29 August 2000 GST/HST Interpretation 32293 - Barter Transactions

Dear XXXXX:

Thank you for your e-mail messages addressed to Alyson Trattner and Richard Aronoff, General Operations and Border Issues Division, concerning the application of the Goods and Services Tax (GST) to various barter transactions. In response to your enquiry, we are providing the following general information.

On April 1, 1997, the provincial sales tax in three participating provinces, Newfoundland, Nova Scotia and New Brunswick, was harmonized with the GST to create the Harmonized Sales Tax (HST). HST applies to the same base of goods and services as the GST, at a rate of 15%. Of this, 7% represents the federal component and 8% represents the provincial component of HST.

In general, a barter transaction involves an exchange of property (or services) between two persons. For GST purposes, this exchange of property will constitute two supplies of property, one made by each of the persons. The GST is generally payable by the recipient of a taxable supply made in Canada at the rate of 7% of the value of the consideration for the supply.

Section 153 of the Excise Tax Act (the "Act") contains the rules for determining the value of the consideration for a supply including supplies made as a result of a barter transaction. This section provides, in part, that if the value of the consideration for the supply is expressed in money, the value of the consideration will be the amount of money. However, if all or a part of the consideration for the supply is other than money, the value of the consideration is equal to the fair market value of the consideration or that part at the time the supply was made. Subsection 153(2) of the Act provides that where consideration is paid for a supply and other consideration is paid for one or more other supplies or matters, and the consideration for one of the supplies or matters exceeds the consideration that would be reasonable if the other supply were not made or the other matter were not provided, the consideration for each of the supplies and matters must be reasonably attributed to each of those supplies and matters. In essence, this subsection is an anti-avoidance rule that applies where there has been an unreasonable apportionment of the consideration for one of those supplies or matters.

To determine the amount of GST payable where a barter transaction occurs, the value of the consideration for the supply made by one person is normally the fair market value of the property received from the other person. The Act provides for exceptions to this general rule related to certain inventory swaps and "trade-ins". There are currently proposed amendments to the Act which, if enacted, would also provide other exceptions including one related to certain exchanges involving barter units.

Inventory Swaps

Where there is a barter transaction between two registrants who exchange property of the same class or kind, subsection 153(3) of the Act provides that if the property is acquired by the recipient and the consideration (or that part thereof) is acquired by the supplier as inventory for use exclusively in the course of commercial activities, the value of the consideration (or that part thereof) in the exchange transaction is deemed to be nil. As a result, the registrants would not be required to collect and remit tax on the fair market value of the property exchanged. Such product-for-product exchanges are common among dealers in the oil and gas and automobile industry.

Policy Statement P-221, Meaning of the Phrase "a Particular Class or Kind" as Found in Subsection 153(3) of the Act, provides our position as to when two properties are considered to be properties of a particular class or kind; specifically, all of the following criteria must be met:

•   they are similar in their constituent materials and general appearance;

•   they have the same primary end-use;

•   they have been subject to a similar level of processing or refining, where applicable; and

•   they are capable of performing the same primary functions.

For more information on this issue, you may wish to consult the enclosed policy.

Trade-ins

Where a consumer (or a business that is not required to charge tax on a particular supply) purchases a good from a registrant and provides a used good in full or partial payment of the purchase price of the good, the registrant supplier is only required to collect tax on the difference between the price of the newly acquired good and the amount credited with respect to the used good provided in trade (i.e., the trade-in). Specifically, where subsection 153(4) applies, the value of the consideration for the newly acquired good is deemed to be equal to the amount, if any, by which the value of the consideration for that supply exceeds the amount credited in respect of the trade-in. For this special treatment to apply, the trade-in must be for consumption, use or supply by the supplier in the course of commercial activities and the person trading-in the property must not be required to collect tax on the trade-in.

The trade-in rules under subsection 153(4) do not apply to any supplies made on or before April 23, 1996. This subsection was added as a consequence of the amendments to section 176, which eliminated certain notional input tax credits. The enclosed technical information bulletin B-084 provides further information on the application of the GST to transactions involving trade-ins.

Barter Networks

The practice of bartering has evolved into an industry that consists of member-only barter clubs or "networks". In order to facilitate trading among their members, most networks use what is commonly referred to as "barter units" as a medium of exchange. Barter units, however, do not fit the definition of "money". Therefore, for GST purposes, the provision of a barter unit is a supply of an intangible personal property.

Proposed section 181.3 of the Act provides for the designation of barter exchange networks and the GST treatment of transactions involving the provision of barter units by a member of the network. For example, if a lawyer (registrant), who is a member of a designated barter exchange network, provides professional legal services to another registrant, who is also a member of the network, in exchange for barter units having a value of $100, the lawyer is required to collect tax on the value of consideration for the legal services (i.e., $100). However, the member receiving the services would not be required to collect tax on the provision of the barter units to the lawyer since proposed subsection 181.3(5) of the Act deems the value of the services being provided as consideration for the barter units to be nil. Consequently, if the provisions of proposed section 181.3 do not apply to the supply of barter units, tax would generally be payable on the supply of the barter units themselves when supplied by a registrant. For your information, we have also enclosed a copy of an announcement entitled Designation Process for Barter Exchange Networks, which explains how a network may be designated in order for its members to be relieved from having to pay tax on the provision of the barter units.

The foregoing comments represent our general views with respect to the subject matter of your enquiry. Any change to the wording of the current proposed amendments or any future proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and do not bind the Canada Customs and Revenue Agency with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-4394 or via Internet at Jacques JE.Allard@ccra.adrc.gc.ca.

Yours truly,

J. Allard
Specialty Tax Unit Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate

Encl.