Charitable Receipts for “Barter Units”
By Alexandra Tzannidakis
A quick Google search will reveal the popularity of so-called ‘barter clubs’, where members exchange goods or services as opposed to paying for them with legal tender. Such arrangements are especially popular in times of economic recession, as one might well imagine. Both charities and prospective donors may be interested to know that the CRA will allow the issuance of charitable tax receipts for donations of barter units.
In a 2008 Income Tax Ruling (ITR),[1] the CRA considered a situation in which an individual was a member of a barter club and donated units of ‘barter dollars’ to a registered charity. Barter clubs can function in a variety of ways, but in this specific situation the individual received the units as ‘payment’ for services rendered or goods sold by his business during the taxation year. Essentially, the units operated like traditional currency. It is important to note that the individual included the transactions for which he received the barter units when calculating his business income for the year.
The first question dealt with in the ITR was whether the barter units counted as ‘property’ under subsection 248(1) of the Income Tax Act and therefore could potentially constitute a receiptable gift. Subsection 248(1) defines ‘property’ as follows:
“property” means property of any kind whatever whether real or personal, immovable or movable, tangible or intangible, or corporeal or incorporeal and, without restricting the generality of the foregoing, includes
(a) a right of any kind whatever, a share or a chose in action,
(b) unless a contrary intention is evident, money,
(c) a timber resource property, and
(d) the work in progress of a business that is a profession
The CRA decided that this very broad definition must include barter units as long as they give the holder the right to acquire goods and can be transferred to a third party.
The other main question addressed in the ITR was how to determine the value of the barter units for the purposes of receipting. Our readers will recall that the eligible (i.e. receiptable) amount of a gift is the amount by which the fair market value of the gifted property exceeds the amount of the advantage (if any) received by the donor. Put simply, if a donor makes a donation of $150 in cash (or of an item with a fair market value of $150) to attend a dinner worth $100, she will receive a charitable tax receipt for $50.
This is very straightforward for cash donations, but determining fair market value (FMV) for in-kind donations is frequently a tricky proposition. The Act prescribes that the FMV of an in-kind gift is the lesser of (a) the FMV of the gifted property, and (b) the cost of the property to the donor.[2] In the ITR, the CRA allowed that the cost of the barter units for the donor could be equal to the total value of the goods, property or services that the donor gave up to acquire the units (minus any cash transactions that may have been involved in the barter).[3]
Given the flexible nature of barter systems, this FMV-vs-cost definition raises some additional questions that are not addressed in the ITR. Suppose your barter club allows you to acquire barter units in return for your promise of rendering services or goods. This seems like a natural type of buy-in for getting people started in the barter system. However, if you have not yet issued services or goods for the units that you are trying to donate, then is your “cost” (and therefore your receipt) equal to zero? Considering that amounts received for services not yet rendered or goods not yet delivered are counted as taxable income, we suspect there is an argument to be made for the “cost” of such owed services being equal to their FMV, but are not aware of any cases in which this proposition has been tested. Certainly, the possibility that no one will ever claim the goods or services that you have promised in return for the barter units calls their potential cost to you into question.
Although barter units are frequently styled as “barter dollars”, it is unlikely that CRA auditors will take the barter units at face value; donors should expect that the auditors will try to assess the true FMV of the items for which the barter units were received. Nonetheless, if the transactions are well-documented, both donors and charities alike may want to open themselves to the possibilities of using barter units as in-kind receiptable charitable donations.
[1] Document No. 2008-0274411I7
[2] ss. 248(35)
[3] More general information from the CRA on the tax implications of barter transactions can be found in Income Tax Interpretation Bulletin IT490 – Barter Transactions (http://www.cra-arc.gc.ca/E/pub/tp/it490/it490-e.html)