Can Credit Card Rewards be Taxed?
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Credit cards provide a wide range of benefits if used responsibly. These include easy access to credit during emergencies, low fees, universal acceptance, protection against fraud, and the ability to build a credit profile.
Many credit cards also offer rewards programs, which you can redeem to save you money on various items. But are such rewards taxable? Do you have to declare them as income when you file your taxes?
Are Credit Card Rewards Taxable?
In general, credit card rewards, which include points, travel miles, and cashback, are not taxable, both at the individual and business level. The Canada Revenue Agency (CRA) classifies these types of benefits as discounts, not as forms of income, so you’re not required to report them when filing your taxes.
It would also be impractical for the CRA to assess the taxes payable on credit card rewards, as determining their fair market value in Canadian dollars is difficult. For example, a credit card may give you the option to redeem Aeroplan points or Air Miles for various items, all of which vary considerably in their value. The same concept applies to other monetary gifts, like lottery winnings, birthday gifts, and prize draws – all of these aren’t taxable.
When Can Credit Card Rewards be Taxed?
Though you don’t have to worry about tax reporting requirements for rewards earned on your personal credit cards, specific provisions in the tax code deem such rewards to be taxable benefits. These rules pertain to individuals who collect credit card rewards as a function of their employment.
As an employee, you’re taxed on your credit card rewards if:
- You convert your rewards to cash: If you convert your rewards into cash, this triggers a tax liability. You must report the cash value on your tax return. This rule only applies to rewards earned through work-related expenditures that your employer reimburses. If you redeem your rewards for points, miles, or cash back, you don’t have to report them to the CRA. Ensure you keep detailed records of your transactions to verify your rewards’ cash value during tax season.
- Your rewards are provided to you as a form of remuneration: In some cases, your employer may give you credit card rewards as additional compensation. The CRA considers this form of payment a taxable benefit, so if you’re the recipient of such rewards, be prepared to declare them on your tax return. In essence, if your status as an employee directly enables you to earn rewards above and beyond what you could make as an individual, the CRA likely views them as a taxable benefit.
- Your rewards constitute a form of tax avoidance: This is a broad category that encompasses all the possible ways individuals can minimize or eliminate their tax liability. Though most forms of tax avoidance are legal, the CRA designates some schemes as being in violation of the “object and spirit of the law.” Sophisticated and artful plans involving employment-related credit card rewards may be classified as tax avoidance by the CRA.
Example of When Your Credit Card Rewards May be Taxed
There are scenarios where the CRA would consider credit card rewards a taxable benefit, which is why it’s crucial to assess the arrangement that enables you to earn them.
For example, suppose your employer has a company credit card that offers a loyalty program where points can be earned on purchases. Your employer allows you to use the card for business-related expenditures, which you do throughout the year, collect points along the way. After some time, you redeem the points for various rewards offered through the loyalty program.
In this case, you will have to report the fair market value of your rewards. Because your employer owns the card and controls the tracking, collection, and redemption of points, the CRA deems your rewards to be a taxable benefit.
How Much Will You be Taxed on Your Credit Card Rewards?
You must include any taxable credit card rewards you earn as part of your regular employment income for tax purposes. Your employer will add the fair market value of the rewards to box 14 on your T4 slip, which includes all your other employment remuneration. The amount will also appear in box 40 of your T4 slip, separate from the rest of your income.
The amount of tax you’ll pay on your rewards will depend on which tax bracket you fall into, both at the federal and provincial levels. Below are the 2021 federal tax rates, according to the CRA:
- 15% on the first $49,020 of taxable income
- 20.5% on the portion of taxable income over $49,020 up to $98,040
- 26% on the portion of taxable income over $98,040 up to $151,978
- 29% on the portion of taxable income over $151,978 up to $216,511
- 33% of taxable income over $216,511
For example, if you’re total taxable income (including taxable credit card rewards) is $75,000, you calculate your tax payable in the following way:
- $49,020 of taxable income multiplied by 15% = $7,380
- $25,980 ($75,000 – $49,020) of taxable income multiplied by 20.5% = $5,325.90
- Tax payable = $12,705.90 ($7,380 + $5325.90)
The above calculation doesn’t consider the provincial/territorial tax, which varies based on where you reside.
Does the type of credit card I have affect whether I need to pay taxes on my credit card rewards?
Credit card points vary in value. How do I know how much to report?
If I convert my credit card rewards for cash, do I have to report it for taxes?
The CRA views credit card rewards as discounts, much like a coupon you would use to save money on your groceries. And since coupons are not taxable, neither are credit card rewards.
However, things get a little hazy when rewards are earned or redeemed through the course of your work. If your rewards stem from using a company business card or your employer provides you rewards as an alternative form of compensation, there’s a good chance these transactions could be considered taxable benefits. If you’re unsure about the tax consequences, visit the CRA website for more details or consult with a qualified tax professional.
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