Eileen Reppenhagen, Certified QuickBooks ProAdvisor
It all sounds so good. We all do it. It starts like this…I will do your accounting. You are going to coach me on being a success, look after my kids for the weekend, fix my car, advertise and market my business, clean up my garden, power wash the house and deck, clean the yard, fix the plumbing and electrical, paint the fence, re-roof the house, dog sit and give me a massage.
A dream comes true. I am looked after; the stuff I tolerate, is dealt with. I will succeed because all the stuff that needs taking care of is dealt with.
Or is it?
What should you be asking yourself before you leap into this quagmire?
Were any or all of these expenditures in your budget? Are any of these a luxury? What happens if they revert to luxury from necessity, due to a change in your lifestyle or health?
What is the opportunity cost of doing this work, over working for a cash paying client? Does it mean that you don’t earn enough cash to pay your other bills when they come due?
The same goes for your client. Would they afford your services if you paid them for the work they do for you or would they choose to spend their money on something they consider more pressing.
Will they come to resent you?
I have learned that not everyone has the same set of values. You may think your services are worth $400. They may think that it is only worth $200. This of course, is after comparing your bill with their friends in the pub last Friday. You think it’s only worth $300 to paint your fence and they think it is absolutely worth $600.
Where are the contracts for service? You have an engagement letter that covers your services to them. Do they have a similar contract for you, setting out what they will do for you, what it will cost, what the completion date is? If it is ongoing, when needed, as needed services, are you sure they will be able to service your needs when your car breakdown or the plumbing is leaking at midnight?
What happens when things go wrong on your end and you find yourself in a conflict of interest or you discover that they are not telling you the truth about their income and you make a decision that you can not associate with them any longer?
What happens when they don’t deliver on their promises or what you expected to receive is not what is delivered? What happens when you owe them more than they owe you?
What happens when their fees go up? What is fair market value? What happens if they are family or other non arms length parties?
Are they in the business of doing what they do for you? What happens when they claim they aren’t in the business and it is just a hobby? Do you believe them?
Remember, you are filing their tax return.
What happens when the services they provide for you are not deductible because your business does not occupy more than 50% of your home, so the landscaping is not an allowable deduction? What if you can not claim their fees because they are not a registered massage therapist, but they didn’t tell you that up front?
What happens when they don’t invoice you until months after the services were provided? What happens if the bill is twice what you expected?
What happens when they work for you in your office and overhear what you say to other clients? Consider a non disclosure agreement?
Consider motivation. Whose work will you do first, if push comes to shove? I’m sitting here staring at a box right now for my fitness trainer. What’s my motivation to work on the fitness trainer’s tax return versus the box for someone else, who pays cash? What if I need that cash to pay the mortgage? How much do I need that fitness coaching?
What happens if you decide you don’t want their services or can’t take the time right now to work with them so that they can fulfill their end of the bargain? How long should they have to wait until you have time?
Expectations. We all have expectations that barter transactions are going to work out so well.
The reality is often quite different.
What do I recommend?
Unless you plan to walk away and lose it all, stay out of barter transactions. Never expect that it will turn out as planned. Be prepared for the unexpected and have an alternative arrangement. Of course, I end up in barter situations myself and I hate it when it doesn’t work out.
Consider a plan to exchange cheques at pre-arranged times for whatever the balance is at that date, to clear up both sides of the agreement. There is nothing worse than when you owe them $300 and they owe you $3,000 or vice versa.
Communicate in writing. Insist on written agreements or contracts for both parties. Lay out expectations in writing about what you expect, what it will cost and what the total is expected to be. Lay out expectations about the time frame in which it is going to be accomplished.
Do progress billings every month and exchange cheques. This is hard to do especially when you did your work and they have to complete their side of the deal, but it requires your participation. In other words, there is work piled up that will pay cash. If you spend time with them, it doesn’t generate cash; it just pays off the debt. Guess who gets put on the back burner.
Charge fair market value and charge the applicable taxes, PST, HST/GST. Agree that if your fees increase for other clients, your fees increase for this client too. Include that in your engagement letter.
Where do you go for guidance?
One of the very first sections in the Income Tax Act, Section 3 and Section 9 address the requirements regarding income inclusion of barter transactions. You must include all income for the year for each office, employment, business and property. It does not matter how you received payment, whether in cash or in kind.
Barter transactions are considered in IT-490 as acceptable forms of exchange of services and consideration. You can find clarification about these types of transactions and how to value them in IT-490 Barter Transactions.
Be aware of non arms length transactions. Section 69 of the Income Tax Act can kick in to deem the proceeds at fair market value, even though the proceeds are a different amount.
Barter can also involve payments to third parties, rather than directly to the person you hired. You might pay for something for that person rather than pay them directly. Indirect payments are recognized by the Income Tax Act in S. 56(2) and discussed in IT-335R.
Make sure you or the other party carries WCB coverage if the work takes place on your property and it is more than the minimum number of hours. Ensure that the employment/self-employment rules are met or you could find yourself offside on a payroll audit.
Document the transaction very carefully if it is non arms length assistance with your business. If you don’t write and pay the actual payroll cheque in lieu of room and board, (a foreign concept to one auditor I met), or you buy them a new computer or some furniture for when they leave home instead of paying them, you could find yourself staring up the nostrils of an auditor who claims that you can’t write off the expense and the family member who has included the income on their tax return can’t reduce it. Say hello to double taxation.
Ever wondered about those barter companies? Have you ever accounted for the transaction fees and interest on a barter account with one of those barter companies where the account is offside and your client owes? You will never consider involvement in one of those schemes if you have ever accounted for those fees. Usurious comes to mind, who in their right mind would ever agree to those exorbitant fees and interest rates?
It all sound so good. We all do it. It starts like this…I will do your accounting… Think twice. Ask a lot of questions and get it in writing.