Credit card holders are failing to claim rewards or overlooking the tax fallout from some redemptions
While Canadians believe that reward points they earn from using their credit cards are as good as cash, many aren’t making the most of the opportunities they have to use them.
Anew report by CIBC has found that 64% of Canadians who earn reward points on their credit card don’t consider them a financial asset. Around 49% confessed they were just aimlessly collecting points, and 37% admitted they rarely or never redeemed theirs. Cardholders were found to be sitting on an average of 48,800 points on their primary credit card.
Jamie Golombek, managing director for Tax & Estate Planning at CIBC Financial Planning and Advice, noted that those planning a summer family getaway could use points to cover their travel expenses. Another little-known opportunity that Canadians may be missing is to use points to pay down debt or purchase an investment, which certain financial institutions may allow in an RRSP, TFSA, or RESP.
The choice between paying down debt and investing may swing on whether the interest on the debt is deductible for tax purposes. If the after-tax rate of return on investment is higher than the after-tax interest rate on debt, then investing is a better choice, particularly for those who are comfortable with the level of risk involved.
Employees that rack up points for expenses that their company pays for, either directly or through reimbursement, may choose to redeem them. But based on the current position of the Canada Revenue Agency (CRA), employees need to declare that as a taxable benefit in their income if the points are converted to cash, the plan is considered to be an alternate form of remuneration, or if the plan is for tax-avoidance purposes. In such cases, the taxable benefit is equal to the fair-market value of the personal rewards received in the year.
According to the report, the same principles should generally apply to business owners who redeem points collected on a business credit card for personal benefit.
Another potential use of loyalty points, unknown to 29% of reward cardholders, is donation to certain charities that accept them. In general, the CRA allows a donation tax credit to be claimed when loyalty points are used to make a charitable gift as long as they are directly transferable to the charity and their fair-market value at the time of the transfer can be reasonably estimated. Taxpayers are also eligible to a donation tax credit based on the fair market value of airline tickets or other merchandise they redeem through points and subsequently donate.
Cardholders who must travel beyond 40 kilometers to obtain medical treatment that’s unavailable where they live may pay for the trip using points or miles earned. In that case, they may also claim a medical expense tax credit amounting to the cost of an equivalent ticket.