Tim Cestnick is managing director at WaterStreet Family Wealth Counsel and author of 101 Tax Secrets for Canadians.
It's true. I'm a Toronto Maple Leafs fan. Go ahead and chuckle. My kids will tell you I bleed blue and white. My son, Win, has different loyalties when it comes to hockey. He likes the Canucks. He'll come to his senses one day. "Dad, if I was Brian Burke I would trade the entire Leaf's offence - minus Phil Kessel - for two composite sticks and a bunch of pucks, " he often says.
That got me thinking: What would be the tax implications of trading Lee Stempniak for a Bauer One-Ninety stick? The truth is, the Canada Revenue Agency (CRA) has put its mind to this issue (well, issues like it) and made some comments about barter transactions.
What exactly is bartering anyway? Very simply, it's the act of two parties trading by exchanging goods and services with each other. It's easier than ever to barter with other parties. All you have to do is go online and search the Internet for websites that facilitate trading with others who might want the goods or services you can provide. There are even barter clubs where members earn credits (like dollars) for providing goods and services, and where those credits can be exchanged for goods or services offered by others. These credits become a medium of exchange possessing a notional monetary unit value.
Here's a real question: What will CRA think of your bartering? The taxman has spelled out his view in Interpretation Bulletin IT-490. Do you believe barter transactions are tax-free? Yeah, right. Think again. CRA's view is that "barter transactions are within the purview of the Income Tax Act."
So, there's going to be a tax implication when you barter. CRA's view is that giving up a good or providing a service as part of a barter transaction should be treated as though you have received a payment for that good or service you've given away. What's the value of this "payment" that you are deemed to have received? It's the fair market value of the good or service you've provided to the other party.
Even where the value of what you've received in return is arguably different than the value of what you've given up, CRA will make the assumption that the values are equal to what you've given up. So, this is the amount you'll have to include in your income.
Now, does all of this mean that you'll face some tax if you give your cousin Harold your Toronto Maple Leaf hockey jersey in exchange for his Bobby Orr rookie hockey card? Not quite. You see, barter transactions are only taxable when the goods or services you're giving up are of the kind generally provided by you in the course of earning income from a business or a profession carried on by you. An example would include a dentist or a plumber who agrees to fix someone's teeth or drains, respectively, in return for services or property provided by the other party.
If you're an employee (a mechanic, for example) who provides help once in a while to a friend or neighbour in exchange for something, you won't face tax unless you make a regular habit of providing these services for cash or barter. And if you're a dentist who agrees to fix someone's drain, or a plumber who agrees to pull someone's teeth (not your usual business) in exchange for something, you should avoid the tax net (unless you regularly do these things for cash or barter).
Now, if you have trouble placing a value on the goods or services you've given up in a barter deal, CRA will allow you to use the value of the goods or services received as the amount to be reported.
Finally, the amount to report as income could be reported as a capital gain, or business income, depending on how you would have reported the profit had you received cash in the transaction instead. And the cost of the goods or services you provide can be deducted when calculating the tax owing on the transaction.
If you're a member of a barter exchange and you receive credits for goods or services you provide, there's an argument, based on the court case Linett v. MNR (1985) that the value of your barter credits (and hence the amount on which you pay tax) should be less than one dollar for each one dollar credit in your account because there are limitations to the credits that make them less attractive than real dollars.