The subject of barter came up at a networking meeting I was attending and I thought it would be an interesting subject for Tidbits. Barter is where you exchange your product or services for someone else’s. For example, you sell widgets and happen to need a website, and fortunately, there is a website person that needs your widgets. In this case you trade your widgets for a new website.
Of course, Canada Revenue Agency has their take on barter too:
In its simplest form, bartering consists of trading by exchanging one commodity for another. Recently, however, the practice of bartering for goods and services has evolved into a sophisticated computer-controlled system of commerce proliferated by franchised, member-only barter clubs, where credit units possessing a notional monetary unit value have become a medium of exchange.
A barter transaction is effected when any 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 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.
Your best scenario is to trade invoices: you invoice the website developer for your widgets, and they invoice you for the website. If the amounts are not quite the same, that’s okay, either of you just pays the difference.
CRA considers barter transactions to fall within the scope of the Income Tax Act. Therefore, barter transactions result in income or expense for your business. This applies if you happen to barter capital equipment you’re not using for another piece of equipment too.
The barter transaction could also result in a personal draw, if you buy something that is not for the business. For example, you sell your widgets for the use of a cabin for a vacation. In this case, the cabin vacation is personal, and, therefore you cannot claim it as an expense. However, you will have to claim the sale of the widgets as income.
I bet you’re now wondering about sales taxes, do I charge GST/HST or PST? Yes, you must treat a barter transaction as a regular transaction and charge the appropriate sales taxes. For example, you sell your widgets to the website developer and you agree on a $500 exchange, we’ll say this takes place in British Columbia. You must charge the website developer the GST/HST (5%) & PST (7%), which is $60.00 for a total of $560.00. The website developer would charge you just the GST/HST (5%) $25 equals $525.00.
Wait, there’s a difference here of $35.00 as you must charge higher taxes than the website developer. You could have to have the website developer pay the $35.00. Or, the website developer could just charge you $560.00 and break out the GST/HST (5%) and his invoice would be $533.33 plus $26.67 GST/HST. This could happen even if you’re trading service for service, as some services must charge PST (here in BC).
There could be the situation where you are bartering with someone in another province. You would charge them sales taxes based on location and they would do the same to you. For example, if you are in Ontario and the other business is in British Columbia, then you would charge them GST/HST (5%) & PST (7%) and the BC business would charge GST/HST of 13%. [Note: you could just charge GST/HST if you’re not registered for the PST in BC and you don’t sell to BC very often and the BC business would self-assess the PST].
From the example above, you’re in Ontario and the website developer is in British Columbia. You would charge $500 plus GST/HST & PST = $560.00 and the website developer would charge $565.00, a difference of $5.00. The website developer could just write off this difference or one of you could adjust the invoice to match the other. If you’re not registered for the BC PST, then you’d just charge $525 and we’re stuck with a difference of $40.00. In this case, it’s best to adjust your invoice up to the $565 of the website developer.
Barter can be a great way to help your business along in tough times, or when you’re first starting out. However, as with anything, too much of a good thing can hurt you. If you take too much barter, you may find your cash flow suffers greatly, and in some cases it’s caused a business to go under. I recommend you take no more than 10% per year for barter transactions.
What is Income Splitting and How Can it Reduce Your Tax Bill?
Summers Coming! Self-employment Ideas you can do in the Sun
Home-based Business? How to Make Your Home Client Friendly
Home-based Business? Some Ideas for Places to Meet Clients Outside Your Home
Should You Pay Yourself Salary or Dividends When You Incorporate Your Business?
Five Common Mistakes That Small Business Owners Should Avoid
Do You Know Why the CRA Uses a Profit Test for Business?
Self Employed? Do You Know What Your Tax Obligations Are?