Canada MSB, an alternative to European EMI license

Money Service Business (MSB) license

To launch your fintech project and provide payment services you need permission or authorisation to perform these operations.

Canadian Money Services Business (MSB) license is one of the several options you can decide for, to register your payment business and start operating immediately. Obtaining an EMI license in any of the EU countries or in the UK is a very long and expensive process; it can take over 12 up to 18 months. At least you will need 3 to 4 months to prepare documents, 9 to 12 months to get authorisation from the regulator, 4 to 6 months to actually launch your basic fintech infrastructure. Reason why new entrepreneurs are usually forced to look for alternative options to start a fintech company – faster than obtaining an authorised PI or EMI license.

There are several options, including to operate as an agent under the umbrella of a licensed provider, to register as a small payment institution or, as a 3rd option, applying for a Canadian Money Services Business (MSB) license.

Services Canadian MSBs can provide

Foreign Exchange Dealing
Involves conducting transactions where one currency is exchanged for another (e.g., converting USD to CAD).

Money Transfer
Facilitates the transfer of funds from one individual or organization to another through electronic funds transfer networks or other methods.

Merchant Acquiring
Allows businesses to accept card payments, either through a POS terminal or an online payment gateway.

Dealing in Virtual Currencies
This covers both virtual currency exchange and transfer services.

Virtual currency exchange services involve:
Exchanging funds for virtual currency,
Converting virtual currency into funds, or
Trading one virtual currency for another.
Virtual currency transfer services include:

Transferring virtual currency on behalf of a client, or
Receiving a virtual currency transfer to remit to a designated recipient.
With new Canadian legislation that took effect in June 2020, cryptocurrency exchanges and payment operators dealing in cryptocurrencies are now officially recognized as financial service providers.

Crowdfunding Platform
These services involve providing and maintaining a platform for individuals or entities to raise funds or virtual currency for themselves or others.

Payment Service Provider
Facilitates the transfer of funds for the payment of goods or services, typically through debit, credit card, or prepaid payment products.

The MSB license also grants permission for activities such as card issuing and IBAN account opening, effectively functioning as an online bank for money transfers and cryptocurrency services.

Thanks to the Canada-EU trade agreement, MSBs can also extend their services across the entire EU.

Money Service Business (MSB)
Foreign Money Service Business (FMSB)

In Canada, two types of financial businesses are required to comply with the obligations of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA): Foreign Money Service Businesses (FMSBs) and Money Service Businesses (MSBs).

An FMSB is a non-bank financial institution that offers financial services and operates outside of Canada, whereas an MSB provides financial services within Canada. Both types of businesses must register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) and adhere to the reporting and recordkeeping requirements set out by the PCMLTFA.

Who will be a Money Services Business (MSB)?

A business qualifies as a Money Services Business (MSB) if it meets the following criteria:

It offers clients at least one MSB service, such as: currency exchange; transactions involving currency conversion; transferring funds, including through bank card transfers; facilitating financial transfers between individuals or entities; or acting as an intermediary between a payer and payee for payments related to bills, wages, loans, mortgages, utilities, etc. (excluding accepting payments on behalf of the payee solely for debt repayment with payment instructions directed to a third party).

It issues or redeems money orders, traveler’s checks, or other similar negotiable instruments (excluding cashing checks for specific individuals or merely selling traveler’s checks issued by another company).

It provides virtual currency services, such as exchanging fiat currency for virtual currency, exchanging one virtual currency for another, transferring or receiving virtual currency, or offering or managing a crowdfunding platform to raise funds or virtual currency.

It operates in Canada, has a physical office in the country, employs staff or agents in Canada, or has established a branch office within Canada.

Who will be a Foreign Money Services Business (FMSB)?

A business is classified as a Foreign Money Services Business (FMSB) if it meets the following criteria:

You offer any services that qualify as those provided by a Money Services Business (MSB), but with the following distinctions:

You do not have a physical presence in Canada—this means no Canadian registration, no office, and no employees, agents, or affiliates located in Canada.

Your business provides services to individuals or entities in Canada, which may result from activities such as: marketing or advertising specifically aimed at Canadian clients, managing a “.ca” domain, or being listed in a Canadian business directory.

If your company serves customers in Canada, it is determined by factors such as: the customer’s residential address, documents issued by the Canadian government, Canadian bank-issued cards, or if the customer is temporarily living, working, studying, or vacationing in Canada.

If you work in the money services business (MSB), you need to know about all
the obligations that apply to you. This includes the registration of your business,
reporting, record maintenance, knowing your customers and having a
compliance program.
You are a money services business (MSB) if all of the following criteria apply:

1. You offer at least one money services business (MSB) service
2. You have a place of business in Canada

Latest MSB activities permitted by FINTRAC

Foreign exchange dealing

Conducting transactions where you exchange one type of currency for another
(for example, exchanging USD for CAD).

Money transferring

Transferring funds from one individual or organization to another using an electronic
funds transfer network or any other method such as Hawala, Hundi, Fei ch’ien, and Chitti

Merchant acquiring

Enable your clients to accept card payments via a POS terminal or an online
payment gateway page.

Dealing in virtual currencies

This includes both virtual currency exchange and virtual currency transfer
services.

• Virtual currency exchange services include exchanging:
• funds for virtual currency,
• virtual currency for funds, or
• virtual currency for another virtual currency.
• Virtual currency transfer services include:
• transferring virtual currency at the request of a client, or
• receiving a transfer of virtual currency for remittance to a
  beneficiary.

The new legislation in Canada, which came into force in early June 2020, has
opened the green light for crypto-exchanges, as well as for payment operators
dealing with crypto-currencies. Now, these organizations are officially classified
as the financial service providers.

Crowdfunding platform

Crowdfunding platform services include the provision and maintenance of a
crowdfunding platform for use by other persons or entities to raise funds or
virtual currency for themselves or for persons or entities specified by them.

Payment service provider

Includes enabling the transfer of funds carried out as payment for the provision
of goods and services, such as by debit, credit card, or a prepaid payment
product.

The MSB license activities permission also includes, besides card issuing, IBAN account opening. So basically it can work as an online bank for money transfers + crypto activities.

The MSB can passport its services to the whole EU, in regards to the Canada-EU trade agreement.

Benefits of MSB license in Canada

Enhanced Credibility in Financial Partnerships

Establishing partnerships with banks, payment processors, and networks is crucial in the financial landscape. Holding an MSB license enhances credibility, facilitating smoother negotiations and collaborations with these entities. It demonstrates a commitment to regulatory compliance and financial stability, making the licensed entity a more desirable partner.

Efficient Licensing Process

Compared to European counterparts, the MSB licensing process in Canada is relatively expedient. The timeframe typically ranges from two to five months, depending on document submission. This efficiency is further underscored by the quick registration process with the BC registrar (1-2 days) and approval from FINTRAC (1-2 weeks).

Reputation for Reliability

Canada’s financial sector is esteemed for its safety, stability, and reliability, thanks to robust banking institutions. This solid foundation, coupled with ongoing innovation, fosters a secure and trustworthy business environment.

Versatility

The MSB license in Canada enables license holders to engage in various services, including foreign exchange transactions, fund remittance, money order issuance, virtual currency trading, and crowdfunding facilitation. This versatility appeals to business owners, offering flexibility for diverse strategies and attracting potential investors.

Requirements for MSB application

How to register and run the Money Services Business?
Procedure for obtaining MSB License in Canada

Time scale

Legislation and Regulation applicable to
MSB and FMSB in Canada

Companies offering financial services in Canada are required to adhere strictly to laws aimed at preventing money laundering, criminal activities, and terrorist financing.

They must register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) and follow the guidelines outlined in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).

As Canada’s financial intelligence unit, FINTRAC plays a critical role in the country’s anti-money laundering (AML) and anti-terrorist financing (ATF) regime. It works alongside the Department of Finance to monitor financial transactions reported by registered companies, aiming to detect and prevent money laundering and terrorism financing.

The Proceeds of Crime and Terrorist Financing Act is designed to combat cross-border criminal transactions that facilitate money laundering or fund illegal activities. It sets clear standards for financial service providers and enforces penalties for non-compliance.

Canada’s AML and ATF regulations are among the most stringent worldwide. Businesses that fail to comply face severe fines and potential criminal charges. As a result, it is crucial for money service businesses to ensure full compliance with Canadian law, actively cooperate with FINTRAC, and regularly train their employees in anti-money laundering and terrorist financing prevention measures.

Register for RPAA Regulations in Canada
Requirements and Registration

The Retail Payment Activities Act (RPAA) is a significant legislative framework introduced in Canada to oversee payment service providers (PSPs). Its main goal is to create a secure, reliable, and efficient retail payment system. PSPs must adhere to the regulatory standards set forth by the act, which cover requirements for risk management, operational resilience, and transparency.

Registration with the Bank of Canada
Key Points about the RPAA

Effective Registration Date
Starting November 1, 2024, all entities classified as Payment Service Providers (PSPs) under the Retail Payment Activities Act (RPAA), including Money Service Businesses (MSBs), must register with the Bank of Canada. This marks the mandatory start date for registration as part of Canada’s initiative to strengthen oversight of retail payment systems.

Who Must Register
The RPAA applies to a broad range of businesses and institutions offering retail payment services in Canada, such as:

Payment processors: Companies that facilitate fund transfers from payers to payees.
Digital wallets: Firms providing electronic wallets for payments.
Money transfer services: Including services offered by MSBs.
Virtual currency exchanges offering payment services.
Any business involved in payment account services, fund transfers, or payment processing.
MSBs providing payment services (such as fund transfers, payment handling, or digital wallet operations) are required to comply with the act.

Key Obligations Under the RPAA
PSPs must meet several key obligations:

Registration with the Bank of Canada: Mandatory for all PSPs operating in Canada’s retail payment sector.
Operational Risk Management: PSPs must implement policies to address risks related to cybersecurity, operational disruptions, fraud, and data breaches, ensuring secure and resilient payment systems.
End-User Fund Protection: PSPs are required to safeguard users’ funds by holding them in trust or using other appropriate mechanisms.
Compliance with Anti-Money Laundering (AML) Regulations: MSBs, in particular, must continue to follow the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).
Transaction Transparency: PSPs must ensure clear communication of fees and terms related to payment services, providing users with full transparency.

Penalties and Enforcement
Non-compliance with the November 2024 registration deadline or failure to meet RPAA requirements may result in penalties. The Bank of Canada will oversee enforcement, which could include administrative penalties or other measures for non-compliance.

Exemptions
Certain PSPs may be exempt from registration under the RPAA. For example, payment services exclusively between affiliates or those related to closed-loop gift cards may not require registration.

Registration Process
The Bank of Canada will outline the registration process for PSPs, which will likely require submission of:

Details on business operations,
Financial statements,
Risk management policies,
Evidence of AML and consumer protection compliance.

Implementation Timeline
2023-2024: The Bank of Canada will continue to develop regulations and guidelines for PSPs to comply with the RPAA. November 1, 2024: All PSPs, including MSBs providing payment services, must be registered with the Bank of Canada.

PSPs and MSBs operating in Canada should take immediate action to ensure compliance with the RPAA, including reviewing operational risks, safeguarding mechanisms, AML obligations, and preparing for registration ahead of the November 2024 deadline.

Overseas Transactions

If a Payment Service Provider (PSP) or Money Service Business (MSB) does not operate within the Canadian retail sector but exclusively offers services internationally, they typically would not be required to register with the Bank of Canada under the Retail Payment Activities Act (RPAA).

The RPAA aims to regulate payment services within Canada’s retail payment environment, primarily focusing on PSPs that facilitate or process retail payments involving:

End-users (either payers or payees) located in Canada, or
Payment services offered within Canada’s domestic market.

Important Considerations:

Geographical Scope
The RPAA applies to PSPs that provide retail payment services to Canadian residents, regardless of the PSP’s physical location. Therefore, if a PSP services Canadian users or handles retail transactions with payers or payees in Canada, they will likely need to register.

Exclusively Overseas Operations
If the PSP or MSB exclusively serves non-Canadian clients (i.e., their customers are entirely based outside Canada and no aspect of the retail transaction involves Canada), they generally fall outside the scope of the RPAA. Such PSPs would not need to register with the Bank of Canada.

Cross-border Payments Involving Canada
If the PSP facilitates cross-border retail payments involving either the payer or payee located in Canada, they would be subject to the RPAA and required to register.

Examples:
A PSP Serving Only European Customers: If a PSP, whether based in Canada or elsewhere, solely serves clients located in Europe or other regions outside Canada and does not provide services to Canadian consumers or businesses, they would not be required to register under the RPAA.

A PSP Facilitating Cross-border Payments: If a PSP facilitates payments between Canadian consumers or businesses and foreign entities (even if the majority of their operations occur outside Canada), the PSP will need to comply with the RPAA and register accordingly.

Summary:
To ascertain if registration is necessary, the key factor is whether the PSP or MSB provides services involving Canadian retail payment users (either payers or payees). If none of the PSP’s activities engage with Canadian customers or the Canadian market, the registration and compliance obligations under the RPAA would not apply. However, if there is any indirect connection to Canadian users or payments, registration may be required.

FINTRAC Penalties for non-compliance

FINTRAC has the power to impose Administrative Monetary Penalties (AMPs) on organizations that fail to comply with the PCMLTFA and its associated regulations. This measure is designed to ensure adherence and safeguard Canada’s financial system from illicit activities such as money laundering and terrorist financing. Organizations that do not comply with the law may face fines reaching several million dollars.

In addition to AMPs, FINTRAC can also enforce other penalties against offenders. For instance, an organization may be required to rectify violations, and FINTRAC may demand further information or documentation from the entity. If an organization neglects to correct its violations or does not cooperate with FINTRAC, it could face criminal charges.

Therefore, maintaining regular compliance is a crucial aspect of the business strategy for companies involved in financial activities in Canada.

MSB/FMSB
Taxation for Money Services Businesses

Tax regulations and standards are essential for overseeing cryptocurrency activities. In Canada, cryptocurrency is classified as an asset rather than an official currency, meaning that transactions involving virtual currency fall under the Income Tax Act (ITA). The applicable tax rate ranges from 15% to 33%, depending on the annual income.

When a customer pays for goods or services using cryptocurrency, this is treated as a profitable (barter) transaction. Consequently, the value of such transactions must be included in the seller’s taxable income. Cryptocurrency entrepreneurs must take into account the tax rates of the province where their business operates and convert the cryptocurrency value to CAD for tax reporting purposes to verify the transaction with the IRS.

British Columbia offers the most favorable tax conditions for registered companies located on Canada’s west coast. The taxation framework here includes several distinctive features:

Companies registered in British Columbia are taxed only on income earned within the province, with a 0% tax rate on income generated outside Canada.
The corporate income tax rate is 12% for income exceeding CAD 300,000, making it one of the lowest rates in North America.
An additional tax credit allows the tax rate to be reduced to 2% for income up to CAD 300,000.
All companies in Canada are also required to pay a federal tax of 15%.
Additionally, the Canadian government advises entrepreneurs to regularly prepare reports on their cryptocurrency activities and include any profits or losses in their tax returns.

Reporting is a crucial aspect of cryptocurrency operations in Canada. The government encourages all entrepreneurs to consistently document their cryptocurrency transactions for tax compliance.

Under the Income Tax Act (ITA), profits derived from cryptocurrency activities are taxed as business income, meaning that 100% of the earnings are taxable. In contrast, if capital gains are reported for tax purposes, only 50% of a company’s profits are taxable. Therefore, entrepreneurs engaged in cryptocurrency transactions must meticulously track and report their profits and losses from buying, trading, or selling digital currencies in their returns. The reports should also include the transaction date and the corresponding price in Canadian dollars at that time.

FAQ about MSB license

What is an MSB in Canada?
An MSB, or Money Services Business, is an entity outside the traditional banking system that can carry out various financial transactions within Canada, including money transfer services, digital currency trading, payment processing, financial agency services, and currency exchange. MSBs in Canada are regulated under the Anti-Money Laundering and Counter-Terrorist Financing Act.

How do I obtain an MSB license in Canada?
To acquire an MSB license in Canada, you need to apply to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). Your application should provide comprehensive information about your business operations, including details about the business model, the presence of a local office, identification of management, and banking information. After submission, FINTRAC will review the application and determine whether to approve or deny the license.

How long does it take to receive an MSB license?
The timeframe for obtaining an MSB license can vary from a few weeks to several months following company registration. If all required documents are in order, it typically takes about three weeks for FINTRAC to review the licensing package. However, if additional documentation is needed during the review, the process may take longer.

What are examples of MSBs?
Examples of MSBs include Western Union and MoneyGram, which offer money transfer services enabling customers to send and receive funds globally. More broadly, any company that provides electronic payments, credit services, currency conversion, remittance sales, or other financial transactions can be considered an MSB. This category encompasses both large financial institutions and small startups.

Who regulates MSBs in Canada?
In Canada, MSBs are regulated by the Financial Transactions and Reports Analysis Centre (FINTRAC), which monitors and gathers information on financial transactions to combat money laundering and terrorist financing. FINTRAC establishes the regulations and standards that MSBs must adhere to and is responsible for issuing licenses for financial activities.

Who does not qualify as an MSB or FMSB?
Entities do not qualify as an MSB or Foreign Money Services Business (FMSB) if they only act as agents providing one or more MSB services or offer other services related to MSB activities, such as acting as securities dealers. Additionally, not all financial institutions are categorized as MSBs or FMSBs; for instance, banks and investment companies generally fall outside these definitions due to differing regulatory frameworks.

What services can you provide with an MSB license in Canada?
Holding an MSB license in Canada allows businesses to offer services associated with electronic payments, such as money transfers, currency exchange, and the issuance and sale of remittances. This license enables companies to conduct transactions in both Canadian dollars and foreign currencies, domestically and internationally. Additionally, MSBs can engage with both individuals and legal entities, including international firms, which enhances opportunities for business expansion and customer base growth.

What are the AML risks for MSBs?
MSBs face AML (Anti-Money Laundering) risks, including the potential misuse of their services for money laundering, terrorist financing, and other illegal activities. They may also become targets for scams and cyberattacks, where perpetrators utilize their services for illicit purposes.

Noncompliance with AML regulations can result in severe consequences for MSBs, including substantial fines, license revocation, and criminal charges. Therefore, it is essential for MSBs to implement robust measures to mitigate money laundering risks and ensure compliance with AML laws.

Our services

Project management

This service assures our support and guidance throughout the process of obtaining your MSB registration approval, including the setup of a new company in Canada in any of the 10 Canadian provinces, except Quebec (which requires a separate and distinct registration with the AMF). A member of the Pay Compliance team will be present at the FINTRAC interview and help guide you through the process. One of the main advantages to acquiring a Canadian MSB license is the short licensing process (3-4 months).

Corporate concierge

From corporate changes to certifications to authorisations to reports – we will deal with every local requirement for you, so that you can focus on the operations.

Compliance support

We will provide a full compliance support to you including design/upgrade of policies, procedures, questionnaires, and forms to meet regulatory requirements; support client on-boarding, AML and KYC checks; liaise with regulators during regulatory examinations, investigations, and post examination remediation; Ad hoc compliance advice, regular compliance reviews, personalised one-to-one training, handling of all correspondence and statutory filings with regulators.

Compliance programme

Comply with the Canadian regulation, a compliance program must be put in place for your company, which will be reviewed by FINTRAC. We can offer a written AML/CFT compliance program that meets Canadian and international standards customised for your business operations.

Risk assessment

We will prepare your risk assessment by considering elements of your business, clients and/or business relationships to identify the impact of possible ML/TF risks, and to apply controls and measures to mitigate these risks.

Clear banking

We will prepare your risk assessment by considering elements of your business, clients and/or business relationships to identify the impact of possible ML/TF risks, and to apply controls and measures to mitigate these risks.

Compliance officer recruitment

As all companies require a Compliance Officer, we will offer support in connecting clients with qualified and experienced candidates who will be equipped with the necessary knowledge about the Act and its associated regulations to ensure that your business remains compliant.