Value In Use Or Value In Exchange, A Serious Tax Issue To Consider Before Bartering
By: Ainsley Brown
In a previous post, As companies battle the recession, bartering comes in handy, Carsten Lexa a contributor here at Commercial Law International, gave us an introduction to bartering schemes and their advantages for cash strapped businesses battling the global recession. This piece is an attempt to build on his fine work by expanding the discussion into the realm of taxation.
Bartering in the simplest of terms is a market transaction where the medium of exchange is goods and services rather than legal tender; in effect exchange in kind. Bartering in fact is the oldest form of market transaction. However, despite its historic lineage and a lack of legal tender, bartering is none the less an exchange of value and will attract the attention of tax authorities. It is therefore prudent before individuals or companies enter such transactions that they inform themselves as much they can – ignorance of the law will supply little or no refuge when the tax-man cometh.
Bartering, as aforementioned involves an exchange of value and it must be understood that in kind transactions are treated by tax authorities in the same way cash transitions are treated; that is as being generally taxable. However, before a transaction can be taxed it needs to be valued, with cash transitions that’s relatively easy – tax the named cash price. Barter transactions, however, raise special valuation issues for tax authorities, that is to say how will the in kind transaction be valued; will it be valued on the basis of value in use to the recipient or value in exchange for the goods or services from the giver?
The following will illustration what I mean: let us say an accountant renders his/her services to an architect in exchange for the architect designing their dream home. The accountant provides $1,000 worth of services – the value in use – however he/she receives $1,800 worth of services – value in exchange – from the architect. For the purposes of income tax what value ought the accountant to use, the value rendered or received?
In Canada the approach is to us the value in exchange, that is the price normally charged for the goods or services rendered. In the above example the accountant would include the $1,000 he/she would have charged and not the $1,800 value of the architect’s services received on his/her income tax. While this is the normal approach, Canadian tax authorities will use the value in use – the value to the recipient – where the price normally charged for the goods or services given cannot be readily ascertained.
