As a business owner, you love credit card, bucause vredit 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. To make sure you will use credit card, most credit cards also offer rewards programs, or cash back. But do you know, the rewards, or cash back on your account is taxable or not?
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 American express rewards for various items, or you could exchange one kind of points to another, 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.