The “Gig economy” represents an ever increasing pool of resources that continues to increase supply and demand of freelance work due to the continuous technological innovations that make it possible to connect within this space. (Think of sites such as UpWork, Fiverr) The freelance market is thriving due to the ease of access to talent, relative efficiency and timeliness offered.
This is great without question for individuals that are interested in being a part of this market and building their brand or adding to existing employment income. But are we completely aware of how to deal with the income and expenses that come along with non-traditional engagements within the gig economy?
Not only are individuals diving deep into freelance work and building their portfolios, but start ups are engaging and finding talent to support their build from the ground up.
What is becoming a common practice, which is in fact an old practice, is the barter of services. Why do individuals engage? It is desirable for those who are constrained for cash but have a need for services or goods and for individuals emerging into the market to gain clients to build a portfolio. Certainly from a cost-benefit perspective the exchange sounds like a win-win.
There are however considerations that must be thought of:
Are services rendered under a barter agreement taxable income and a taxable deduction?
Let’s explore the proper tax treatment for Barter Transactions.
The answer is yes, services rendered are taxable and services received are deductible. The CRA’s position is that regardless of whether cash has been exchanged for arms-length transactions the exchange is considered income and subsequently considered a deductible expense for goods and services received.
The next point to consider is how do we determine the value of the income and expense. Fair-market-value, the amount that an individual would pay for the good or service is the amount to be reported.
The next consideration is Sales Tax. If an individual or company is GST/HST registered, a non-cash transaction will have a cash flow impact for Sales Tax reporting. A registrants GST/HST return must include the amounts that would have been received on the sale and they are eligible to claim an input tax credit for the good or service they would have purchased, provided it is not zero-rated or exempt.
Let’s demonstrate this with a simplified example:
Stefanie agrees to prepare a tax return for Joe Smith in exchange for the design of her website.
Stefanie would typically charge $1,500 for preparing a tax return as required by Joe and Joe would typically charge $1,300 for the development of a website.
On her business return, Stefanie would include $1,500 in Revenue. This is the amount that Joe would have paid if this was not a barter exchange. She will also deduct $1,300 for website development expenses.
Joe would include $1,300 in his business return as Revenue and would be able to deduct $1,500 for accounting expenses.
On their GST/HST returns, they would report the following:
What we can see here is that Stefanie will have an increase in Sales Taxes Payable and Joe a decrease.
Again, a non-cash barter transaction creating a cash impact when properly reported.
The next question that many will ask, “do I really HAVE to claim it?”
Yes, you do. That’s what the Income Tax Act states and what the CRA enforces. If this isn’t enough to convince you, I encourage you to take the following scenario into consideration.
You enter into a significant barter transaction with an individual/company. You do not report the transaction for income or sales tax purposes. The individual that you were involved in the exchange with reported an expense for the good/service that you provided. The individual/company is audited by the CRA. The barter transaction comes under scrutiny and the CRA requests details of the transactions and as a result of the investigation the CRA proceeds to verify against your income tax return. What is the consequence of failing to report income?
First time offence:
The federal and provincial or territorial penalties are each equal to the lesser of:
10% of the amount you failed to report on your return for 2018 or
50% of the difference between the understated tax (and/or overstated credits) related to the amount you failed to report and the amount of tax withheld related to the amount you failed to report
Multiple offences in preceeding years:
you may have to pay a federal and provincial or territorial repeated failure to report income penalty.
The CRA is very much aware of the increase of barter transactions, we live in an era of sponsorship. The exchange of goods and services for promotion, you can rest assured that the CRA wants to protect the integrity of the tax system and ensure that all individuals that should be subject to taxes are reporting accurately.
Ensure that you are following the regulations and that your filings are in accordance with that of your partners and potential third-parties that could be reporting on your behalf as well.
As technology continues to expand our reach within the freelance market, other technologies continue to provide the CRA reach to access information, particularly with the access that social media provides.
If you are unsure – ask your tax advisor about any transactions that may be subject to barter consideration.
More info can be found on the CRA website: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/report-business-income-expenses/completing-form-t2125/part-1-business-income.html