We’re close to the tax filing deadline and panic is in the air as tax season comes to a head.
As convoluted as our tax code is, credit card rewards may introduce another layer of complexity. The average Canadian does not have to pay taxes on their credit card points, miles or cash back earned. However, the Canadian Revenue Agency (CRA), does have a set of rules which govern how employees may or may not benefit from rewards accumulated from work related expenditures.
Most rewards that are earned by Canadians are treated by the CRA as a discount, as opposed to income, and thus non-taxable. Just like you’re not taxed on the economic benefit of coupon savings, or store discounts, you’re also not taxed on incentives your credit card company provides to encourage you to use their card.
It’s also hard for the CRA and consumers to value rewards because they’re issued as a proprietary currency. For example, what’s the market value of 25,000 Aeroplan miles? It depends on which flight you redeem your miles for, when you redeem, and what class of ticket you purchase. Furthermore, you would have to know the value of your alternatives to ascertain the true market value of the ticket, if you were to book the flight through cash – an impractical task.
As a result, the CRA has given consumers, retailers and banks a free pass when it comes to reporting rewards earned from credit card spend or from credit card welcome bonuses.
However, the CRA gets a little more finicky when it comes to consumers earning credit card rewards from work-related expenditures.
You’re allowed to collect frequent flyer miles if you book a business trip on your personal card, even if your employer reimburses you. The CRA is very clear in stating that the employee does “not have to include in their income the value of the rewards they received or enjoyed from the points they collect on these business trips.”
However there are several cases where an employee would have to pay taxes on their earned credit card rewards:
- If an employee convert points to cash. Again, this is only for individuals who earned their points by using their credit cards for business expenses, and were subsequently reimbursed for those expenses by their company. If you redeem your rewards as points, miles or cash back you do not have to report them as a taxable benefit. However, if you convert your points to cash, as you can with some programs, then you would have to declare the cash value of the points on your returns. The lesson is, keep your points in their original form.
- Your employer is giving you points as an alternative form of remuneration. Your employer can’t simply award you 100,000 miles every year as part of your annual bonus. Nor can they allow you to pay for office supplies with your personal credit card, so you can collect rewards, and then reimburse you. That would also be considered a form of remuneration.
- The plan or arrangement is a form of tax avoidance. This is a catch-all rule, whereby the CRA is giving itself the latitude to rule against tax avoidance schemes it hasn’t conceived of, but breach the spirit of the law.
If you meet any of the above conditions, you would have to declare the fair market value of any personal rewards you received on your income tax return.
One area many entrepreneurs have to watch out for is when they use their company credit card to pay for business expenses. The CRA mandates that if the company controls the points, i.e. it earns points from its own business credit card, it cannot give those rewards to an employee for personal use, without those points becoming a taxable benefit.
If an owner-operator uses the company’s business credit card, as opposed to their personal credit card, to book their business travel, they would not be able to redeem the company’s rewards for personal use without creating a taxable benefit, because they would be receiving the rewards as an employee. Better to use their personal credit card, earn their rewards and have the company reimburse the expenses.
In the end, consumers are clear to collect and use as many rewards as they can without having to worry about paying taxes on the market value of their points. The only complication comes when collecting rewards from business expenses.