Are Canadian Credit Card Rewards Taxable?
Come tax season, your credit card rewards may introduce another layer of complexity to your return. In most cases, the average Canadian doesn’t have to pay taxes on their credit card points, miles or cash back earned. However, if you use a business credit card, that’s when things get complicated.
In This Article:
Why Aren’t Most Credit Card Rewards Considered Taxable Benefits?
The CRA treats most credit card rewards as a discount—not an income—and therefore they are not taxable. Just like you’re not taxed the money you save using coupons or store discounts, you’re also not taxed on the incentives your credit card company provides to encourage you to use its card, such as points or miles. 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 points? It depends on which flight you redeem your points for, when you redeem, and which ticket class you purchase.
Furthermore, you would have to know the value of all your alternatives to learn the true market value of the ticket if you were to book the flight through cash – an impractical task.
As a result, the CRA doesn’t require consumers, retailers or banks to report rewards earned from credit card spending or from credit card welcome bonuses.
How are Credit Card Rewards From Business Expenses Taxed If You’re an Employee?
The CRA gets a little more finicky when it comes to 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 credit card, even if your employer reimburses you for the total. So, if you earned 1000 Aeroplan points from making work-related purchases on your Aeroplan-branded personal credit card, you wouldn’t have to pay taxes on them. 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 converts the 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. 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 bottom line: 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 other employee’s expenses, such as flights and hotels, with your personal credit card in order to let you collect the rewards, even though they reimburse you. This would also be considered a form of remuneration. The bottom line: Don’t accept credit card rewards or points as part of your compensation from your employer.
- The plan or arrangement is a form of tax avoidance. This is a catch-all rule, whereby the CRA is giving itself the ability to rule against tax avoidance schemes it hasn’t conceived of but breach the spirit of the law. The bottom line: Make sure that all sources of income get reported on your taxes.
If you meet any of the above conditions, you will have to declare the fair market value of any personal rewards you received on your income tax return.
How are Credit Card Rewards on Business Expenses Taxed if You Own the Company?
But what if you own the company and you use your business card to earn the rewards points? According to the CRA, the rule is that if the company controls the points (i.e., you earns points from your own business credit card), it cannot give those rewards to an employee for personal use, without those points becoming a taxable benefit.
So, if an owner-operator uses the company’s business credit card (instead of 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. It’s better for the business owner to use those points for business trips instead of personal vacations if they want to avoid paying the extra taxes.
Do I Need to Pay Taxes on My Credit Card Points or Not?
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 you collect rewards from business expenses. It’s up to you (and your accountant) whether you think you need to report credit card rewards income on your taxes, but it’s always better to err on the side of caution when it comes to the CRA.