DAVID WILKENFELD, CPA, CA, canadian tax CONSULTANT

Posts Tagged ‘Loyalty Programs’

What’s Your Tax Issue? Credit Card Rewards

In Business Expenses, Canadian Income Tax, Employment benefits, Employment Income, Personal Tax on February 5, 2014 at 4:17 pm

Questions3The Tax Issue

What is the policy for using a personal rewards credit card to pay business expenses? Do I get taxed if I use the points I earned for business only. Will this raise red flags with CRA if I start spending 50k/month on this personal card?

The Answer

Believe it or not, the CRA has put so much thought to this question and changed their policy so often, I don’t blame anyone, including me for needing a quick refresher, so I’m glad you brought this up.

Basically, the CRA’s position is rooted in section 6 of the Income Tax Act, which essentially taxes an employee on the value of any employment-related benefit received in any manner whatever.

Regarding your question, the CRA’s general position has historically been as follows:

Where an employee accumulates points while incurring employment-related expenses which are reimbursed or paid for by the employer, the employee will be in receipt of a taxable benefit if the points are redeemed by the employee for personal travel or to obtain other personal benefits.

It is the employer’s responsibility to quantify the value of the benefits received by the employee, and include that amount on the employee’s T4 slip each year.

However, in 2009, the CRA modified its position, recognizing that it would be difficult for employers to quantify the benefit where the credit card was a personal one controlled by the employee. So, unless it’s a company credit card, the employer is off the hook. But the employee is not.

Well, not entirely. The CRA does acknowledge that it would be difficult for an employee to track personal expenses vs. business expenses on his personal credit card, so their position is that no taxable benefit will arise on points earned on a personal credit card. However, there are conditions.

No taxable benefit will arise on points redeemed from the use of a personal credit card, as long as:

  • the points are not converted to cash
  • the plan or arrangement is not indicative of an alternate form of remuneration, or
  • the plan or arrangement is not for tax avoidance purposes

The CRA provides an example of an employee who is allowed by her employer to pay for business expenses whenever possible through her personal credit card, for which she is reimbursed. In order to maximize her points, she uses her personal credit card to pay for various employer business expenses, including travel expenses of other employees.

The CRA would view this arrangement as being indicative of an alternate form of remuneration and would therefore not allow their administrative concession. The employee would have to calculate the value of the benefit and add that amount to her taxable employment income.

So, to finally answer your question, if you use your personal credit card mostly for normal personal use, and for your own normal business expenses for which you are reimbursed, the CRA would likely not charge you with a taxable benefit; however, if you suddenly start putting $50K/month of your employer’s business expenses on your personal credit card, I would say that it appears this might be a plan to increase your remuneration as outlined in the above example. And yes, the CRA might come knocking on your door.

CRA and the Air Miles Double-Standard

In Canadian Income Tax, Personal Tax on July 27, 2010 at 10:06 am

Whenever I use my frequent flier points, it always seems like I’m getting something for free. That’s the beauty of it, isn’t it? But of the course, like everything else, the CRA has to spoil it. The CRA believes there’s value to those points. Sure, there’s value, but does this view only hold true when it benefits the government?

[picapp align=”left” wrap=”true” link=”term=airplane&iid=9257105″ src=”http://view4.picapp.com/pictures.photo/image/9257105/launch-virgin-america-1st/launch-virgin-america-1st.jpg?size=500&imageId=9257105″ width=”234″ height=”192″ /]

Using Points For Personal Purposes

Everyone loves a vacation. So when you use those travel points to fly for free, would you ever think that the CRA would tax you? Until recently, the CRA’s policy was indeed to tax an employee on the value of reward points used for personal purposes if the credit card charges to earn those points were made as an employee and reimbursed by the employer. So, let’s say you took a trip to Vancouver on business and charged the hotels, flight, meals etc. on your credit card. When you returned, you put in an expense report and were reimbursed for all those costs. In December, you decided to take a trip to Disney World with the kids, and used reward points to pay the airfare. Prior to 2009, the CRA would have asked you calculate the value of your points, then the portion of that value that related to the amount that was reimbursed by your employer, and then they would tax you on this amount. I kid you not!

Well, the CRA has since changed their policy. They came to the realization that they were being completely nutty (my word, not theirs 🙂 ) in asking employees to make such determinations. Starting in 2009, they no longer tax you in cases such as the one described above. As long as the credit card is yours, and the reimbursements are not in some way abusive to the point where you are really disguising some form of additional remuneration, then there will now be no taxable benefit on the use of your points. However, if you are spending money on a company credit card, where the employer controls the points, any use you make of them will be taxed in your hands, and your employer will be required to value the benefit as described above, and add it to your T4 as taxable employment income.

The Johnson Case – Points Used For Medical Travel

The above policies by the CRA shows how interested they are in the value of these reward programs – when there is tax to be collected. But what about when there is a deduction to be taken? Suddenly these valuable points become totally impossible to appraise.

In 2007, Mr. Johnson flew to Chicago from Thunder Bay in search of medical care. Travel costs can be eligible medical expenses, and Mr. Johnson claimed the value of his flight, even though it was paid with his Aeroplan points.

Given the CRA’s clear view that such points have value (when it suits their purpose), it is truly baffling to note that the Minister of National Revenue argued in Tax Court that “the value of the points that were used to obtain the ticket could not be determined, and therefore, that it could not be said that an amount was paid for the ticket”.

Really, CRA? Have you not read your own policies?

In the end, the judge decided that the points had a value, since they could be exchanged for something that had a price.

The taxpayer won his case and of course, the CRA policy  still exists (although far less onerous since 2009).

Free travel? Have you seen my credit card statement?