Shakepay's Qualified Investment Submission to the Department of Finance Canada
Our submission addresses Questions 4 and 5 of Finance Canada’s consultation on Qualified Investments for Tax-Advantaged Savings Plans. The questions examine the inclusion of new asset classes and the appropriateness of crypto-backed assets as qualified investments.
Shakepay believes that digital innovation is essential as the financial industry evolves, and that providing Canadians with equitable tax treatment for holding bitcoin for retirement savings is of vital importance to fostering a vibrant, secure, and globally competitive financial ecosystem in Canada. We make the case for bitcoin’s inclusion in Tax-Advantaged Savings Plans in this submission.
Classifying Bitcoin as a Qualified Investment
A broad range of assets are currently deemed qualified investments in Canada, including mutual funds, publicly traded securities, government and corporate bonds, and guaranteed investment certificates. These registered plans help middle-class Canadians earn investment income tax-free. We applaud the Government of Canada for undertaking this consultation and believe now is the time to extend the definition of qualified investments to cover certain digital assets, namely Bitcoin that is purchased through a regulated crypto trading platform in Canada.
For several years, Canadians have been able to gain exposure to Bitcoin through exchange traded funds (ETFs) that are eligible for tax benefits because they can be held as qualified investments in RRSPs, TFSAs, and other tax beneficial savings vehicles. These ETFs have become increasingly popular with Canadians and demonstrate there would be strong uptake were similar treatment to be extended to holding Bitcoin directly. Today, there are over $3.3B in assets under management, with the Purpose Bitcoin ETF (BTCC) leading the market with over CAD $2.4 billion in assets under management, reflecting significant trust from Canadian investors (Saavy New Canadian). The average investment size per investor in these ETFs is estimated to be around CAD $13,000,¹ with an impressive adoption rate of 73% year-over-year since their launch in 2021 (CoinDesk). This wide acceptance underscores the maturity and stability of Bitcoin as a viable investment option within Canada’s regulated financial landscape.
Despite the popularity of investing in Bitcoin ETFs, similar tax treatment has not been extended to holding Bitcoin directly. We believe the Government of Canada should consider how to extend this treatment to Bitcoin given its low risk propensity as compared to other more volatile assets that are tax-advantaged. Given the broad adoption rate, as well as the relative risk of Bitcoin, Shakepay submits that the Government of Canada should extend the definition of qualified investments to this digital class. Furthermore, we assert that Bitcoin should be considered legal investments, meeting the criteria for diversification as advised by financial experts. We believe this is supported by a number of factors that are explained in detail below.
Firstly, as a matter of principle, we do not believe that the federal government should reject whole asset classes from the qualified investment regime because they are new investment vehicles. Ultimately, it is not the role of the federal government to approve or disapprove of specific assets, this is the role of securities regulators who have asserted clear authority over the regulation of Bitcoin. Ultimately, the purpose of Qualified Investments is to encourage Canadians to save - not decide what they save in.
Additionally, if a security trades on at least one exchange that Canada's Finance Department considers a Designated Stock Exchange, it will be recognized as a qualified investment irrespective of the risk propensity or potential volatility of the investment. Ultimately, current regulations allow for significant risk in other qualified investments, raising the question of why the volatility of Bitcoin would be treated differently. Moreover, Bitcoin derivatives trade on recognized exchanges, and Bitcoin itself trades on a registered Marketplace in Canada at Coinsquare, further establishing its legitimacy and regulatory oversight.
We also believe that the market for Bitcoin has reached sufficient levels of maturity that the exchange function is now governed in a manner consistent with other designated stock exchanges and other financial markets that are covered by the qualified investment regime. Bitcoin trading platforms have implemented rigorous security protocols, real-time auditing, and compliance measures that align with traditional financial market standards. These platforms also use advanced blockchain technology, ensuring transparency and immutability of transactions, therefore providing a secure and reliable trading environment.
The liquidity inherent to the Bitcoin network, with high daily trading volumes and a global presence, allows for the asset to be bought and sold quickly without significantly impacting market prices. Additionally, at the protocol level, Bitcoin is technically immutable due to its decentralized consensus mechanism and cryptographic security, ensuring that no single entity can alter the transaction history, thus maintaining the integrity of the network.
Furthermore, we believe that there is precedent under Canadian jurisprudence that Bitcoin is a liquid asset that meets certain objective criteria that ensures it is not subject to market manipulation or excessive control by one actor or consortium. For example, in the OSC’s decision in the matter of 3IQ Corporation and the Bitcoin Fund, the regulator indicated that “there is sufficient evidence of real volume and real trading in bitcoin on registered exchanges in large dollar size, both in absolute terms and compared to other markets for commodities and equities, which constitutes a liquid market.”
Finally, there is also a public policy benefit to expanding the eligibility of qualified investments, namely incenting the use of regulated platforms. Securities regulators have put in place stringent criteria for crypto investments, and we believe that only Bitcoin held in a regulated platform should be considered eligible for tax treatment as a qualified investment. Because only those assets managed by regulated crypto trading platforms would be held as qualified investments, this would incent the use of regulated platforms thereby enhancing investor protections while steering Canadians away from unregulated, riskier investment vehicles.
International Examples
While Canada’s unique division of powers between the federal and provincial governments means that the regulation and oversight of Bitcoin will require a made-in-Canada solution, it is nevertheless instructive to look at how other comparable jurisdictions manage the tax implications of holding Bitcoin in an individual’s retirement portfolio.
In the United States, retirement plan administrators can either add cryptocurrency assets to the menu of core investment options or initiate or expand a self-directed window that allows participants the freedom to choose cryptocurrency investments as part of their 401(k) plan. The U.S. Department of Labor issued a Compliance Assistance Release in March 2022 advising 401(k) plan administrators and other plan fiduciaries to adopt an extremely cautious approach when considering whether cryptocurrency assets constitute appropriate retirement investments. Nevertheless, plan administration of 401(k)s does not preclude the ability to place holdings in this tax-advantaged savings vehicle.
In Germany, cryptocurrencies are designated as private assets, and capital gains from selling them are tax-free if held for more than one year. If they are sold before that, they are taxed as personal income and subject to a tax-free allowance of €600. Furthermore, Singapore does not impose a capital gains tax, making it a favorable country for cryptocurrency investments. Cryptocurrencies can be held and traded without incurring tax on the gains. While there are no specific retirement savings plans that incorporate cryptocurrencies, the absence of capital gains tax provides a natural tax advantage for long-term holders.
Given other comparable jurisdictions already allow Bitcoin to directly be held on a tax-exempt basis for certain purposes, we believe that Canada should consider its own approach to respond to the growing demand for Bitcoin as a savings vehicle.
The Risk Proposition of Bitcoin
Bitcoin carries a significantly different risk profile than other cryptocurrencies, and regulatory decision makers should manage it accordingly. Most cryptocurrencies depend on centralized parties, meaning their characteristics can be changed. Most also have an unlimited supply. In contrast, Bitcoin operates on a peer-to-peer network without the need for a centralized authority. It also has a limited supply. The maximum supply of 21 million Bitcoin is hard-coded into the network’s protocol, which means that no more than 21 million Bitcoin can ever be created.
This scarcity is a core component of the value proposition of Bitcoin, as it helps ensure that the cryptocurrency retains its purchasing power over time. No other digital asset retains an immutable monetary policy on par with that of Bitcoin, which is why it is not a get-rich-quick scheme, but rather a long-term investment. In fact, 70 percent of Shakepay users have indicated that they view Bitcoin as a stable, long-term investment.
The presence of over 23,000 cryptocurrencies with varying degrees of security, governance mechanisms and tokenomics globally has played a key role in creating divergent regulatory paths across different jurisdictions. However, existing contradictions in the global regulatory regime on crypto assets can be reconciled via the adoption of a risk-differentiated approach where applied consistently, provides regulators and industry players with greater regulatory certainty.
Regulating crypto assets in line with their risk profile also reflects an industry-wide consensus in Canada, confirmed by Shakepay’s fellow witnesses at a Standing Committee on Industry and Technology hearing on November 24, 2022: Bitcoin carries a substantially different risk profile from other crypto assets.²
There is also regulatory precedent for this in Canada, as the Canadian Securities Administrators have stated that they consider Bitcoin to be different, classifying it in the safer category of ‘Specified Crypto Asset’ with only three other tokens (Bitcoin, Ether, Litecoin, and Bitcoin Cash), with every other cryptocurrency considered higher risk.
Accordingly, Shakepay believes that there is value in overseeing crypto assets based on their risk profile, and we have proactively developed a risk categorization grid to offer you a sense of what such an approach could look like, outlined below:
Example Risk Grid for Crypto Assets*
* Hypothetical classifications
Conversely, a risk grid used for the traditional finance markets would follow a similar format. However, in this case low-risk, medium-risk, and high-risk assets are all eligible as Qualified Investments. While we do not suggest that we can view the asset classes as similar in their risk proposition, this does demonstrate that more volatile assets like small cap stocks remain eligible for preferential tax treatment.
Risk Grid Traditional Finance
Given Shakepay’s own perspective on the risk propensity of Bitcoin, we believe it should be considered differently than other crypto assets when determining eligibility as a qualified investment in Canada. We also believe that Bitcoin is less volatile, with lower risk propensity as compared to some other qualified investments in traditional markets.
Conclusion
In conclusion, Shakepay thanks the Government of Canada for the opportunity to provide this written submission. We believe we can better unlock innovation with policy and regulations that strike the right balance between sector growth and protecting consumers. We look forward to further engaging with the Government of Canada to help craft a public policy approach to financial services that continues to modernize Canadian payments services, facilitate the safe growth of Bitcoin in Canada, and prioritize consumer protection above all else. Companies like ours have immense compliance, accounting, legal, technical and regulatory expertise and we look forward to offering this expertise to the Federal Government in pursuit of sound public policy.
Note: This document is for informational purposes only and does not constitute financial advice. Investments in cryptocurrencies are speculative and involve significant risk. Past performance is not indicative of future results. Please consult a financial advisor before making any investment decisions
¹ While exact data on the average investment size per Canadian investor is not explicitly available, we can reasonably infer that it is likely similar to the $13,000 figure observed in the U.S because of similar market dynamics, investor behaviour and ETF structures between the two countries.
² Blockchain Technologies: Crytocurrencies and Beyond. June 2023. Page 31.