September 26, 2014
Print

Employers are always looking for innovative new ways to attract and retain employees. Recently, there has been a growing interest in paying employees with virtual currencies like bitcoin, and a few Canadian employers have already jumped on the bandwagon. Unsurprisingly, the early adopters are mainly start-up technology companies, where workers tend to be more comfortable with online developments and may already own bitcoin.

For those who aren’t quite sure what bitcoin is, it’s a relatively new form of ‘virtual money’ or ‘digital currency’ that is generated by computers and ascribed value through complex mathematical algorithms. Bitcoin is not controlled or backed by any central bank or government authority, and can be traded anonymously online.

According to recent news reports by the CBC and CTV, an Ontario based company, Wagepoint, is the first payroll firm in Canada to provide a bitcoin payment option for employers. The project began last year in November, 2013, and employees from ten Canadian firms have already signed up for the option. While the option to pay salaries in virtual currencies will likely be attractive to both employers and employees looking for flexibility in how they are paid, the option is not without its risks, and should be considered carefully before its implementation.

Here is a brief overview of how Wagepoint’s bitcoin payroll option works. When an employer signs up for the option, their employees can choose to convert all or part of their net pay into bitcoin. Employees are essentially paid in Canadian dollars, and any payroll deductions including federal income tax, Canada Pension Plan (‘CPP’) and Employment Insurance (‘EI’) deductions are made before Wagepoint’s payroll system automatically exchanges Canadian dollars for bitcoin. The conversion is made using a Canadian virtual exchange at the current market rate. This approach likely helps avoid some of the risks that employers might otherwise face in offering a bitcoin payment option.

Employees receiving their pay directly through bitcoin would face additional risks. According to the Canada Revenue Agency (‘CRA’) paying with bitcoin is a barter transaction involving an exchange of goods or services. In other words, bitcoin is considered a ‘good’ and not a currency. A CRA spokesman explained to CTV that when an employer pays an employee for their services directly in bitcoin, it must be valued and reported to the CRA for income tax purposes in Canadian dollars. In addition, employees may face capital gains issues related to the change in value of the bitcoin from the time they receive it to the time they exchange it for currency or for other goods or services. One author recommends that employees keep records of the value of bitcoin when they receive it, as well as the value when they exchange it, so that they can account for losses and gains accrued during that period for tax purposes.

Aside from tax implications, there are other risks for employers and employees considering bitcoin salary payments as an option. The most significant of these is the volatility of bitcoin, and the large, rapid fluctuations it experiences in value over time. In addition, as with most other emerging technologies, bitcoin is still an unregulated currency in Canada, and the legal and regulatory framework surrounding bitcoin has yet to be developed in any meaningful way, leaving bitcoin owners without much of a safety net when it comes to their hard-earned income. For this reason, it is recommended that employees opting to be paid in bitcoin consider taking only a portion of their wages in bitcoin at this time. Any employer should also ensure that employees who choose this option are aware of and accept the risks involved.

Another risk for employers is that paying employees directly in bitcoin may not be in compliance with the Canadian employment standards legislation in place in their jurisdiction. For example, in Ontario, ‘wages’ are defined under the Employment Standards Act, 2000  (the ‘ESA’) to mean, ‘a monetary remuneration for work performed,’ and the Currency Act makes it clear that the monetary unit of Canada is the dollar. In addition, in the Exemptions, Special Rules and Establishment of Minimum Wage, a regulation made under the ESA, the minimum wage rate for Ontario is expressed in terms of dollars an hour. While employers under federal jurisdiction may be more fortunate from the point of view of the definition of wages, which under the Canada Labour Code are defined more broadly to include 'every form of remuneration,' they will still be subject to the minimum wage requirements in the jurisdictions in which they operate.

Paying employees in bitcoin is certainly an innovative approach to compensation, and as virtual currencies gain wider acceptance, more Canadians may ask to be paid with it. However, it may not be an option that is widely adopted by Canadian employers in the near future. For now, the risks will outweigh the benefits for many employers, especially for more traditional ones, at least until a stronger regulatory framework is put in place around it (for example, the ESA and/or the Currency Act are amended to recognize virtual currencies as being monetary remuneration). In the meantime, it may be less risky to consider providing bitcoin as a type of employee benefit, something like a bonus or stock option. The takeaway for employers considering bitcoin as an option is that they should be cautious, and always consider consulting with an experienced employment lawyer in advance.

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2017 Nelligan O’Brien Payne LLP.

Service: Employment Law