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Bartering 101 – Tax Implications
| Guest post by: Brenda Parker |
Article Overview: Bartering between businesses and the tax implications involved.
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Free Download - Accounting - Beyond the Tax Return By Brenda Parker |
Bartering 101 – Tax Implications
At one time bartering meant trading a delicious cupcake for a bag of chips. Now, you are a new business owner needing to get your name out there. Bill agrees to offer you some advertising in exchange for your computer services. Bartering predates the use of currency, but is alive and well.
Bartering has its advantages. Your business may be cash strapped, in its "down time" or may have excess stock. Bartering is a good way of keeping things moving along. You can reach new customers through your effort. Even if the other person is not interested in what you have to offer, they may need the service of a third party who you could offer an exchange with in order to help out your initial contact. When bartering takes place at arm's length, the people involved normally consider that the value of what they receive is at least equal to the value of what they give up.
What does the Canada Revenue Agency think of this? According to IT-490, the view of the department is that such transactions are within the scope of the Income Tax Act and can therefore result in income and expense. It may involve the acquisition or disposition of capital property, eligible capital property, personal-use property or inventory, depending on the circumstances.
You need to look at the type of transaction involved. If you exchange a good or service as part of your normal business activity or profession, then you must include it in income at the value which you would charge your regular customers. A service would be regular income while a good which you trade may give rise to regular income or a capital gain (for example, sale of a valuable painting or land) depending on the circumstances. According to IT-490, the cost of the services, goods or property received is the same amount as the total value of the goods, property or services given up, plus any cash given as part of the barter, and minus any cash received as part of the barter Do not forget that GST/HST rules are applicable as well. There may be situations where a barter is not subject to tax. For example, a mechanic who is normally an employee and decides to fix his/her neighbor's car in exchange for babysitting. The mechanic does not do this on a regular basis. However, if this activity were to become more frequent, then it may be viewed as a business in nature and would be taxable.
Where the transaction is not at arm's length, one party may end up getting more in exchange for what their offering is worth. Where the service/good provided is undervalued, it must still be recorded at the value that it would have been worth if the trade was equal. The cost of the goods/services received is restricted to its fair market value. According to the bulletin, where the goods or services given up cannot readily be valued but the goods or services received can, the Department will normally accept the value of the latter as being the price at which the transaction took place if the parties were dealing at arm's length. Speak to your tax professional when you need to clarify your situation.
So, in a nutshell, the occasional trade among friends and neighbors seems to be exempt until it reaches the point that it appears to be a business. Similar to flea markets where you may participate the odd time. However, once it looks like a business similar to some of the ones on E-Bay, for example, you must consider the tax implications. Happy bartering!
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Article Tags: bartering, tax implications
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About the Author: Brenda Parker RSS for Brenda's articles - Visit Brenda's website
Brenda Parker operates Scotia Accounting and Tax Services located in Stellarton, NS, Canada. After graduating summa cum laude from St. Mary's University in Halifax with a B Comm in Finance and a BA in Economics, she worked for a national grocery firm in various departments with her last role being assistant manager of Taxation. During this time she attained her Certified General Accountant's designation. Since getting her CGA, she has worked in various management/accounting positions for government ,public accounting firms, and as controller of a regional hotel chain and a new car dealership. She is a Simply Accounting Certified Consultant and Quickbooks partner. In her accounting practice she has served both large and small clients in a wide variety of sectors. From personal taxes to businesses in manufacturing, wholesale, retail and services to charities and not-for-profit organizations. She has clients from Cape Breton Island, NS to Montreal, Quebec to Calgary, Alberta and in many locations in mainland NS. All information in her articles is offered without prejudice and she advises readers to consult a professional accountant in person in regards to their personal situations. Click here to visit Brenda's website   Whats New for 2009 Personal Tax Returns Back to School tax tips 2 Moving Expenses Are you an Employee or a Self Employed Individual Wake Up Sleepy Head Its Time to Go to Work |
Related Forum Posts
Re: How Much Do You Need To Start?
- I have been called the Bootstrapping Queen by many of my friends. I've started businesses with no money and only the ability to sell anything. Once I had an 'order' I took the deposit and invested in what I needed to deliver.
In my own consulting and business development company we are really great for clients who say, I have no money because often they really do but arent using it well, or we can share some ideas that are very low investment. The key is to focus only on revenue generating activities.
I have also developed a very strong network of freelancers and people who can help me. Bartering is great when you start too, as long as you both measure value with the same criteria.
For someone just thinking about starting, I would recommend they really do the research first. Always sell it first before building it....just be upfront about timing and delivery.
good luck
J
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