Reward points can add up fast. I use the Scotiabank Momentum Visa Infinite card to get cash back for my purchases. Last year I earned almost $600 in cash back simply by putting my everyday spending on the card and making sure I put all gas and grocery purchases on the card (which gives me 4% cash back).
Related: Why I Gave Up On Air Miles
My cash back amount is fairly average, but I know of some who have earned almost $1,000 cash back in a year simply by allocating their spending to the right credit cards. Since the points (or cash) can add up so quickly, some people may wonder whether they are considered taxable and if they need to be claimed as income on a tax return.
Reward Points Earned Personally
Reward points earned by a taxpayer through their own personal spending are not considered taxable.
They aren’t taxable because the money spent to earn the rewards (your hard earned cash) has already been taxed, so taxing it again wouldn’t make any sense.
Reward Points Earned as an Employee
The issue starts to get tricky if you earn reward points as an employee and pay for expenses on your personal credit card, and then get reimbursed by your employer (while earning rewards on your own card).
In this case a taxable benefit arises if the points are redeemed for personal travel or to obtain other personal benefits. Basically CRA is saying if you pay for business expenses on your personal credit card and then get reimbursed, the rewards you earn for these transactions create a taxable benefit.
This raises a huge issue: it’s almost impossible for an employee to track the personal vs. business benefits on their own credit card.
So because of this, CRA explained that no taxable benefit will arise as long as: (1) the reward points aren’t converted to cash, (2) the plan isn’t indicative of another form of compensation and (3) the plan is not for avoiding taxes.
For example: Joey is an employee of Company ABC. He pays for his business expenses like parking, cell phone, travel, and various other things as much as possible through his own personal rewards card. Company ABC then reimburses him for the expenses. He also pays for other employees expenses on his personal credit card to maximize his rewards.
CRA would consider this an ‘alternative form of compensation’ and Joey would need to include the value of the rewards earned for these items in his tax return.
However, for most people the reward points they earn are not considered taxable and do not need to be reported as income.
Reward Points with a Company Credit Card
If you use a company credit card for business expenses it is assumed the company has control over the card (and the rewards related to the card).
If the company were to let you use the reward points for personal travel, the cost of the personal travel would be considered a taxable benefit. It is up to the employer to report this as a taxable benefit of the employee.
Click here to get more information on the taxable benefits related to reward points such as Air Miles, Aeroplan points, etc.
Conclusion: determining whether reward points are taxable is a grey area. CRA appears to be looking at what’s reasonable for reward points. If you use your personal rewards card for mainly (or all) personal use, there should be no issue and the rewards shouldn’t be taxed. However, if you start to put large amounts of business expenses on your card and get reimbursed, this could be considered an ‘alternative form of compensation’ and may need to be reported as taxable income.