GST/HST Treatment of Money Services Businesses in Canada: A Practical Guide

Money services businesses (MSBs) in Canada, including those dealing in traditional currencies, remittances, or virtual currencies, face complex GST/HST obligations under the Excise Tax Act. 

Each revenue stream must be analyzed separately because activities such as currency exchange, payment transfers, virtual payment instrument (VPI) trades, and technology or administrative services can receive different treatment. Misclassification can lead to incorrect tax collection, lost input tax credits, or compliance issues.

This guide outlines key GST/HST considerations and rules for MSBs. It is intended to help MSBs identify the issues that require careful analysis and documentation.

Classify each supply

Firstly, assess the classification of your supply. An MSB may provide:

• money or foreign-currency exchange;
• remittance or payment services;
• transfers of virtual payment instruments (VPIs);
• technology, platform, administrative, or data-processing services; and
• supplies involving other crypto-assets.

These activities may have different GST/HST treatment. A fee’s label such as “commission,” “spread,” or “transaction fee” does not determine whether it is taxable or exempt. The contractual terms and substance of the arrangement are relevant.

Exempt financial services

The ETA definition of “financial instrument” includes a qualifying VPI. In general, a VPI is a digital representation of value that functions as a medium of exchange and exists only at a digital address on a publicly distributed ledger. The definition contains several exclusions.

Bitcoin, Ether, and Litecoin are commonly cited examples of VPIs, but classification must be considered on an asset-by-asset basis.

The transfer of a qualifying VPI may be a financial service. Financial services are generally exempt under Part VII of Schedule V to the ETA. As a result:

• GST/HST generally is not charged on the exempt transfer; and
• the MSB generally cannot claim ITCs for inputs used to make that exempt supply.

Similar treatment may apply to certain traditional MSB activities involving money, foreign currency, money orders, or remittances. The particular activity must still fall within the financial-service definition and must not be excluded by the ETA.

An amount charged in connection with an exempt exchange may form part of the consideration for that financial service. However, a separately supplied technology, administrative, advisory, customer-support, or data-processing service may be taxable even if it relates to an exempt transaction.

Non-VPI crypto-assets

Not every crypto-asset is a VPI. Certain utility tokens, security tokens, NFTs, and other digital assets may not qualify.

Where an MSB supplies a non-VPI crypto-asset in the course of a commercial activity, the supply may be treated as a taxable supply of intangible personal property, subject to the applicable ETA rules. The MSB should document the basis for its classification, particularly where it deals in multiple types of assets.

Crypto-assets used as payment

The GST/HST treatment depends on the underlying supply.

If an MSB supplies a taxable software, platform, administrative, or other service and accepts cryptocurrency as payment, the service remains taxable. The consideration must generally be determined in Canadian dollars, using the fair market value of the crypto-asset at the relevant time.

This is different from an exempt transfer of a qualifying VPI. The mere involvement of cryptocurrency does not determine whether GST/HST applies.

Registration and the small-supplier threshold

An MSB whose supplies are all exempt financial services is generally not required to register for GST/HST. Making exempt supplies is not a commercial activity, so the MSB has no commercial activity to trigger registration.

The small-supplier test generally considers taxable supplies, including taxable supplies of associated persons, measured against:

• $30,000 in a single calendar quarter; or
• $30,000 over the applicable four-consecutive-calendar-quarter period.

Only taxable (which includes zero-rated) revenue, including technology fees, platform services, and taxable supplies of non-VPI assets, is included in the test.

Special registration rules may apply to certain non-resident digital-economy suppliers and platform operators.

Assess LFI Status 

The Financial Institution GST/HST Annual Information Return is separate from the basic GST/HST registration and small-supplier rules.

An MSB becomes a listed financial institution (LFI) under section 149 of the ETA if its principal business is trading or dealing in financial instruments (including qualifying virtual payment instruments) or money. LFI status is not triggered merely by high exempt revenue or transaction volume.

If the MSB is an LFI:

• It generally must file GST111 annually (due six months after its fiscal year-end), whether or not it is registered for GST/HST.
• Additional rules may apply to ITC attribution, elections, and reporting.
• If it also has a permanent establishment in more than one province (or meets certain other conditions), it may be a selected listed financial institution (SLFI) with further filing requirements.

In short, the small-supplier threshold determines whether an MSB must register and charge GST/HST on its taxable supplies. LFI status (and the GST111 filing obligation) is a separate test based on the nature of the business and can apply even when the MSB has only exempt supplies and is not otherwise required to register. MSBs should assess both.

Input tax credits

The GST/HST treatment of an input generally follows the activities it supports:

• Exempt activities: GST/HST is not charged and related ITCs are unavailable.
• Zero-rated activities: GST/HST is charged at zero percent, and ITCs and related ITCs may be available, subject to the normal rules.
• Taxable activities: GST/HST is charged, and related ITCs may be available, subject to the normal rules.

For an MSB, ITCs may be restricted for expenses such as rent, software, professional services, compliance tools, and infrastructure to the extent those inputs support exempt  supply.

Shared expenses must be allocated between exempt and taxable activities using a fair and reasonable method that is applied consistently. Direct attribution, usage data, employee time, floor space, or revenue may be appropriate depending on the expense. No single allocation method applies in every case.

Zero-rated financial services to non-residents

Certain financial services supplied to non-residents can be zero-rated under Part IX of Schedule VI to the ETA, allowing the supplier to charge GST/HST at 0% and claim related input tax credits. Non-resident status of the recipient alone is not enough; the specific statutory conditions in Part IX must be met.

For financial services relating to a financial instrument (including a qualifying virtual payment instrument), zero-rating is restricted in important ways. In particular, a supply made by a financial institution acting as principal is generally not zero-rated if the institution acquired the financial instrument otherwise than directly from a non-resident issuer (other than in the case of an insurance policy or precious metal). CRA has confirmed this administrative position in the context of virtual payment instruments.

Whether the MSB is acting as principal or agent, the nature of the financial instrument, and the circumstances of its acquisition can all affect the result. Adequate documentation is essential to support a zero-rating claim, including:

• evidence of the recipient’s non-resident status,
• the contractual terms of the supply,
• the capacity in which the MSB is acting, and
• records of how the financial instrument was acquired.

Because the rules are fact-specific, MSBs should carefully review the exact conditions in Part IX of Schedule VI (and related CRA guidance) before treating a supply to a non-resident as zero-rated.

Recordkeeping

An MSB should maintain records that distinguish:

• exempt, zero-rated, and taxable revenue;
• Place of supply: For each taxable supply of IPP in Canada, the purchaser’s location should be documented to support the province used to determine the applicable GST/HST rate.
• VPIs from non-VPI crypto-assets;
• customer funds from the MSB’s fees or spreads;
• GST/HST charged on taxable supplies;
• GST/HST paid on expenses;
• shared-expense allocation methods;
• support for non-resident and zero-rating determinations; and
• Canadian-dollar valuations where crypto-assets are used as consideration for taxable supplies.

Records must be retained for the period required by the ETA and applicable CRA requirements.

Common errors

Common GST/HST errors include:

1. Treating every MSB fee as either taxable or exempt.
2. Assuming all crypto-assets are VPIs.
3. Claiming full ITCs for expenses supporting exempt activities.
4. Failing to charge GST/HST on separately supplied taxable technology or administrative services.
5. Treating all services to non-residents as zero-rated.
6. Ignoring possible listed-financial-institution status.
7. Measuring the small-supplier threshold using exempt revenue.
8. Failing to support crypto-asset valuations and expense allocations.

Conclusion

An MSB’s GST/HST obligations depend on the nature of each supply.

Transfers of qualifying VPIs and certain traditional money-related services may be exempt, restricting related ITCs. Separately supplied technology, administrative, data-processing, and other non-financial services may be taxable. Supplies involving non-VPI crypto-assets require separate analysis.

Metrics Chartered Professional Accounting can help MSBs classify each revenue stream, document the treatment, allocate shared expenses consistently, and consider whether listed-financial-institution or special cross-border rules apply.