Paying Income Taxes with a Credit Card
The Canada Revenue Agency (CRA) encourages taxpayers to go digital, allowing us to file taxes via tax software (practiced by 80% of Canadians) and receive refunds via direct deposit. This benefits all parties involved, since filing your taxes is usually easier and more accurate with software compared to doing it by hand, and refunds are deposited much faster via direct deposit as opposed to getting a cheque.
But despite this seemingly streamlined method of filing, Canadian taxpayers are often let down by the fact that although it’s relatively easy to pay directly from a bank account, paying taxes with a credit card is a bit more convoluted. The process involves going through a third-party service provider such as Plastiq or PaySimply, both of which charge convenience fees. But paying with a credit card may still be optimal in some circumstances even after factoring in the third-party payment fee. Take a look at all the options available before you make a decision about how to pay.
Paying Taxes Owed
Though tax software makes it easy for you to file your taxes, you can’t pay any amounts owing from within the software itself. After filing your taxes, the software will prompt you to pay amounts owed via your financial institution.
If you’d like to go this route, all you need to do is log in to your financial institution’s online banking service and add “CRA (revenue)” as a payee. Note that you’ll see three different options: current-year tax return, tax amount owing, and tax instalment. Pick the one that applies to you and enter your social insurance number as your CRA account number.
There is also an option to pay in person with cash or debit at any Canada Post, but you need a quick response (QR) code that’s generated from your CRA account first. The CRA also allows you to pay them directly through their My Payment electronic service. There are no fees, but you can only pay via Visa Debit, Debit MasterCard, or Interac. There are a few rewards debit cards in Canada (like the card that comes with the Scotiabank Momentum Chequing Account), so this could be a nice way to earn points if you owe taxes and don’t want to go through the trouble of paying with a credit card via a third-party payment platform.
Paying Income Taxes with a Credit Card
Since you can’t pay the CRA directly with your credit card, you have to use a third-party service provider that allows you to link your credit card and has the CRA as a payee.
Plastiq accepts all major credit card processors, including Mastercard, Visa, and American Express, but Plastiq charges a processing fee of 2.5%. There’s also PaySimply, which accepts Visa, Mastercard, Amex, Union Pay, PayPal, and Interac e-Transfer. Like Plastiq, PaySimply charges a fee of 2.5% when you make payments with credit cards or 2.29% if you choose the PayPal option.
Understandably, many taxpayers would look at those fees and think that’s too high a price to pay to earn points or cash back, but it may benefit you in certain situations.
Cashback Cards for Paying Income Tax
PaySimply and Plastiq are merchants that qualify as eligible purchases under the “other” or “flat rate” purchases category, for which many credit cards give a 1% return rate in cash back or rewards.
Let’s say you owe $2,000 in taxes. If you were to pay your taxes with a cashback card that earns 1%, you’d pay $50 in fees with Plastiq or PaySimply while earning just $20 in cash back, resulting in a loss of $30. In this scenario, it makes no sense to pay your income taxes with a credit card, but there are some select card promotions where you can come out ahead.
Those who apply for the Scotiabank Momentum Visa Infinite card by April 30, 2019 will earn 10% cash back on all purchases for the first 3 months of cardmembership, up to $2,000 in total purchases. That means you would come out ahead by $150 if you owed CRA $2,000 and opted to pay with the Scotia Momentum Visa Infinite.
In recent years more and more Canadian credit card issuers have started to offer high sign-up cashback promotions, so you can take advantage of them whenever you know you have a major purchase or spending increase coming up.
Rewards Cards for Paying Income Tax
Though the remuneration from rewards cards is perhaps less direct than cash back, some rewards cards nonetheless yield very high return rates, and are worth considering when paying taxes.
The TD Aeroplan Visa Infinite card currently offers up to 30,000 Aeroplan Miles as a sign-up bonus when you apply for the card by March 2, 2020. New cardholders get 15,000 miles after a first purchase and an additional 5 points per $1 spent for the first three months; up to an extra 5,000 miles per month. 30,000 potential bonus points total.
In some scenarios the value of this sign-up bonus will exceed whatever fees you are charged to pay taxes via a third-party service. For example, you’ll be charged a fee of $25 if you pay $1,000 in income taxes via Plastiq or PaySimply, but 30,000 Aeroplan Miles are worth substantially more than that (approximately $480 on average per our estimates).
What If I Don’t Have the Funds to Pay My Taxes?
Forget cash back or rewards points for a second—many Canadians want to use their credit cards to pay taxes because they might not currently have the cash available for a direct debit to their bank account. This is a viable strategy in theory, since a credit card provides a few weeks to pay off your balance before you have to pay any interest. But this is only a good idea if you will definitely have the cash available by the time your credit card statement is due.
Remember, most credit cards charge an average interest rate of 19.99% (with the exception of special low-interest credit cards), which is quite high. By comparison, do you know how much the CRA charges in interest for late payments? Just 1% per month that you’re late, up to a maximum of 12% interest after 12 months. That is likely much lower than the interest you would pay with your credit card.
We’re not advocating that you slack off on paying whatever you owe the CRA, but in the hierarchy of debt it might make sense to first focus your financial energy on more pressing, high-interest debts you might have. Keep in mind that the CRA does offer an RC4288 Request for Taxpayer Relief where you might qualify for a monthly tax installment payment schedule where the interest fees are waived. We should also note that the CRA charges a 5% late filing penalty right away, so you should never miss the deadline to file even if you’re currently unsure how you’ll pay any taxes owed.