provided to a non-resident person.

The proposed changes have a major impact on businesses that are engaged in mining activities as GST / HST becomes a cost for miners. Their services would now be excluded from the application of GST / HST and to the extent they are able to, such miners will strive to incorporate in their cost base and consideration payable for their services the cost of the taxes they incur. From a tax policy standpoint, for a supplier who is not an end-user or consumer in any way, to be including GST / HST in its cost basis is not an ideal result.

The next step will depend on seeing what, if any, changes are incorporated into the draft legislation.