How to Pay Employees with Crypto in Canada?

A Crypto Tax Lawyer's Guide to paying employees in crypto, the income tax classification, withholding requirements, and the benefits and drawbacks.

As mainstream adoption of cryptocurrency becomes more prevalent, prudent employers would be well-advised to develop the capacity to respond to demands for such schemes of compensation. It is essential to understand the methods through which cryptocurrency compensation can be offered, the income and payroll tax consequences, and the associated benefits to both employees and employers. This article will discuss these topics in depth.

Methods to Offer Digital Currency Compensation

Currently, there are two common ways to compensate employees and independent contractors in cryptocurrency.

One option is for employers to directly pay their employees or independent contractors in cryptocurrency. Either the full amount or a portion of their salary, wages, or other remuneration can be paid in digital assets directly to the recipients’ digital wallets. In this approach, employers would purchase cryptocurrency through a cryptocurrency exchange with a corporate account. Numerous exchanges are available to Canadian businesses, including WonderFi, Newton, Shakepay, and Coinbase. Upon purchasing cryptocurrencies from an exchange, the employer can directly transfer the amounts owing to the digital wallet addresses of their employees or independent contractors from either the exchange or their own digital wallet.

The second option available is for the employer to retain the services of a third party. This third party will receive the compensation in fiat from the employer and will convert it to the designated cryptocurrency based on the employee or independent contractor’s chosen allocation. The amounts will then be transferred to their specific digital wallet addresses. Currently, companies such as Bitpay and Bitwage all provide these services. Although the we do not endorse any particular service in Canada, these services generally operate in the following manner to enable employers to pay their employees in cryptocurrency: the employer and its employees will create an account with the service; the employer will create a payroll account and fund the account with fiat currency or cryptocurrency; and the employee will select their desired method and allocation of payment. The service will calculate the appropriate withholding and deposit the appropriate amount of cryptocurrency as wages to the employee less applicable deductions.

Although both options are frequently utilized, if a business is considering purchasing cryptocurrency for more than just its payroll needs, creating a corporate account on an exchange provides the flexibility to hold, trade, and make other business transfers seamlessly. Exchanges also provide supporting documentation of a user’s transaction history, which can be given to accountants for tax filing purposes or uploaded to crypto accounting websites. These websites allow users to calculate their tax liability arising from cryptocurrency transactions by combining transaction records from multiple trading platforms. They generate tax reports and Schedule 3 Tax Forms to report capital gains (or losses). [1]

However, if a business is only considering purchasing cryptocurrency for its payroll needs, the use of a third party may be the preferred option. These services are dedicated to processing payroll in digital currencies and will reduce administrative hurdles.

Income Tax Considerations

Employees and Independent Contractors

In Canada, many of the same rules which apply to paying wages to employees are applicable to paying remuneration to employees in cryptocurrency. From the employee’s perspective, subsection 5(1) of the Income Tax Act (the “Act”) [2] provides that a taxpayer’s employment income includes “salary, wages and other remuneration, including gratuities” [3] received by the taxpayer within the relevant taxation year. This provision has been interpreted broadly so as to capture most payments made to employees by virtue of their employment status. Further, any employment income earned by the taxpayer is recognized in the year that it was received. As a result, if an employer elects to pay remuneration to an employee in cryptocurrency, the fair market value of that cryptocurrency at the time it was received must be included in the taxpayer’s income for the relevant tax year. Accordingly, the Canada Revenue Agency (the “CRA”) has taken the position that: [4]

"Where an employee receives digital currency as payment for salary or wages, the amount (computed in Canadian dollars) will be included in the employee’s income pursuant to subsection 5(1) of the Act”.

Independent contractors may also choose to receive compensation for services rendered in the form of cryptocurrency. Unlike employees, the characterization of income earned by independent contractors is characterized as being from a business or property under the Act. [5] Very generally, characterization as business income is preferable for independent contractors, as this provides a more favourable tax treatment for the deduction of expenses. More precisely, independent contractors can make certain deductions to their taxable income for business expenses incurred in the process of carrying on business that are not available to employees. A discussion of whether an individual worker is an employee or an independent contractor is beyond the scope of this article, but like any employee, independent contractors must include remuneration earned in the form of cryptocurrency into their income.

In addition, paragraph 6(1)(a) of the Act provides that “the value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer, or by a person who does not deal at arm’s length with the taxpayer . . . by virtue of the taxpayer’s office or employment” [6] (emphasis added) is generally included in the taxpayer’s income for the year that the benefit was received. Thus, if an employer decides to confer any non-cash benefits upon an employee by virtue of the recipient’s employment status (including cryptocurrency), the fair market value of the benefit must be included in the taxpayer’s income and is subject to taxation. Moreover, an employer may not make “voluntary payments” to an employee to circumvent this provision of the Act. As articulated by the CRA in Income Tax Folio S3-F9-C1:[7]

. . . sometimes individuals receive a voluntary payment or other valuable transfer or benefit by virtue of an office or employment from an employer, or from some other person. In such cases, the amount of the payment or the value of the transfer or benefit is generally included in employment income pursuant to subsection 5(1) or paragraph 6(1)(a).

When an employee eventually disposes of the cryptocurrency paid by an employer for services rendered, the income that the taxpayer receives will be characterized as either business income or a capital gain. [8] For the employee, this characterization is important because only one-half of a capital gain must be included in a taxpayer’s income, whereas all business income must be included in the taxpayer’s income and is subject to tax at the applicable marginal rate. The CRA has opined that the following are relevant factors to consider when determining whether a taxpayer who deals with cryptocurrency is engaged in a business:

1. The taxpayer carries on activity for commercial reasons and in a commercially viable way;

2. The taxpayer undertakes activities in a businesslike manner, which might include preparing a business plan and acquiring capital assets or inventory;

3. The taxpayer promotes a product or service;

4. The taxpayer shows that he/she/they intended to make a profit, even if he/she/they is unlikely to do so in the short term;

5. The date on which the taxpayer’s alleged business activities began; and

6. The taxpayer is engaged in an adventure of concern in the nature of trade. [9]

The Act also defines the term “business” to include “an adventure or concern in the nature of trade.” [10] Courts have held that an “adventure or concern in the nature of trade” may include an isolated transaction (that lacks the frequency or system of trade) in which the taxpayer buys property with the intention of selling it at a profit, and subsequently sells it (usually at a profit, but sometimes at a loss). Although a taxpayer who enters into an isolated transaction will not be considered a trader, if the transaction was intended to yield a profit and was not undertaken as an investment, the transaction would likely be considered to be in the nature of business. [11]

Employees who receive cryptocurrency as remuneration should aim for capital gains treatment by avoiding characterization as business income. Each individual’s particular circumstances will vary, but in general, taxpayers should limit the number of transactions pertaining to their cryptocurrency holdings, avoid engaging in cryptocurrency trading, and hold their cryptoassets for a prolonged period of time so as to be characterized as an investment. If an employee’s income derived from cryptocurrency is considered a capital gain, then whenever the employee eventually disposes of the cryptocurrency, he or she will realize a capital gain or a capital loss which will depend on the fair market value at the time of the disposition less the adjusted cost basis of the cryptocurrency. [12] However, as discussed above, the initial fair market value of any cryptocurrency paid to an employee by an employer must be included in income the year that such cryptocurrency was received.

Employers

From the employer’s perspective, if it elects to pay its employees in cryptocurrency, it is still responsible for withholding and remitting an appropriate amount of source deductions to the Receiver General in respect of employment income. [13] In general, these amounts will include income tax withholding, contributions to the Canada Pension Plan and employment insurance unless a relevant exception applies. As a result, it is imperative that employers ensure that they calculate the correct fair market value of any cryptocurrency paid as remuneration to their employees in order to ensure that proper remittances are made to the CRA. An employer who fails to comply with the withholding and remittance requirements under the Act may be held liable for the employee’s Canadian tax and any applicable penalties. [14]

Payments and Remittances to Non-Residents

A Canadian employer may wish to make payments to non-resident employees with cryptocurrency. In general, there is no provision under the Act which would prevent a Canadian-resident business from distributing employment income to a non-resident. However, employers should be cognizant of certain tax consequences which may apply when paying non-resident employees. More precisely, paragraph 153(1)(a) of the Act [15] and section 102 of the Income Tax Regulations (the “Regulations”) [16] impose a withholding and remittance requirement on amounts paid to both a resident employee and a non-resident employee who performs employment duties inside Canada. Moreover, if a non-resident individual (who is not an employee) renders services in Canada, paragraph 153(1)(g) of the Act [17] and subsection 105(1) of the Regulations [18] operate in conjunction to require the payor to withhold tax on fees, commissions, and other amounts paid to non-residents of Canada. Currently, the rate of withholding for these individuals is 15% of the gross amount paid. [19] Therefore, if a Canadian employer elects to pay its non-resident employees or non-resident individuals who are not employees (such as independent contractors) in cryptocurrency for services rendered in Canada, it must withhold proper amounts and make appropriate remittances to the CRA.

In general, the tax consequences of paying non-resident employees with cryptocurrency depend largely on whether an applicable treaty exists between Canada and the country in which the non-resident employee resides. For instance, the Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital, as amended (the “Canada-U.S. Treaty”) provides that any remuneration in excess of $10,000 Canadian dollars paid to a non-resident for services rendered in Canada will be subject to Canadian taxation. [20] Additionally, if payment is made by or on behalf of a person resident in Canada to a non-resident employee who provides services in Canada, that non-resident employee will be subject to Canadian income tax. [21]

Accordingly, the taxation regime of cryptocurrency for Canadian resident taxpayers described above will apply to non-resident Americans providing services in Canada pursuant to the Canada-U.S. Treaty. Subsection 200(1) of the Regulations [22] imposes an obligation on a Canadian employer to provide a T4 slip annually to an employee captured by paragraph 153(1)(a), and to file a T4  information return annually to the CRA outlining the employee’s income and applicable deductions.

BENEFITS AND DRAWBACKS OF PAYING CRYPTOCURRENCY AS REMUNERATION

Employer Benefits/ Perspective

At a time when many industries have faced increased voluntary unemployment, there is certainly a need for employers to differentiate themselves to attract and retain talent. Accordingly, employers offering compensation through cryptocurrencies have a comparative advantage when hiring and retaining the best and brightest talent. Such employers may be able to represent themselves as forward-thinking by being an early adopter of this method of compensation.

Employers also benefit from streamlined cross-border payments to remote or international contractors. Payments to any digital wallet, whether foreign or local, can be completed in as little as a few minutes. When compared with wire transfers, digital currency payments are significantly faster, as wire transfer payments generally take between one to five days. Moreover, as cryptocurrencies operate on the Blockchain, there is always a transparent and verifiable ledger available. These payments can be made at any time of day, without the need to make transfers through a bank, and at a fraction of the cost of the typical international payments, with no immediate impact from international currency exchange rates on employees.

Employer Drawbacks

The volatility of cryptocurrency may discourage employers from paying their employees’ wages in cryptocurrency. Rapid fluctuations in the market are fairly common and may add an element of unwanted unpredictability for employers who purchase their own cryptocurrencies to pay to their employees as wages. To mitigate the risk stemming from this volatility, employers could retain the services of a company to pay the cryptocurrency directly to their employees.

Thus, employers would also be well-advised to ensure that their employees are aware that they could suffer a dramatic loss in value when receiving cryptocurrency as wages as a result of the current volatility of cryptocurrency. Proper education of the volatility of cryptocurrency is imperative to provide both employees and candidates with the knowledge and context necessary to make an informed decision in respect of compensation.

As discussed above, an employer who elects to remunerate its employees in cryptocurrency is still responsible for remitting source deductions on the income of its employees. Tax reporting may become more complicated from an employer’s perspective when withholding and remitting source deductions for cryptocurrency paid to employees as wages as opposed to fiat currency. Although services are available to assist businesses in fulfilling their reporting and tax obligations in relation to paying cryptocurrency as wages, these services may charge a fee to the employer, which adds additional costs to the process. Moreover, an employer will likely be forced to take additional administrative steps to document the compensation scheme, including inserting an authorization to pay employee wages in cryptocurrency in the relevant employment contract.

Employee/ Independent Contractor Benefits

The purported benefits of cryptocurrency have been discussed at length in the scholarship and by its advocates, and we do not intend to provide an exhaustive discussion of the advantages of cryptocurrency. Instead, we merely wish to identify a few of its practical benefits, which may entice employees to seek having their remuneration made in cryptocurrency.

First, proponents of cryptocurrency have long extolled the virtue of cryptocurrency as a long-term hedge against inflation.36 The fact that cryptocurrency is finite in nature and has a fixed cap has led some to conclude that cryptocurrency is an effective tool against inflation when compared to fiat currency, which can be routinely manipulated by a country’s central bank. For instance, Bitcoin has a fixed supply cap of 21 million BTC, while in contrast, the CAD is subject to manipulation and we have seen a dramatic increase in the Canadian money supply. Accordingly, employees may find comfort in the fact that the stored value of their cryptocurrency may serve as a hedge against inflation arising from an increase in government expenditures.

Second, offering employees an opportunity to receive cryptocurrency as compensation for services rendered may be particularly useful when paying non-resident employees or independent contractors who live in areas where access to bank accounts may be difficult. Since cryptocurrency is generally paid directly to a digital wallet, this allows employers to bypass banks entirely and remit payment directly to an employee or independent contractor.

Third, and consistent with the second benefit discussed above, paying employees in cryptocurrency allows these individuals to receive payment almost instantaneously. This is particularly beneficial for payments to non-resident individuals, where remittances in a fiat currency could take days to clear and are subject to bank rules and fees.38 Commercial services purport to allow for im- mediate distributions of cryptocurrency, which can be particularly useful for employees to pay their bills or rent on-time, and without unnecessary delay. This method of remuneration also provides the benefit of enabling individuals to avoid the barriers of entry which ordinarily might discourage users from holding cryptocurrency. Individuals who choose to receive remuneration in cryptocurrency through payment by a third-party service are only required to set up a digital wallet to receive payment; they are not required to trade on an exchange or make cryptocurrency purchases on their own initiative. This is an easy and cost-effective method of holding cryptocurrency.

Finally, if the employee chooses to use a cryptocurrency exchange app, transfers of cryptocurrency into fiat currency are also almost instantaneous. As previously discussed, the transfer of cryptocurrency into fiat would likely result in a taxable disposition under Canadian income tax law. As a result, employees would be well-advised to note the price at which they initially acquired the cryptocurrency to ensure that any capital gains or losses are properly accounted for.

Employee Drawbacks

The most immediate concern of most employees when receiving wages in the form of cryptocurrency is related to the rapid fluctuation in its value. For instance, if an employee receives cryptocurrency at a time when its value is high, he or she will receive fewer units of cryptocurrency than when its value is lower. Accordingly, employees must be amenable to some degree of volatility when electing to receive cryptocurrency as remuneration. One approach that an employee could adopt to mitigate the risk of fluctuating cryptocurrency is to allocate an appropriate balance of income to be received in cryptocurrency and fiat currency rather than receiving the entirety of their compensation in cryptocurrency.

Another potential disadvantage of receiving wages as cryptocurrency is that the tax reporting obligations and compliance mechanisms are more complicated when compared to receiving wages in fiat currency. The CRA is becoming increasingly aggressive in addressing non-compliance in cryptocurrency transactions. Thus, it is advisable that an employee who receives cryptocurrency as compensation retain the services of accountants or tax advisors to assist in preparing tax-filings on the income received through cryptocurrency. This, of course, may add additional, unanticipated costs to receiving compensation as cryptocurrency for employees. However, crypto accounting software is available to individuals as well and can generate the necessary tax forms and reports.

CONCLUSION

As cryptocurrency becomes even more pervasive, employee interest in cryptocurrency remuneration will intensify. Employers should be prepared to meet these demands and understand the tax implications of compensating their employees in cryptocurrency. In general, employers have two options available to pay their employees in cryptocurrency: (1) they can open a business account with an exchange and purchase their own cryptocurrency to compensate employees, or (2) they can rely on the services of a third-party, which will ease the process. It is important that employers evaluate which of these options is most suitable to their business and the benefits and drawbacks that arise from this means of compensation. Employers are encouraged to consult their tax practitioners to develop solutions to address their needs.

If you have not properly reported your crypto compensation to employees or if your are an employee who has received crypto but have not properly reported it to the CRA, consider the Voluntary Disclosure Application. It's important to properly report and disclose any cryptocurrency transactions to the CRA to avoid any Tax Audits.

Resources

---

1 Koinly, “Bitcoin Tax Calculator for Canada” online: Koinly https://koinly.io/ canada/; Sam Stone, “Cryptocurrency Taxes in Canada” (April 23, 2019) online: CoinTracker https://www.cointracker.io/blog/cryptocurrency- taxes-in-canada.

2  R.S.C. 1985, c 1 (5th Supp) [“ITA”].

3  Ibid., at s. 5(1).

4 Canada Revenue Agency, “What You Should Know About Digital Currency” (March 17, 2015) online: Government of Canada https://www.canada.ca/ en/revenue-agency/news/newsroom/fact-sheets/fact-sheets-2013/what-you-should-know-about-digital-currency.html.

5  ITA, supra note 2 at s. 9(1).

6 Ibid., at s. 6(1)(a).

7 Canada Revenue Agency, “Income Tax Folio S3-F9-C1, Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime” (July 3, 2020), online: Government of Canada https://www.canada.ca/en/reven-ue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-3-property-investments-savings-plans/series-3-prop-erty-investments-savings-plans-folio-9-miscellaneous-payments-re-ceipts/income-tax-folio-s3-f9-c1-lottery-winnings-miscellaneous-re-ceipts-income-losses-crime.html.

8 Canada Revenue Agency, “Guide for cryptocurrency users and tax professionals” online: Government of Canada https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/digital-currency/cryptocurrency-guide.html (last modified December 13, 2023).

9 Ibid.

10  ITA, supra note 2 at s. 248(1).

11 Jinyan Li et al., “Principles of Canadian Income Tax Law”, 9th Edition, (Thomson Reuters: Toronto), citing to: MNR v. Taylor, [1956] CTC 189, 56 DTC 1125 (Can. Ex. Ct.) and Regal Heights v. MNR, [1960] CTC 384, 60 DTC 1270 (SCC).

12 Ibid.

14  ITA, supra note 2 at s. 39(1).

15  Ibid., at s. 153(1)(a).

16 Income Tax Regulations, CRC, c. 945 at s. 102 [ITA Regs].

17  ITA, supra note 2 at s. 153(1)(g).

18  ITA Regs, supra note 16 at s. 105(1).

19  Ibid.

20 Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital, (September 26, 1980), online: Government of Canada https://www.canada.ca/en/department-finance/ programs/tax-policy/tax-treaties/country/united-states-america-con- vention-consolidated-1980-1983-1984-1995-1997.html (Entered into force 16 August 1984) at art. XV, s. 2(a) [Canada-U.S. Treaty].

21  Ibid., at art XV, s. 2(b).

22 ITA Regs, supra note 16 at s. 200(1).