4 November 2008 External T.I. 2008-0280701E5 - Barter Transaction - Income Tax & GST Implications

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues:

1. What amount should be bought into income by a person providing services in a barter transaction?

2. On what value should GST be collected and remitted, where a person provides services in a barter transaction?

Position:

1. In an arm's length situation, the amount that the person would normally have charged a stranger for his services.

2. GST should be collected and remitted based on the fair market value of the consideration at the time the supply was made.

Reasons:

1. Our position is outlined in paragraph 7 of IT-490: "Barter Transactions".

2. Subsection 153(1) of the Excise Tax Act.

								2008-028070
XXXXXXXXXX 							Renee Sigouin
(613) 957-2128
November 4, 2008

Dear XXXXXXXXXX :

Re: Barter Transactions

We are writing in response to your email of June 4, 2008 wherein you requested our comments regarding the income tax, Goods and Services Tax ("GST") and Provincial Sales Tax ("PST") implications of a barter transaction.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.

You have presented the following hypothetical situation for our comment. A lawyer invoiced his client $150 for legal services. The lawyer and his client are members of the same barter exchange network. The invoice was paid through the barter exchange network by accepting a $15 credit (barter units) on account.

The CRA's position with respect to the income tax implications of a barter transaction is outlined in Interpretation Bulletin IT-490: "Barter Transactions". The principle of a barter transaction is described in paragraph 3 of IT-490 as one where "two persons agree to a reciprocal exchange of goods or services and carry out that exchange usually without using money. In a barter transaction between two persons who are dealing with each other at arm's length, it is a fundamental principle that each of those persons considers that the value of whatever is received is at least equal to the value of whatever is given up in exchange therefor."

There are no specific provisions in the Income Tax Act (the "Act") which deal with barter transactions. The CRA takes the view that barter transactions are within the purview of sections 3 and 9 of the Act. In the case of services bartered by a taxpayer for either goods or services, paragraph 5 of IT-490 states that "the value of those services must be bought into the taxpayer's income where they are of the kind generally provided by him in the course of earning income from, or are related to, a business or a profession carried on by him. Examples are a dentist or the owner of a plumbing business who agrees to fix someone's teeth or drains (respectively) in return for services or property provided by the other party."

In determining the amount that must be bought into income in respect of a barter transaction, paragraph 7 of IT-490 states that "in arm's length transactions, where an amount must be bought into income or treated as proceeds of disposition of capital property, that amount is the price which the taxpayer would normally have charged a stranger for his services or would normally have sold his goods or property to a stranger".

In your example, the lawyer initially invoiced his client $150 for the legal services provided by him. As the lawyer's services were of the kind generally provided by him in the course of earning income, it is our view that $150 should be bought into his income in respect of the barter transaction. This is consistent with the underlying principle that the value of whatever is received (i.e., the barter units) is at least equal to the value of whatever is given up in exchange thereof (i.e., revenue of $150 from the invoice).

The Excise and GST/HST Rulings Directorate has reviewed your inquiry and has provided the following comments regarding the GST implications. For GST purposes, the lawyer should collect and remit GST on $150.00 as provided for in paragraph 153(1)(b) of the Excise Tax Act ("ETA"), on the assumption that $150.00 represents the fair market value of the supply. We note that GST will be imposed under subsection 165(1) of the ETA, which states that "every recipient of a taxable supply made in Canada shall pay to Her Majesty in right of Canada tax in respect of the supply calculated at the rate of 5% on the value of the consideration for the supply".

The value of consideration upon which tax is imposed under section 165 of the ETA is outlined in subsection 153(1) which states that the value of the consideration, or any part thereof, for a supply shall be deemed to be equal to:

(a) where the consideration or that part is expressed in money, the amount of the money; and

(b) where the consideration or that part is other than money, the fair market value of the consideration or that part at the time the supply was made. We note that section 181.3 of the ETA applies to the treatment of the supply of barter units when a barter exchange network has been designated by the Minister. This section is only relevant to the supply of the barter units by the lawyer's client to the lawyer. The treatment of the supply of the barter units may or may not be taxable depending on whether the barter exchange network is designated. However, this does not relate to the abovementioned example regarding the treatment of the supply of the lawyer's services to his/her client and there are no special rules in section 181.3 related to that supply.

The question of determining the fair market value of the lawyer's services is based on general principles and that determination should be undertaken by the registrant and would be subject to review by the CRA during an audit.

We are unable to comment on the PST implications of your example. We suggest that you contact the British Columbia Ministry of Finance in relation to this matter.

We trust these comments will be of assistance to you.

Yours truly,

Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch