The Taxman is Coming – Should You Pay With Your Credit Card?Posted April 10, 2014 in Personal Finance
With the tax deadline of April 30th fast approaching, many Canadians are scrambling to file their taxes on time. If you’re one of the thousands of Canadians with a balance owning this year, did you know you can pay your taxes and earn reward points? That’s right, with an online payment platform called Plastiq you get the best of both worlds – you can rack up a lot of points and pay the taxman conveniently online via credit card. For self-employed individuals and those with large tax balances owing this can be a great way to earn points – as long as you pay off your balance in full and avoid costly interest.
Reasons to Consider Paying Your Taxes by Credit Card
Reward Points. The biggest allure of paying your taxes by credit card is reward points. For those with hefty tax bills, such as self-employed individuals and landlords who don’t have tax withheld at source, you can earn a boatload of points just for paying your taxes. For example, if you had a balance owing of $10,000 owing to Canada Revenue Agency (CRA), you’d earn a whopping 10,000 reward miles just by using your travel rewards card and be on your way to that five-star vacation in Hawaii sooner!
Grace Period. Tax time can be stressful. If you’re running into temporary cash flow issues, using your credit card can be a great way to temporarily bridge the gap and earn reward points. Most credit cards come with a 21-day interest-free grace period at the end of your statement date. As long as you’re able to scrape together the funds to pay the taxman, you can buy yourself some breathing room, while still paying your taxes on time and avoid CRA’s 5% late filing penalty.
Why You Should Think Twice About Paying by Credit Card
Fees. As the saying goes, there’s no such thing as a free lunch. As you may be aware, when you use your credit card the retailer pays a percentage of the purchase in the form of fees to the credit card processor. It’s no coincidence credit cards that offer the greatest rewards usually take the highest fees. When you pay your taxes by credit card the roles are reversed – instead of CRA eating the fees, taxpayers are stuck footing the bill. That means you could be paying the taxman 1.99% to 2.49% just for the luxury of paying by plastic. If the reward points are less than the fees, it’s best to avoid using your credit card.
Interest. We’re big advocates of using your credit cards responsibly – that means earnings credit card reward points, while paying off your balance in full each month. If you have a large balance owing to the taxman and won’t have the funds to pay it off any time soon, you should think twice about using your credit card. Although you’ll earn reward points, you’ll start accruing interest once your grace period ends. Most credit cards accrue interest based on your average daily balance at 19% or higher – you could be up to your eyeballs in debt before you know it!
If you’re not able to pay off your credit card balance in full, a far better alternative is to use a cheaper form of credit, such as a line of credit. CRA also offers an attractive option on balances owing – if you pay your taxes on time you’ll avoid CRA’s 5% late filing penalty and only accrued interest at the tax agency’s prescribed interest rate – 5% for most taxpayers.
If you’re willing to weigh the pros and cons of paying your taxes via credit card, you can come out ahead. Although you can rack up a lot of points, you’ll pay a hefty interest rate if you can’t pay it off in full. Before paying by plastic make sure the reward points outweigh the fees.