Even Barter Transactions Are TaxableBrian Jang ON November 9, 2017
When watching kids trade baseball cards on the playground, one probably doesn’t immediately think of it as a business transaction. After all, it’s a simple trade. Both children give and receive, and if one child gives away three cards to receive one that he truly desires, the trade is considered fair and equal, even if, on the surface, one child seems to receive more than the other.
Some small businesses take a similar view of the goods and services that they trade in exchange for the good and services of another, thinking of such exchanges as trades, exempt from taxes.
Unfortunately, that is incorrect.
What is Barter?
Barter, in essence, is the giving of goods or services in exchange for something in return, without the use of money. People have been bartering for as long as one person wanted what another person possessed.
In the past, a farmer without much disposable cash might provide eggs or milk to a store in exchange for other goods that they could not normally afford. Barter has proven useful for centuries, allowing those with skills the ability to gain the things they need. And while it might not be quite as ubiquitous as it once was, it is still quite common, but with a modern twist.
Not surprisingly, barter transactions are now taxable in most cases. There are some exceptions, but generally speaking, barter must be recorded and included on financial reports, and taxes must be paid. This can sometimes be overlooked by small businesses, resulting in potential tax difficulties.
Determining the amount of tax to be paid should be relatively simple and is based on the actual goods and services being offered. If for example, you are a carpenter who does work on a neighbour’s home in exchange for their plumbing expertise on your own, this is a prime example of barter and also of a transaction that would be taxable.
The CRA bases the payable tax on fair market value of the goods and/ or services that you are giving away, even if what you are receiving in return is of a different value. Therefore, if you are providing services normally valued at $2,000, you will be responsible for the taxes on that dollar value, even if you have not received money, and regardless of the value of what you are receiving in return. You will be able to deduct your costs on the goods and services that you are giving away.
There are some cases that are excluded from taxes. After all, giving away the Christmas sweater that Grandma knitted for you in exchange for something else would not be taxable. Likewise, any service that you provide or goods that you trade that you would not normally charge for over the course of your regular business dealings would not be taxable.
That means that if you are the carpenter in the above example, and you happen to be very handy in a number of areas, you would not need to pay taxes on the repairs you make to your neighbour’s television, even if it is part of your transaction, unless it is a service that you routinely offer and charge money for.
Barter remains a quick and easy way to make transactions. Just keep in mind that, unlike with kids on the playground, the taxman is keeping an eye on you.
If all this is a bit confusing to you, your best bet is to talk to an accountant. Give us a call today at 604-431-0445 for a free consultation.