The Taxman and Loyalty Points

Posted October 5, 2018 by cccadmin in

Couple Doing Taxes

Us Canadians love our loyalty points. But before you redeem your points, be sure to understand the tax consequences, especially if you earned those points through your work.

Now, I know what you’re thinking. Tax consequences, what, tax consequences? And you’d be right in most cases. If you’re using your personal credit card to earn and redeem loyalty points, then there wouldn’t be any tax consequences from earning and redeeming them.

However, the waters get a little murkier when you have points coming from business travel or a personal credit card used to pay for business expenses that are reimbursed by your employer.

The Taxman: Then and Now

The taxman used to take the position that when you have points coming from business travel or a personal credit card used to pay for business expenses, it was your responsibility to figure out the fair market value of any trip or merchandise you received from redeeming your points. You’d then be required to include it as part of your income as a taxable employment benefit.

This wasn’t always easy. First of all, what is the fair market value of a free flight to, say, Hawaii? More importantly, was the free flight that you earned related to the points you earned while flying on business for your employer or to the points you earned on personal spending charged to the same credit card. If points are mixed together, are the taxable employer loyalty points used first or are the personal points used first? Talk about a complicated situation! That’s why a lot of people hire an accountant to prepare their taxes.

The good news is that it’s no longer as complicated. The Canada Revenue Agency (CRA) has simplified its view some years ago. The CRA says that you’re required to include a taxable benefit in your income if you convert the points to cash or the points are seen as an “alternate form of employee remuneration.”

In these instances, the taxable benefit is considered the fair market value of the personal reward points you receive throughout the year. If you, the employee, control the points (i.e. by using a corporate credit card), then the benefit must be reported on your T4 slip.

That’s fine and dandy, but what does that actually mean? Let’s run through a couple examples.

Jill’s employer let’s her pay for work-related business expenses using her personal credit card, which she earns loyalty point. She then goes and redeems those personal points towards a family vacation. In this case, she wouldn’t need to include any extra amount as a taxable benefit, as the CRA says this isn’t considered a form of additional remuneration.

But if Jack uses his employer’s credit card to pay for business expenses and redeems points earned for his personal use, since his employer receives and pays the credit card bills and the receives the loyalty point tracking statements, Jake’s employer must report a taxable benefit on his T4 for the fair market value for any rewards he redeems during the year. This is due to the fact that Jack’s employer has control over the tracking and redemption of points.

The Bottom Line

If you use your personal credit card to earn and redeem points and you don’t have a business credit card, you don’t need to be concerned about reporting a taxable benefit on your credit card. But if you have a business credit card, it might be worth seeking out professional advice on how to handle the situation, as each individual’s personal tax situation varies.

Note: We’re not tax professionals. Please seek out advice from a professional when considering anything related to tax issues.