Cryptocurrency Business in Canada: An Overview The Canadian government has expressed that all cryptocurrency companies and exchanges have to comply with the regulations. A public notice was issued in March 2021 by the Canadian Securities Administrators and IIROC (Canadian Investment Regulatory Organisation). Every company indulging in the business of cryptocurrency is required to register itself with the Financial Transaction Analysis Centre of Canada (FinTRAC). The securities legislation also apply to Cryptocurrency transactions. The use of cryptocurrency is not restricted in Canada, but it is not considered legal tender. Transactions in cryptocurrency are allowed, but they cannot be used to pay the state fee, charges and taxes. Cryptocurrencies have been regarded as a commodity which can only be used as a barter transaction in exchange for other goods. Regulatory and Statuary requirements for crypto businessin Canada The following two major legislations regulate the Crypto business in Canada: Proceeds of Crime (Money Laundering and Terrorist Financing) Act (PCMLTFA Act) PCMLFTA is the Anti-Money Laundering law of Canada. Virtual Money services businesses qualify as Money Services Businesses (MSBs) in Canada. The jurisdiction of this Act is also applicable to the exchanges that are operating outside Canada and providing services to entities and individuals in Canada. The Securities Act The licensing of virtual currency exchanges and virtual transactions in Canada is regulated by the CSA Staff Notice 46-307 Cryptocurrency Offerings Act which was passed by the Canadian Securities Administrators (CSA) in August 2017. Regulatory authority for Cryptocurrency regulation in Canada Since cryptocurrency has been considered an asset or security by Canadian law, it is regulated by the Canadian Securities Administrator. Companies who wish to start cryptocurrency transfer services or crypto exchanges need to obtain a Money Services Business license from the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC). FinTRAC is the financial intelligence unit of Canada that oversees matters related to the crypto business in Canada. Regulatory provisionsgoverning Crypto business in CANADA Securities Act As per the Canadian Securities Act, Cryptocurrency has been considered a security and not a fiat currency itself. Cryptocurrency is similar to other assets such as stocks, financial assets, ETFs, bonds, investments and options. The securities in Canada are regulated by a Canadian authority called the Canadian Securities Administrator (CSA). MSB License In case a company wants to start a crypto business, such as a currency exchange or money transfer, or wallet service, then it has to obtain a license for a Money Services Business (MSB). These cryptocurrency companies are therefore subjected to federal and state tax requirements. Cryptocurrency businesses in Canada are regulated in the same way as the companies that provide money services. Cryptocurrency businesses have the same record-keeping and verification obligations as the Fiat Money Service Businesses. AML/CFT compliances After getting the approval of the AML/CFT amendments, the companies are supposed to get themselves registered with FinTRAC. Guidance was issued by FinTRAC in March 2021 for vetting companies, businesses and individuals providing financial services to approve the following amendments: The identity of every individual or entity has to be verified that pays or performs a cash transaction of $ 10,000 CAD or more. Those customers have to be verified who undertake transfers or exchanges equivalent to $ 1,000 in cryptocurrency The identity of the company has to be confirmed within a period of 1 month after receiving information on the exchange or transfer of digital currency. In the case where the cryptocurrency has been received from a financial institution or a government organisation, the company is supposed to undertake additional verification about the identity of the organisation that received the transaction. Virtual Currency Transfer Rule The companies are also required to register cross-border transactions, and electronic funds transfer. This has been made mandatory under the Virtual Currency Transfer Rule. The rule makes it obligatory on the part of companies to treat cross-border transactions with the same level of scrutiny as well as other provisions of the Proceeds of Crime (Money Laundering and Terrorist Financing) Act. The laws govern international monetary transactions involving Canadians and their reporting requirements. Major Requirements for starting a Crypto Business in Canada Physical office- Irrespective of the type of crypto business being undertaken by the companies, a physical office is a necessary requirement. Therefore, companies should first open a physical office before starting with their crypto operations. Registration with FinTRAC - FinTRAC is the financial intelligence unit of Canada with which the companies operating in the crypto business need to get themselves registered before commencing their business operations. Registration with FinTRAC is a necessary requirement to be able to procure Money Services Business license in Canada. All the companies doing crypto business in Canada, irrespective of their registration in Canada or foreign land, need to get themselves registered with the FinTRAC and comply with its reporting requirements in order to be able to commence crypto operations in Canada. Implementation of AML/CFT policies - The companies involved in the crypto business in Canada have to implement an Anti-Money Laundering (AML) and Combating Financing of Terrorism (CFT) program and adhere to the standards laid down in the Proceeds of Crime (Money Laundering and Terrorist Financing) Act (PCMLTFA) and other associated regulations. They are also obligated to maintain the records and compilations for a period of at least 2 years, implement appropriate risk controls and adhere to the reporting rules. KYC compliances - As an extension to the AML/CFT compliances, the companies are also required to onboard clients after completing the KYC compliances and fulfilling all the necessary client identification requirements. Appropriate Know Your Client (KYC) mechanisms should be embedded in the system before onboarding new clients. The records of the clients should be maintained and reported to the appropriate authorities when called upon to do so. Directors with clean record - All the founders of the company, its shareholders and employees should have a clean record and should be in good standing. Companies are also required to submit to the regulatory authority the certificates of a non-criminal record in the country of citizenship of the founders, shareholders and employees employed with the company. Appointment of Chief Compliance Officer - There is also a requirement for the appointment of a Chief Compliance Officer who would be responsible for developing and ensuring compliance with the AML/CFT compliances by the company. Monitoring Reporting of suspicious activities- The compliance officers and the top management are obligated to monitor suspicious activities and report such information to the regulatory authorities. Appointment of Experienced Director - These companies are required to appoint at least one director who has economic experience working with such companies in the past. Procedure to apply for a Crypto License in Canada The entire process of starting a crypto company in Canada takes approximately a period of 8-10 weeks for its registration as a Money Services Business. An extra time period of 2-3 weeks is required to become fully operative and further open a bank account to kick start its business operations. Collecting and Compiling the necessary Paper works for the business The first step in the process of registration of crypto business in Canada begins with the collection and compilation of the necessary Paper works for the business. The important necessary papers required in this process include the preliminary project analysis, Business description, KYC information collection and the preparation of AML/CFT policies. This helps in gathering basic information about the clients and provides the Paper works for the execution of power of attorney. On the economic side, it gives clarity on the project scope and the budget required for starting the business. This process takes a period of almost 2 weeks. Registration of a Crypto company in Canada The next process is the registration of a crypto company in Canada. This process begins with choosing a name for the company. Thereafter, finding a physical office space, renting it and signing the agreement. You need to determine the share capital of the company and prepare the necessary necessary papers that are certified by a notary. You are also required to appoint professionals having expertise in finance. The registration of a company is a matter of 4-6 weeks. The company gets registered under the approved name and the legal address is registered with the appropriate authority. Opening of a Bank Account The next step after the registration of the company is opening a bank account in the name of the company. In order to open a bank account, notarized necessary papers are required. The company has to speak to the payment institution and initiate the account opening process. Only after the bank account has been opened, payment of share capital can be made. Without the opening of a bank account, the company will not be able to comply with the requirements of the tax authorities and the supervisory authorities as a provider of virtual assets. Opening a bank account takes roughly 4-5 weeks. Registration of the company and pre-application work After completing the basic formalities of company formation and opening the bank account, the next process begins with registration as a Money Services Business. This process involves preparation and adapting the AML/CFT program with the proposed cryptocurrency operations. The company then submits the application for obtaining the license. It involves collecting the additional necessary papers sought by the FinTRAC representative. Repeated rounds of negotiations take place with the FinTRAC representative and compliances have to be met as asked by the FinTRAC representative. This process takes roughly 2 weeks to be completed. Obtaining the MSB license The next process is to obtain the MSB license, and finally, the name of the business appears in the Registry of Licenses. Finally, after a time period of 4 weeks, the business is registered. Tax on Crypto Business in Canada Applicable Tax laws and Standards - All the virtual currency transactions taking place in Canada are regulated by the Income Tax Act. Cryptocurrency in Canada has not received the status of a currency but has the status of assets. If a person pays for goods or services through a Cryptocurrency, then it is considered a profitable (barter) transaction. These ‘goods’ are added to the income of the seller for tax purposes. The entrepreneurs are required to convert the value of the cryptocurrency into Canadian Dollars to confirm the transaction to the IRS. Applicable Tax Rate - The activities falling within the ambit of Cryptocurrency are regulated by the Income Tax Act (ITA). The applicable tax rate on the income generated from crypto business in Canada depends on the income earned and falls between the brackets of 15%- 33%. In addition to that, the businesses also need to consider the provincial income tax that they need to pay to the provincial government where they are operating. Reporting for taxation purposes - The profits made from Cryptocurrency activities are taxed as a profitable business where 100% of the profits are taxable. Where the capital gains are reported for tax purposes, only 50% of the company’s profits are taxable. The Canadian government recommends that entrepreneurs should prepare a regular report recording the date of cryptocurrency transactions and the value of such transactions in CAD. Those who are involved in the business of cryptocurrency are required to report the gains and losses from the purchase, sale and exchange of cryptocurrencies in their declarations.