You can now pay income tax with a credit card
But should you? We crunch the numbers to see if it makes financial sense.
But should you? We crunch the numbers to see if it makes financial sense.
Canada Revenue Agency has spent years getting taxpayers to file their tax returns digitally (more than 80% now do so) and to sign up for digital options to receive their tax refunds. It was easier for the tax department and you had an incentive to join in if you were getting money back—it was a lot faster than waiting for a tax refund cheque in the mail.
Now it’s getting much easier to pay your tax bill without using paper, too. It’s finally a simple operation to plug in CRA as a payee on your online banking account and pay direct; all you need to add is your social insurance number. And now, for the first time, more than 6.5 million customer account holders of PayPal in Canada can now pay the tax man by using their bank account, credit card, Visa debit card, or the balance in their PayPal account to pay their federal taxes.
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The latest changes create a role to play by third-party providers such as California-based Plastiq and Payment Source of Vancouver—two companies that allow you to pay your tax bill with a credit card through their websites or, in Plastiq’s case, through their mobile app as well.
Some consumers would already know those names if they pay through them to cover their utility bills. What taxpayers need to figure out is if paying a fee for the privilege is worth the money. The attraction is simple. Using a third party site and a credit card to pay your taxes is fast, simple and secure and if you’re in good financial shape, it could be attractive for you—especially if privacy and security of your financial information are paramount.
“A digital payment solution like PayPal is ideal for Canadians who want to pay their taxes without revealing their bank account or credit card details to third parties,” says Paul Robert Hyde, VP Payment Services for Payment Source. Unique IDs are created at the time of payment and those personal IDs are kept with PayPal.
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This type of electronic payment also appeals if you’re one of the 2.8 million Canadian citizens living abroad. “Canadian expats who need to file their taxes and owe money to the CRA can now use their PayPal account to pay their federal tax even if they’re based overseas,” says Paul Parisi, President of PayPal Canada. Yet another selling point? That using your credit card to pay taxes allows you to build up rewards points with your favorite loyalty program.
This all sounds great. But even though these companies do offer protection over your financial info falling into the wrong hands, does it make good financial sense? “As a general rule, everyone should avoid paying taxes with credit cards—even if you have the money to pay off the card when the bill arrives,” says certified financial planner Janet Gray.
It’s even more important to avoid third-party payment providers. Why? The fees. Even if you’re a part of a good credit card loyalty program, chances are high that the 1% to 2% you get in rewards won’t cover the 2.29% to 2.5% in fees that these companies will charge you on the balance paid to the CRA.
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Let’s run the numbers. If you owed $5,000 in taxes and used your credit card with a 2% cash-back reward to pay for this, you’d get $100 in cash rewards for using your card to do the transaction. But with a fee of 2.29% (what Payment Source offers) you’d be charged $114.50—so you’d be $14.50 in the hole after the transaction ($114.50 fee minus $100 in cash rewards). Remember, most credit card holders are lucky if they get 2% back—many only get 1% back or less. Another drawback? Loyalty cards with good rewards often carry a higher interest rate than other cards—often 12% higher, or more.
But let’s say you’re in debt and don’t have the money come April 30th to pay your tax bill, should you consider paying with your credit card to get this payment out of the way? The answer is definitely no. It could just cause you to go deeper into high-interest rate credit card debt—especially if you’re not able to pay off the balance when the credit card bill arrives the following month.
A better approach? “Even if you’re in debt and don’t have the money to pay the CRA on hand, file your taxes anyhow,” says Allan Norman, a certified financial planner with Atlantis Financial in Barrie, Ont. “You’ll avoid the 5% late filing penalty right off the bat.” Norman notes that after that the CRA charges 1% for every month you’re late paying your taxes to a maximum of 12% interest after 12 months.
His suggestion? “If you have a high-interest-rate balance on your credit card already—says 19% or more—it makes sense to pay the higher interest rate debt first, do some cash flow management in your family budget, and aim to pay your tax bill off over the next 12 months,” says Norman. “The interest rate of 1% per month is actually better. Of course, a loan from friends or family would be nice, especially if this is a one-time occurrence.” The worst option? “Don’t get scared and rush out to get a payday loan,” says Norman. “That’s the worst thing you could do.”
Debbie Gillis, a credit counseling coordinator with Resolve Counselling Services Canada has another suggestion. “Work with the CRA,” says Gillis. “It holds regular fairness hearings and you can file an RC4288 Request for Taxpayer Relief with them.” If you’re on a debt reduction program with a counselor, have a very low income, or simply experienced one-time hardship through medical issues, work with a debt counselor or tax accountant to fill in the application and work out a reasonable monthly tax installment payment schedule with you that you can present to them.” The payments schedules are reasonable and the CRA often removes the 1% per month interest rate it charges on late taxes.
Finally, if you have the money on hand to make your tax payment, consider paying through your Visa or Mastercard debit card. You can register for MyAccount, a free electronic payment service offered by the CRA by going to your MyCRA account. You’ll be able to set up your account right away. Or, consider online banking. In general, you should be able to add CRA as a payee using your bank’s online payment system, even if you don’t have an online CRA account.
Finally, if all this digitization still makes you uncomfortable, you can still go “old school”. If you have a personalized CRA remittance voucher, you can simply make a payment at your Canadian financial institution. Or, just send a cheque with the outstanding balance through Canada Post. Include your payment year and social insurance number on your cheque and mail it to: Ottawa Technology Centre, 875 Heron Road, Ottawa ON K1A 1A2.
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