What is Money Laundering?

This blog post discusses the definition of money laundering. It was written by Addison Cameron-Huff, a lawyer who specializes in Bitcoin. He highly recommends that you seek legal counsel to obtain advice about money laundering.

 

“Money laundering is the process used to disguise the source of money or assets derived from criminal activity” according to FINTRAC, Canada’s money laundering regulator.

 

Money laundering is how criminals earn money illegally and convert it, through a series of steps, into money indistinguishable from legitimately earned income. The “series of steps” that money launderers use are diverse and constantly changing as they attempt to outwit law enforcement/tax authorities.

 

The OECD’s Financial Action Task Force explains the reason why criminals need to launder money:

“In order to be able to spend money openly, criminals will seek to ensure that there is no direct link between the proceeds of their crime and the actual illegal activities. They may also seek to construct a plausible explanation for an apparent legal origin of the money that they possess. In this way, criminals seek to “launder” their proceeds of crime before spending or investing it in the legal economy.”

 

The primary source of law in Canada regarding money laundering is the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. There are also Criminal Code offences (to be covered in future posts).

Deducting Expenses Related to Bitcoin Mining

Deducting Expenses Related to Bitcoin Mining

This blog post was written by Addison Cameron-Huff, a lawyer who specializes in Bitcoin. He highly recommends that you obtain legal advice before acting in the Bitcoin space.

 

Bitcoin mining is the process by which new bitcoins are generated. It requires buying hardware (“ASIC miners”) to mine bitcoins and power to run the hardware.

 

If you’re mining to make a profit then you may be able to deduct your business-related expenses.

 

According to the CRA: “As a rule, you can deduct any reasonable current expense you paid or will have to pay to earn business income.” There are many exceptions to this “rule” and a tax advisor should be able to help you determine whether you are operating a business for which you can deduct mining expenses.

Selling Bitcoins: Do You Need to Charge HST?

This blog post looks at the issue of whether sellers of bitcoins need to charge HST. It was written by Addison Cameron-Huff, a lawyer who specializes in Bitcoin. Tax is a complex area and you should seek accounting/legal advice before acting.

 

Most stores in Ontario that sell goods are required to charge 13% HST. According to the CRA:

“Almost everyone has to pay the GST/HST on purchases of taxable supplies of property and services (other than zero-rated supplies). A limited number of sales or supplies are exempt from GST/HST.”

 

One transaction that is exempt from HST is the sale of “gift certificates”, as provided for in s. 181.2 of the Excise Tax Act:

“… the issuance or sale of a gift certificate for consideration shall be deemed not to be a supply and, when given as consideration for a supply of property or a service, the gift certificate shall be deemed to be money.”

 

The Excise Tax Act does not define “gift certificate” but in 2012 the CRA issued a policy statement that explains their view on what a gift certificate is. The CRA’s definition of gift certificate requires the following five attributes:

“1. It has a monetary exchange value that is evident on the certificate or that is easily determined by the parties involved in the transaction. The monetary exchange value may, for example, be specified on the face of the certificate or it may be stored on the certificate electronically. In certain cases, the customer may be permitted to add additional amounts to the monetary exchange value of the certificate. Alternatively, the gift certificate may be for a particular supply of property or a service that is identified on the certificate.

  1. It is issued or sold for consideration by the supplier of the property or service or another party for use at a particular supplier. The consideration paid for the certificate may not necessarily be the same as the monetary exchange value.
  2. It is accepted as payment or partial payment of the consideration for a supply of property or a service offered by the supplier of that property or service.
  3. It does not require the bearer to do anything to redeem the certificate other than to present it as a means of payment or partial payment for the property or services being acquired. The holder of the certificate should not be required to meet other conditions, such as, making a purchase of a particular value (i.e., a required minimum value) or purchasing one item to exchange the gift certificate for another item (e.g., buy one, get one free) in order to redeem the certificate.
  4. It does not have any intrinsic value. The certificate should not have any value other than its monetary exchange value.”

 

In addition to the CRA’s policy statement there is case law that helps to explain what “gift certificate” means in Canadian law such as Royal Bank of Canada v. The Queen, 2007 TCC 281.

 

There are severe penalties for failing to comply with tax obligations. A seller of goods who fails to charge HST could be liable for the entire amount that should have been charged (with interest and penalties) and, if the seller is a corporation, liability may extend to the director(s).

 

It is possible to request from the CRA a tax ruling or interpretation regarding HST obligations: http://www.cra-arc.gc.ca/E/pub/gp/rc4405/rc4405-e.html, but this please note that interacting with the CRA may result in negative tax consequences. You are strongly advised to seek the advice of a tax professional before starting to sell bitcoins or charging/not charging HST.

Do the Consumer Protection Act Gift Card Rules Apply to Bitcoin Sales?

This blog post discusses the applicability of the Ontario Consumer Protection Act, 2002 gift card rules to the purchase of bitcoins. It was written by Addison Cameron-Huff, a lawyer who specializes in Bitcoin. He highly recommends that you seek legal advice when deciding whether the Consumer Protection Act, 2002 applies to your transactions.gift cards and bitcoins

 

The Consumer Protection Act, 2002 (CPA)is the main consumer protection law in Ontario. Among its many provisions are rules about “gift cards”, a concept that sounds like it could include bitcoins. If the sale of bitcoins is considered the sale of gift cards under the CPA then there could be fee limits for sales (ss. 25.4(2)(a) & 25.4(2.1)(b)) and potentially a consumer refund right (s. 25.4(3)-(4)).

 

Gift card is a defined term in the CPA:

“gift card” means a voucher in any form, including an electronic credit or written certificate, that is issued by a supplier under a gift card agreement and that the holder is entitled to apply towards purchasing goods or services covered by the voucher; …“gift card agreement” means a future performance agreement under which the supplier issues a gift card to the consumer and in respect of which the consumer makes payment in full when entering into the agreement; …“open loop gift card agreement” means a gift card agreement that entitles the holder of a gift card to apply it towards purchasing goods or services from multiple unaffiliated sellers.Consumer Protection Act, 2002, OR 17/05, s. 23.

 

The definition of gift card requires that the “holder is entitled to apply [it] towards purchasing goods or services covered by the voucher”. When a consumer purchases bitcoins they are not entitled as the holder of those bitcoins to apply them towards good or services. There are some merchants who accept bitcoins but this isn’t any different than merchants willing to barter for other goods. Since there’s no entitlement it seems unlikely that a bitcoin purchase could be considered a gift card purchase under the CPA.

 

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Are Bitcoins “Securities” Under the Ontario Securities Act?

This blog post discusses the question of whether bitcoins are “securities” in Ontario. It was written by Addison Cameron-Huff, a lawyer who specializes in Bitcoin. He highly recommends that you seek legal advice on issues related to securities law.

 

If bitcoins are “securities” under Ontario securities law then there are important implications for anyone engaged in trading them.

 

According to the Ontario Securities Commission (the regulator of securities):

“In general, firms must register with the OSC if they conduct any of the following activities in Ontario:-are in the business of trading in, or advising on, securities. This is referred to as the “business trigger” for registration.-act as an underwriter or as an investment fund manager-conduct trading activities involving commodity futures contracts or commodity futures options.

 

Individuals must register if they:

-trade, advise or underwrite on behalf of a registered dealer or adviser, or-act as the ultimate designated person or chief compliance officer of a registered firm.

 

The main restriction on securities activities can be found in section 25(1) of the Ontario Securities Act:

“Unless a person or company is exempt under Ontario securities law from the requirement to comply with this subsection, the person or company shall not engage in or hold himself, herself or itself out as engaging in the business of trading in securities unless the person or company, a) is registered in accordance with Ontario securities law as a dealer or b) is a representative registered in accordance with Ontario securities law as a dealing representative of a registered dealer and is acting on behalf of the registered dealer”Securities Act, R.S.O. 1990, c. S.5, s. 25(1).

 

But what is a “security”? “Security” is a very broadly defined term that includes the following 19 sub-definitions:

(a) any document, instrument or writing commonly known as a security,(b) any document constituting evidence of title to or interest in the capital, assets, property, profits, earnings or royalties of any person or company,(c) any document constituting evidence of an interest in an association of legatees or heirs,(d) any document constituting evidence of an option, subscription or other interest in or to a security,(e) a bond, debenture, note or other evidence of indebtedness or a share, stock, unit, unit certificate, participation certificate, certificate of share or interest, preorganization certificate or subscription other than,(i) a contract of insurance issued by an insurance company licensed under the Insurance Act, and(ii) evidence of a deposit issued by a bank listed in Schedule I, II or III to the Bank Act (Canada), by a credit union or league to which the Credit Unions and Caisses Populaires Act, 1994 applies, by a loan corporation or trust corporation registered under the Loan and Trust Corporations Act or by an association to which the Cooperative Credit Associations Act (Canada) applies,(f) any agreement under which the interest of the purchaser is valued for purposes of conversion or surrender by reference to the value of a proportionate interest in a specified portfolio of assets, except a contract issued by an insurance company licensed under the Insurance Act which provides for payment at maturity of an amount not less than three quarters of the premiums paid by the purchaser for a benefit payable at maturity,(g) any agreement providing that money received will be repaid or treated as a subscription to shares, stock, units or interests at the option of the recipient or of any person or company,(h) any certificate of share or interest in a trust, estate or association,(i) any profit-sharing agreement or certificate,(j) any certificate of interest in an oil, natural gas or mining lease, claim or royalty voting trust certificate,(k) any oil or natural gas royalties or leases or fractional or other interest therein,(l) any collateral trust certificate,(m) any income or annuity contract not issued by an insurance company,(n) any investment contract,(o) any document constituting evidence of an interest in a scholarship or educational plan or trust, and(p) any commodity futures contract or any commodity futures option that is not traded on a commodity futures exchange registered with or recognized by the Commission under the Commodity Futures Act or the form of which is not accepted by the Director under that Act,
whether any of the foregoing relate to an issuer or proposed issuer”Securities Act, R.S.O. 1990, c. S.5, s. 1(1).

 

Some of the sub-definitions clearly can’t apply to bitcoins (e.g. “any certificate of interest in an oil, natural gas or mining lease, claim or royalty voting trust certificate”). Others, such as “investment contract” require the assistance of case law to interpret.

 

There’s very little information available about the position of the Ontario Securities Commission. An Ottawa Citizen article published on February 25th, 2014 notes that “[t]he Ontario Securities Commission has said it is closely monitoring developments pertaining to digital currencies”.

 

A securities lawyer can help you understand whether Ontario’s securities regulation regime is applicable to your Bitcoin business.

 

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The IRS and CRA on Bitcoin

The IRS (US tax authority) recently released a six page document with 16 questions and answers that explain position on Bitcoin: http://www.irs.gov/pub/irs-drop/n-14-21.pdf.irs and cra on bitcoin

 

Our own CRA hasn’t put quite so much pen to paper but did post a fact sheet on digital currency late last year: http://www.cra-arc.gc.ca/nwsrm/fctshts/2013/m11/fs131105-eng.html.

 

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Criminal Money Laundering: s. 462.31

This blog post outlines criminal money laundering under s. 462.31 of the Criminal Code. It was written by Addison Cameron-Huff, a lawyer who specializes in Bitcoin. He highly recommends that you seek legal advice when considering issues related to criminal money laundering.

 

Criminal money laundering is a serious offence and can result in a ten year jail sentence. The offence for “laundering proceeds of crime” is found in s. 462.31 of the Criminal Code:

 

“462.31 (1) Every one commits an offence who uses, transfers the possession of, sends or delivers to any person or place, transports, transmits, alters, disposes of or otherwise deals with, in any manner and by any means, any property or any proceeds of any property with intent to conceal or convert that property or those proceeds, knowing or believing that all or a part of that property or of those proceeds was obtained or derived directly or indirectly as a result of

 

(a) the commission in Canada of a designated offence; or

(b) an act or omission anywhere that, if it had occurred in Canada, would have constituted a designated offence.”

Criminal Code, R.S.C. 1985, c. C-46, s. 462.31

 

The term “designated offence” in s. 462.31 means:

”(a) any offence that may be prosecuted as an indictable offence under this or any other Act of Parliament, other than an indictable offence prescribed by regulation, or

(b) a conspiracy or an attempt to commit, being an accessory after the fact in relation to, or any counselling in relation to, an offence referred to in paragraph (a);”

Criminal Code, R.S.C. 1985, c. C-46, s. 462.3(1)

 

The punishment for violating s. 462.31 is up to ten years in jail (s. 462.31(2)(a)).

 

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