Start A Crypto Business in Canada: Procedure & Requirements
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In the ever-changing cryptocurrency market, regulatory frameworks play a critical role in influencing the business climate. In Canada, cryptocurrency companies and exchanges are subject to a strict set of regulations and requirements, ensuring transparency and compliance with the law. In this guide, we’ll delve into the intricacies of the cryptocurrency business in Canada, from regulatory authorities to licensing and tax obligations.
Regulatory Framework in Canada
The Canadian government has made it clear that cryptocurrency companies and exchanges must adhere to specific regulations. The Canadian Securities Administrators and the IIROC (Canadian Investment Regulatory Organisation) together released a public notice in March 2021. This notice requires all cryptocurrency companies doing business in Canada to register with the Financial Transaction Analysis Centre of Canada (FinTRAC). Additionally, the securities legislation in Canada applies to cryptocurrency transactions.
While the use of cryptocurrency is not restricted in Canada, it’s essential to note that it is not considered legal tender. This means that while cryptocurrency transactions are allowed, they cannot be used to pay state fees, charges, or taxes. Instead, cryptocurrencies are viewed as commodities, suitable for barter transactions in exchange for other goods.
Regulatory and Statutory Requirements for Crypto Business in Canada
Two major legislations govern the cryptocurrency business in Canada:
- The Securities Law: The CSA Staff Notice 46-307 Cryptocurrency Offerings Act, issued by the Canadian Securities Administrators (CSA) in August 2017, governs the licensing of virtual currency exchanges and transactions in Canada.
- Proceeds of Crime (Money Laundering and Terrorist Financing) Act (PCMLTFA Act): This is the Anti-Money Laundering Act of Canada. It designates virtual money service businesses as Money Services Businesses (MSBs). Notably, this Act’s jurisdiction extends to exchanges operating outside Canada but providing services to entities and individuals within the country.
Regulatory Authority for Cryptocurrency
Canadian law categorizes cryptocurrency as an asset or security, and as such, it falls under the regulation of the Canadian Securities Administrator. Companies looking to engage in cryptocurrency transfer services or operate crypto exchanges must obtain a Money Services Business license from the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC), which oversees matters related to cryptocurrency businesses in Canada.
Under the Canadian Securities Act, cryptocurrency is classified as a security, not a fiat currency. This classifies cryptocurrencies alongside stocks, financial assets, ETFs, bonds, investments, and options. The Canadian Securities Administrator (CSA) is the regulatory authority responsible for overseeing securities in Canada.
In addition to the Securities Act, companies intending to operate in the cryptocurrency space, including currency exchanges, money transfers, and wallet services, must obtain a Money Services Business (MSB) license. These digital currency firms, like regular fiat money service businesses, are subject to federal and state tax regulations.
Companies that conduct cryptocurrency transactions must follow anti-money laundering (AML) and counter-terrorism financing (CFT) legislation. These include stringent verification requirements for individuals and entities involved in transactions. For instance:
- Verification is required for any individual or entity making a cash transaction of CAD 10,000 or more.
- Customers conducting transfers or exchanges equivalent to $1,000 in cryptocurrency must be verified.
- Companies receiving cryptocurrency from financial institutions or government organizations must conduct additional verification regarding the receiving organization’s identity.
Virtual Currency Transfer Rule
The Virtual Currency Transfer Rule also requires cryptocurrency enterprises to register cross-border transactions and electronic fund transfers. This rule requires that cross-border transactions be scrutinized in the same way as other requirements of the Proceeds of Crime (Money Laundering and Terrorist Financing) Act are. It encompasses the governance of international monetary transactions involving Canadians and their reporting requirements.
Requirements for Registering a Canadian Crypto Business
Registering a cryptocurrency business in Canada involves several essential steps:
Registration with FinTRAC
Registration with FinTRAC is a critical step. To conduct cryptocurrency operations in Canada, all cryptocurrency organizations, whether registered in Canada or overseas, have to register with FinTRAC and comply with its reporting requirements.
AML/CFT Policy Implementation
AML and CFT programmes must be implemented by cryptocurrency enterprises following the Proceeds of Crime (Money Laundering and Terrorist Financing) Act (PCMLTFA) and related legislation. This involves maintaining records, implementing risk controls, and adhering to reporting rules.
KYC (Know Your Client) mechanisms should be integrated into the system for onboarding new clients. Records of clients must be maintained and reported to the relevant authorities as required.
Regardless of the type of Bitcoin business, having a physical office is a must. Companies must establish a physical office before commencing cryptocurrency operations.
Directors with a Flawless Record
Founders, shareholders, and employees of cryptocurrency companies must have clean records and be in good standing. Companies must also provide non-criminal record certificates for these persons.
Appointment of Chief Compliance Officer
A Chief Compliance Officer is required to develop and ensure compliance with AML/CFT regulations.
Monitoring and Reporting of Suspicious Activities
Compliance officers and top management must monitor suspicious activities and report such information to regulatory authorities.
Appointment of an Experienced Director
Companies must appoint at least one director with prior economic experience working with such businesses.
Procedure to Apply for a Crypto License in Canada
The process of starting a cryptocurrency company in Canada typically takes 8-10 weeks for registration as a Money Services Business. An additional 2-3 weeks are needed to become fully operational and open a bank account for business operations. The key steps involved are as follows:
Collecting and Compiling Necessary Documentation
The process begins with collecting and compiling essential documentation for the business. This includes preliminary project analysis, business description, KYC information collection, and the preparation of AML/CFT policies. This step is crucial for gathering basic client information and outlining the project scope and budget.
Registration of a Crypto Company
This involves selecting a company name, securing a physical office space, determining share capital, and preparing necessary documents certified by a notary. The registration process typically takes 4-6 weeks, resulting in the official registration of the company.
Opening a Bank Account
The next step after registering a company is to open a bank account in the firm’s name. This process involves notarized documents and interactions with a payment institution. Opening a bank account usually takes 4-5 weeks.
Registration of the Company and Pre-Application Work
This stage includes preparing and adapting the AML/CFT program for cryptocurrency operations. The company then applies for the MSB license, involving negotiations with FinTRAC representatives and meeting compliance requirements. This process takes approximately 2 weeks.
Obtaining the MSB License
The final step is to obtain the Money Services Business (MSB) license, and the business name appears in the Registry of Licenses after about 4 weeks.
Taxation of Crypto Business in Canada
The Income Tax Act governs cryptocurrency transactions in Canada. Cryptocurrency is regarded as an asset rather than a currency, and using it to pay for products or services is regarded as a profitable (barter) transaction. The profits from cryptocurrency activities are subject to income tax, with tax rates ranging from 15% to 33%. Additionally, businesses must consider provincial income tax obligations based on their operating location.
Entrepreneurs involved in the cryptocurrency business must maintain detailed records of transactions and report gains and losses in their declarations, following the guidance of the Canadian government.
Navigating the Canadian cryptocurrency business landscape requires a thorough understanding of the regulatory framework, licensing requirements, and taxation obligations. By following the stringent regulations and compliance measures outlined in this guide, cryptocurrency businesses can operate with transparency and confidence in the Canadian market.
Yes, income generated by the crypto industry in Canada is taxable. Tax rates vary according to income and typically range from 15% to 33%. Depending on the operational area, provincial income tax may also apply.
Starting a cryptocurrency company in Canada takes around 8-10 weeks for registration as a Money Services Business. It will take another 2-3 weeks to become fully operational and open a bank account.
The Canadian Securities Administrator regulates cryptocurrency in Canada. Companies who seek to provide bitcoin transfer services or manage cryptocurrency exchanges must first get a Money Services Business licence from FinTRAC.
The Money Services Business (MSB) license is the primary license required to launch a crypto business in Canada. Businesses must also comply with the Virtual Currencies Transfer Rule and AML/CFT regulations.