As a small business owner or freelancer, you may occasionally decide to trade your products or services for another individual’s products or services. Not only is this an efficient transaction, but it also fosters a mutual relationship with another company. Even if you have a barter exchange with a customer or client, you still need to document the transaction for financial reporting and paying taxes to the Canada Revenue Agency.
How a Barter Exchange Happens
For example, you may install and supply brand-new hardwood floors in a client’s house. In exchange, the customer agrees to send you a year’s worth of organic whole chickens at three chickens per week. How you conduct the transaction is up to you and the customer, but you must understand the CRA treats barter transactions as if they’re cash. Instead of earning money on the deal, you earned 156 whole organic chickens, but you still owe income taxes or even GST/HST on the transaction.
How to Report and Document Barter Exchanges to the CRA
You may barter and trade in your personal life with no tax consequences, but if you barter and trade products or services you normally sell as part of your business, you must report those transactions. The CRA considers the barter exchange an equal trade of goods, meaning the cost of the installed hardwood flooring was equal to the organic chickens. Make a note describing the transaction for your records, and include the fair market value of the item you receive as business revenue on your tax return on Form T2125.
Take a look at how to determine a fair market value, which is the cash value of an item your customer typically sells.
- The organic whole chickens weigh an average of 5 pounds.
- Your customer normally sells the chickens at $5 per pound.
- Each chicken costs $25.
- The amount the customer paid to you is 156 chickens times $25 per chicken.
- The amount you record for tax purposes comes to $3,900.