Launch of Equity Crowdfunding Quebec (Financement participatif en capital Québec)

Jillian Friedman, principal attorney at Friedman Law, is actively working to promote equity crowdfunding and is part of a team that recently launched a not-for-profit organisation called Equity Crowdfunding Quebec (Financement participatif en capital Québec). This organisation’s goal is to promote and support the development of equity crowdfunding in Quebec.

To access the FPCQ press release click here.

Who are we?Equity Crowdfunding Québec (“ECQ”) is a not-for-profit organization that aims to promote and support, at the provincial level, the development of equity crowdfunding.

Our members comprise large corporations, start-ups, SMEs, stakeholders from the financial and entrepreneurial sectors, as well as citizens looking to gain insight into this new form of financing.

Mission

The Mission of ECQ, which was formed by a group of concerned local industry participants is to:

  • Lobby the local Quebec Securities Regulator, L’Autorite de Marches Financiers, in order to ensure that equity crowdfunding is made accessible to the average citizen, business owner, and investor in the province of Quebec.
  • Educate the general public and local business owners and investors on the opportunities stemming from this new financing model.
  • Offer and share information with its members about how this new financial model is being implemented across the globe, and to promote discussion and comment regarding the effectiveness of these efforts in various jurisdictions.
  • Provide recognition to Quebec’s equity crowdfunding industry and highlight the contributions of local portals, consultants, companies and individuals to the growth of equity crowdfunding in the province of Quebec.

Our Vision

ECQ strives to contribute to the sustainability of Quebec businesses through promoting alternate forms of financing and engaging the public in the success of our ecosystem.

ECQ believes that the development of equity crowdfunding in Quebec and the democratization of this new form of financing can support an environment conducive to entrepreneurship, contributing to the creation of innovative businesses, the growth of SMEs, and job creation, in addition to enabling citizens to invest in companies and projects they chose to support.

Advertisements

Canadian Senate hearings on digital currency

On October 2, 2014, the Bitcoin Foundation Canada, the Bitcoin Embassy and the Bitcoin Alliance of Canada were panelists for the Senate Committee on Banking, Trade, and Commerce Committee’s “Study on the Use of Digital Currency”. As chief-legal-officer of the Bitcoin Foundation Canada, I had the privilege of sharing a panel with four other top-notch digital currency industry experts. It was a truly fascinating experience and I was extremely impressed by the quality of the Committee’s questions and their interest. Their 2015 report is eagerly awaited. Re-printed below is a copy of the statement that I made and a link to the video of the testimonies.

 

Remarks by the Bitcoin Foundation Canada Senate Standing Committee on Banking, Trade and Commerce Study on the Use of Digital Currency

by: Jillian Friedman

Mr. Chair and honourable Senators, Mr. Babin-Tremblay and I are both here as directors of the Bitcoin Foundation Canada, the BFC. On behalf of our organization we thank you for the invitation to appear before you. The BFC is a federal not-for-profit corporation that is affiliated with the Bitcoin Foundation, a global organization headquartered in the United States. Currently there are nine affiliated Bitcoin Foundations in as many countries. The BFC is mandated to coordinate and lead efforts to protect and promote Bitcoin in Canada. This includes monitoring regulatory and legislative developments, educational campaigns, and supporting maintenance and improvement to the Bitcoin protocol.

I also speak to you as a member of the Quebec bar and my remarks today will focus on consumer protection law in Quebec and digital currency, specifically Bitcoin. We can identify the applicable legal rules by looking at the function or activity in which Bitcoin is being used. To quote American Judge Frank H. Easterbrook, “the best way to learn the law applicable to specialized endeavours is to study general rules”. Guided by that principle, it is clear that claims that Bitcoin offers consumers no consumer protection at all are simply false.

The question is not so much whether consumers need to be protected, but whether they need more than they already have. Consumer protection laws are broad and apply to consumer contracts for goods or services where Bitcoin is tendered as payment, whether the transaction is defined as barter or otherwise. Additionally, the chapter on sale in the Civil Code of Québec applies, mutatis mutandis, to contracts for exchange. A consumer’s purchase of Bitcoin from an exchange or vendor would also in principle be governed by these rules.

What does this mean? Consumers tendering payment in Bitcoin or purchasing Bitcoin enjoy implied and legal warranties under consumer protection law and the Civil Code. Additionally, Bitcoin exchange services subject to Quebec consumer law have to disclose any fees they charge to consumers, including exchange fees. It merits mention that traditional financial service providers are also subject to this rule and must disclose fees related to currency conversion services as was confirmed earlier this month by the Supreme Court.

Merchants must also provide instructions necessary for the protection of the consumer against risk or danger of which the consumer would otherwise be unaware. This obligation is relevant when dealing with a technology as novel and complex as Bitcoin especially since many users are still unaware of basic security precautions that need to be taken.

A key complaint about Bitcoin is that the irreversibility of transactions is seen to favour the merchant over the consumer. This is considered anathema to consumer protection law, which is designed to do the opposite. Recall however, that consumer protection law is not beholden to chargeback technology for the protection of consumers engaging in online commerce. In Quebec, the online merchant must perform his obligation before exacting payment unless a credit card is used. This means that if an online merchant sells goods and services for Bitcoin in Quebec to Quebec consumers, he must deliver before the consumer is required to pay. The Bitcoin sector has shown great interest in building its own solutions to the problem of trust in consumer transactions. One is the use of multi-signature addresses that require multiple permissions (or signatures) to transmit funds from a Bitcoin wallet. An escrow agent and dispute arbitrator can hold one key to a multi-signature wallet, and the consumer and seller the other two.

Securities law, which is premised on protection of the investing public, is the other major area of consumer protection law where Bitcoin and related technology is concerned. As is further set out the paper submitted by Attorney Hoegner and I, Bitcoin is likely not a security. Nevertheless, Bitcoin or other digital assets can be used as the unit of account underlying some part of a securities transaction, whether it be consideration for issuance or an investment fund denominated in Bitcoin.

It is important to examine digital currency in the context of a broader innovation known as “decentralized autonomous organization” technology, or DAOs. Decentralized autonomous organizations are software built to run on their own and mimic the operations of a corporation. The use of DAOs to raise funds, spend them, and make distributions through participation of its stakeholders is a highly anticipated use of this technology and has already been subject to experimentation. An issuance of ownership units and their trade in a secondary market may engage provincial securities rules.

We must acknowledge that digital currency technology is distinct from the programs and services that operate on it. Where possible, legal obligations should be based on the function performed rather than the technology, or medium, used to execute it. In the spirit of competition and technological neutrality – legal treatment of digital currency should avoid favouring the use of one technology over the other. Bitcoin is complicated and impressive and it requires a substantial level of technical understanding. It is encouraging that the Canadian government is indeed educating itself before making any decisions on these matters. The opportunity to share my thoughts and research with you here today has been a great honour. Thank you.

 

At last – some clarity from the CRA on Bitcoin mining

If you are mining bitcoins or alt-coins or have been considering getting involved with mining, it is important to be aware of the tax implications. The Canada Revenue Agency (“CRA”) has let it be known in a technical interpretation that mined digital currency, unsurprisingly, is not immune from tax treatment.

For tax purposes, a key consideration to be made is whether your mining consists of a personal or a business activity. If the activity is considered a business activity the mined bitcoins may be considered inventory or capital property and taxed accordingly. If it is a business activity then expenses and certain losses associated with the mining operation can also be deducted. We know from previous CRA bulletins, that payments received in respect of, or in connection with, a business carried on by the taxpayer, must be included in the taxpayer’s income from that business. Bitcoins rewarded to miners for supporting the network and verifying transactions, where the mining activities are considered business activity, must be calculated as income.

Whether your mining operation is a business or personal activity is determined on a case-by-case basis. However, there are some key elements that can facilitate making the distinction. A personal activity is endeavored to provide a personal benefit rather than a financial one; it is primarily undertaken for pleasure, entertainment, or enjoyment rather than for profit, business, or commercial reasons. Drawing on the Supreme Court’s decision Stewart v. Canada, the CRA explains that “In order for an activity to be classified as commercial in nature, the taxpayer must have the subjective intention to profit and there must be evidence of businesslike behavior which supports that intention”. Even a personal hobby can be considered a business activity if it is pursued in a sufficiently commercial and businesslike way – and consequently would be considered income under the Income Tax Act. For example, you may be a bitcoin enthusiast and for fun in your spare time, decide take a bunch of old computers you have lying around and set them up to start mining bitcoins or dogecoins. Is this a personal or business activity?
The determination of whether an activity is undertaken for profit is based on facts and determined case-by-case. In light of this understanding, it is very possible that your mining operation is a business activity and you just don’t know it.

For some, mining is merely a hobby activity and for others it represents a major commercial undertaking in which significant sums have been invested with the expectation of very high returns. Not all mining activity will be subject to this test –large-scale mining operations that involve multiple stakeholders and external financing are clearly business activities. Only where there is a personal and hobby element involved might bitcoins or altcoins generated through mining activity not be considered business income. An activity that has been financed externally is an indication that an activity is being operated in a business like manner (Stewart v. Canada par. 59). A reasonable expectation of profit is another one of several factors taken into account in making the determination. Other factors that may be considered include, without limitation, the taxpayer’s training, the taxpayer’s intended course of action, and the capability of the venture to show a profit.

If the activity is a business activity then the bitcoins may be evaluated as inventory. It will be necessary to determine the value of the taxpayer’s inventory for the purposes of computing a taxpayer’s income from business. There are specific rules pertaining the valuation of inventory. Different methods exist for valuing inventory and which one is used can be relevant.

The CRA also indirectly references the consequences of loss of bitcoins from theft when they are acquired in the context of business activities. A loss of trading assets, such as inventory, which would include mined bitcoins, or cash, through theft, defalcation or embezzlement is normally deductible in computing income from a business if such losses are an inherent risk of carrying on the business and the loss is reasonably incidental to the normal income-earning activities of the business (see IT-185R). One wonder’s whether mined bitcoins that were lost in connection to Mt. Gox would be considered “reasonably incidental” to the activities of the business.

Exchanges operating entirely in digital currency fall within reach of the taxation rules – says the CRA. The purchasing of one digital asset with another, through an exchange would be treated as a barter transaction and the value of the goods must be brought into the taxpayer’s income if they are business related. The value received from such an exchange might also result in a capital gain.

While this post aims to provide some clarity with respect to your tax obligations the greatest comfort can come from your bitcoin legal expert. Note that the technical interpretation provides general comments and is intended only to assist in making determination. For greater clarity –consult your bitcoin legal professional. Note that the technical interpretation does not confirm the income tax treatment of a particular situation, it is aimed to assist taxpayers engaging in activities related to the creation of, or trading of, digital currency.