14 August 1996 External T.I. 9614785 - BARTER TRANSACTION

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

What is the tax treatment of a transfer of shares for services rendered?

Position:

Position of the Department with respect to barter transactions is in IT-490.

Reasons:

			5-961478
XXXXXXXXXX		R. Gagnon

August 14, 1996

Dear Sir:

Re: Barter Transaction

This is in reply to your letter of April 25, 1996 wherein you requested our opinion concerning the tax treatment with respect to the following situation.

Mr. X owns one ninth of the shares of Mco, a public corporation in the business of acquiring and developing resource properties. He is also an officer and a director of Mco. Mr. X is a trader in the shares of Xco and holds the shares of Xco as inventory. Mr. X enters into an agreement with a stock promoter for services to be rendered by the stock promoter with respect to the promotion of the shares and business of Mco. In exchange for the services rendered, Mr. X will transfer a specified number of shares of Mco to the promoter in three separate tranches if the trading price of Mco's shares reaches targeted amounts. If the shares do not reach the first targeted trading price at a certain time, the agreement is terminated without consideration. Mr. X and the promoter deal with each other at arm's length.

Comment

The situation outlined in your letter appears to relate to transactions that have either taken place or are proposed transactions with identifiable taxpayers. If you wish the Department's view with respect to completed transactions, you should write to your client's Tax Services Office. Moreover, as indicated in Information Circular 70-6R2, we do not express opinions on proposed transactions otherwise than by way of advance income tax rulings. While we are unable to comment on the income tax consequences attendant on the specific facts described in your letter, we provide the following general comments which we hope will be of assistance to you.

There are no specific provisions in the Income Tax Act which deal with barter transactions. Consequently, the general rules applying to the computation of income from a business apply. The position of the Department with respect to barter transactions is described in interpretation bulletin IT-490.

In the case of property in inventory bartered by a taxpayer for services in arm's length transactions, the proceeds of disposition will be the price that the taxpayer would normally have sold his property to a stranger at the time of the transfer. The taxpayer deducts the cost of the property in inventory transferred in the computation of his business income. The cost of the services received by him is the same amount as the value of the property given up.

The question of whether the amounts paid to a promoter would be deductible in computing income would depend on all the relevant facts and it is not possible to offer an opinion on this question in a hypothetical situation. It would depend in particular, on whether the property is effectively inventory of the shareholder and not capital property, and whether the expense could be regarded as being a reasonable business expense incurred for the purpose of earning income from the business. Moreover, even if it was determined that the expense was a deductible business expense, it should be noted that an expense incurred for services is not necessarily deductible in the year it is paid.

It is the position of the Department that the timing of a deduction for tax purposes must generally be established in accordance with generally accepted accounting principles unless a specific provision of the Act requires a departure therefrom, taking into account whichever method presents the truer picture of a taxpayer's income by matching the expenditure with the revenue (matching principle). Where expenses incurred in a taxation year can be linked with specific items of income earned in another taxation year, they should be deferred and deducted in the taxation year where the income is earned.

The foregoing opinion is not a ruling and, in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, is not binding on the Department.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch