Paying Income Taxes with a Credit Card
The Canada Revenue Agency (CRA) encourages taxpayers to go digital, allowing us to file taxes via tax software (practiced by 80% of Canadians) and receive refunds via direct deposit. This benefits all parties involved, since filing your taxes is usually easier and more accurate with software compared to doing it by hand, and refunds are deposited much faster via direct deposit as opposed to getting a cheque.
But despite this seemingly streamlined method of filing, Canadian taxpayers are often let down by the fact that although it’s relatively easy to pay directly from a bank account, paying taxes with a credit card is a bit more convoluted. The process involves going through a third-party service provider such as Plastiq or PaySimply, both of which charge convenience fees. But paying with a credit card may still be optimal in some circumstances even after factoring in the third-party payment fee. Take a look at all the options available before you make a decision about how to pay.
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Paying Taxes Owed
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Though tax software makes it easy for you to file your taxes, you can’t pay any amounts owing from within the software itself. After filing your taxes, the software will prompt you to pay amounts owed via your financial institution.
If you’d like to go this route, all you need to do is log in to your financial institution’s online banking service and add “CRA (revenue)” as a payee. Note that you’ll see three different options: current-year tax return, tax amount owing, and tax instalment. Pick the one that applies to you and enter your social insurance number as your CRA account number.
There is also an option to pay in person with cash or debit at any Canada Post, but you need a quick response (QR) code that’s generated from your CRA account first. The CRA also allows you to pay them directly through their My Payment electronic service. There are no fees, but you can only pay via Visa Debit, Debit MasterCard, or Interac Online. There are a few rewards debit cards in Canada, so this could be a nice way to earn points if you owe taxes and don’t want to go through the trouble of paying with a credit card via a third-party payment platform.
Related: How to Choose the Right Tax Return Software
Paying Income Taxes with a Credit Card
Since you can’t pay the CRA directly with your credit card, you have to use a third-party service provider that allows you to link your credit card and has the CRA as a payee.
Plastiq accepts all major credit card processors, including Mastercard, Visa, and American Express, but Plastiq charges a processing fee of 2.85%. There’s also PaySimply, which accepts Visa, Mastercard, Amex, Union Pay, PayPal, and Interac e-Transfer. Like Plastiq, PaySimply charges a fee of 2.5% when you make payments with credit cards or if you choose the PayPal option (within Canada).
Understandably, many taxpayers would look at those fees and think that’s too high a price to pay to earn points or cash back, but it may benefit you in certain situations.
Cash Back Cards for Paying Income Tax
PaySimply and Plastiq are merchants that qualify as eligible purchases under the “other” or “flat rate” purchases category, for which many credit cards give a 1% return rate in cash back or rewards.
Let’s say you owe $2,000 in taxes. If you were to pay your taxes with a cash back card that earns 1%, you’d pay $57 or $50 in fees with Plastiq or PaySimply while earning just $20 in cash back, resulting in a loss of $30-$37. In this scenario, it makes no sense to pay your income taxes with a credit card, but there are some select card promotions where you can come out ahead.
In recent years more and more Canadian credit card issuers have started to offer very lucrative promotions when you sign up for a credit card for the first time, e.g., 10% cash back on all purchases for the first few months. Signing up for one of those cards can potentially allow you to game the system come tax season, provided you stand to get more out of the sign-up bonus than you’ll pay in third-party processing fees. Just keep in mind that most of these cash back cards have spending caps of around $2,000 for earning at their promotional rates, which can be limiting for those who make sizable CRA payments.
Check out our list of Canada’s best current credit card sign-up bonuses to see which cards offer worthwhile deals for tax season.
Rewards Cards for Paying Income Tax
Though the remuneration from rewards cards is perhaps less direct than cash back, some rewards cards nonetheless yield very high return rates, and are worth considering when paying taxes, particularly when they come with a very appealing welcome offer. In order to qualify for their full welcome bonus, rewards cards usually require that you spend a minimum amount of money in a relatively short timeframe—typically $3,000 or so within three months. So in that sense they may be even better suited to big CRA payments than cash back cards.
Rewards points can usually be redeemed for travel (flights, hotels, rental cars, etc.), as well as gift cards, merchandise, credits against your card statement, or even to boost some investments. The value you get per redeemed point varies from one loyalty/rewards program to the next, so you need to do a little research and some math to determine if a rewards card’s sign-up bonus value outweighs what you’ll swallow in third-party processing fees to make a CRA payment.
Related: The Canadian Loyalty Program Bible
How Does Paying Your Taxes with a Credit Card Affect Your Credit Score?
While the possibility of getting a bunch of rewards points or cash back might lure you into paying your taxes with a credit card, keep in mind that there are drawbacks to this payment method as well.
Credit utilization—the total amount of your available credit that you’re using at any given time—is one of the most important factors that influences your credit score. When your credit utilization goes above 30%, it can start to drag your score down, and making big payments to the CRA puts you at risk of crossing that 30% barrier. For example, if your credit card is your only source of credit and it has a $5,000 limit, a $2,500 CRA payment would bring your credit utilization to 50%, which is a bad sign in the eyes of Canada’s credit bureaus.
Now keep in mind, temporarily exceeding 30% of your credit utilization is a far better fate than owing late penalties and interest to the Canada Revenue Agency. Even if you can’t pay off the full balance on your credit card right away, the impact of high utilization on your credit score should be pretty negligible and temporary, provided you can at least make the minimum payment. You should be fine as long as you don’t get in the habit of exceeding 30% of your credit utilization every month.
What If I Don’t Have the Funds to Pay My Taxes?
Forget cash back or rewards points for a second—many Canadians want to use their credit cards to pay taxes because they might not currently have the cash available for a direct debit to their bank account. This is a viable strategy in theory, since a credit card provides a few weeks to pay off your balance before you have to pay any interest. But this is only a good idea if you will definitely have the cash available by the time your credit card statement is due.
Remember, most credit cards charge an average interest rate of 19.99% (with the exception of special low-interest credit cards), which is quite high. By comparison, do you know how much the CRA charges in interest for late payments? Just 1% per month that you’re late, up to a maximum of 12% interest after 12 months. That is likely much lower than the interest you would pay with your credit card.
We’re not advocating that you slack off on paying whatever you owe the CRA, but in the hierarchy of debt it might make sense to first focus your financial energy on more pressing, high-interest debts you might have. Keep in mind that the CRA does offer an RC4288 Request for Taxpayer Relief where you might qualify for a monthly tax installment payment schedule where the interest fees are waived. We should also note that the CRA charges a 5% late filing penalty right away, so you should never miss the deadline to at least file even if you’re currently unsure how you’ll pay any taxes owed.
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Article comments
I’m not sure about your recommendation to pay your taxes with a Scotiabank Rewards Debit Card. My local branch Advisor told me that rewards are only accrued on purchases and paying income taxes would not apply.
Yes Beefus,
You can’t pay your taxes with a credit card directly, but you can can pay your taxes with Visa debit or Mastercard debit online if you have that enabled on your debit card. It’s similar to making an online purchase, as if your debit card was a credit card, but the money comes directly from your chequing account.
Just moments ago, I was on CRA’s site. While they make mention via their payment section in your CRA My Account, they specifically say that you can’t pay your installments by credit card.
Which brings up another fact. Those who have net taxing owning greater than, say, $3000 in most provinces, will be obligated to pay your taxes in ADVANCE in installments even if you file your taxes and pay in full by the due date of April 30, each year.
Should you not comply with their feeble reminder notice which doesn’t not spell out the ramifications should you dnot comply or you don’t have a crystal ball and determine you’ll receive a refund or owe at the end of the year, you’re still obligated to pay in advance using the installment method. What makes things even more tricky is the email or letter you receive, it doesn’t say you must pay in advance but uses wording like “should”.
As a result, when tax payers file on April 30 with a balance owing but pay it in full at that time, they will be charged interest plus any applicable penalty charges. This is particularly shocking to those who have changes in life events or transition between employeement and retirement.
Should you receive a refund and not owe, you must apply for a refund for the amount of installments. Gotta love CRA, eh?