Optimize your Points: a Tax Guide for Businesses in Canada

Understanding the Tax Implications of Points

Loyalty points and rewards programs have revolutionized consumer spending, offering individuals enticing benefits for their everyday purchases. In Canada, over half of credit card holders collect points that can be redeemed for travel, products, and other rewards such as cash-back. However, the financial implications and tax consequences of loyalty points, especially those earned through business expenses, often go unnoticed.

This article explores the intricacies of redeeming loyalty points and rewards earned through business transactions and sheds light on the associated tax considerations when you face an audit.

Accumulating and Exchanging Loyalty Points

At first glance, collecting loyalty points seems like a thrilling pursuit. Yet, it’s vital to assess the true value of the rewards against the underlying costs. Let’s take a closer look using an example:

Imagine you have earned 100,000 Membership Rewards that can be exchanged for a new PlayStation console and games worth $1,000 or a travel experience valued at $10,000 such as a flight on Qatar Airways Qsuites from North America to the Maldives. By evaluating the actual cost of the rewards in comparison to the points needed for redemption, you can establish a value on your points. In this instance, the travel experience might provide better value for your points.

Undeniably, one of the most lucrative company products you can have is the Business Platinum Card^® from American Express, mainly because:

The grey area comes when you’ve earned those points using business expenses because you’ve basically earned value with your company, a value that is being used or enjoyed personally.

Personal vs. Professional Usage

The distinction between personal and professional usage of loyalty points plays a pivotal role in determining tax implications because they have a cash value.

The discount principle: why most points aren’t taxable

Before getting into the more complex cases, it helps to understand the basic rule. When a reward is directly tied to an actual expense—whether paid by an individual or a business—the Canada Revenue Agency generally treats it as a discount: it reduces the cost of the expense rather than constituting income to report. In practical terms, if your business spends $1,000 and receives the equivalent of $50 in points, the actual deductible expense becomes $950, not $1,000. This principle covers the vast majority of points earned in the normal course of business.

The CRA’s 4 conditions for an employee’s points not to be taxable

For employees who earn points by making business expenses, the CRA applies a specific administrative policy. These points are not considered a taxable benefit if the following 4 conditions are met:

If one of these conditions is not met—for example, if the employer controls the points or if the arrangement amounts to a way of topping up compensation—the fair market value of the rewards may become taxable employment income. See the CRA’s full policy on loyalty and points programs for details applicable to your situation.

Tax Implications for Employees

• Direct expenses: Suppose you are an employee who earns loyalty points by making business expenditures, such as business travel. According to the CRA’s administrative policy, these points are generally not taxable if the employer does not control them, if they are not convertible to cash, and if the arrangement does not constitute a form of additional remuneration or tax avoidance.
• Using a personal credit card for business expenses: Using your personal credit card for business expenses reimbursed by your employer can raise tax questions if this practice resembles a form of additional remuneration. Revenu Québec, in particular, has ruled that an employee who systematically pays almost all of their employer’s expenses with their personal card to be reimbursed could receive a taxable benefit, even if the points are not controlled by the employer.

Tax Implications for Business Owners

• Personal Usage: Business owners who use loyalty points accrued from company expenses for personal purposes must assess whether the benefits are taxable. The nature of the benefit—employee or shareholder—impacts the tax treatment.
• Business Expenses: Using personal and business points to cover expenses can raise tax questions, especially if the arrangement suggests a benefit conferred to the shareholder or employee.

The shareholder angle deserves special attention. In an interpretation letter dated January 18, 2019 (ref. 18-042787-001), Revenue Quebec analyzed the case of a sole shareholder who paid nearly all of the company’s expenses on his personal credit card before being systematically reimbursed—an approach that allowed him to accumulate substantial rewards. Revenue Quebec found that this arrangement could constitute a taxable benefit, not under the administrative policy on loyalty programs (deemed of little use in this specific case), but under section 37 (employee benefit) and, secondarily, section 111 (shareholder benefit) of the Quebec Taxation Act.

The distinction matters: it’s not simply using business points for personal purposes that creates an issue, but rather the fact that the way those points are generated resembles a form of additional compensation. A shareholder who occasionally pays a business expense on a personal card is not in the same situation as someone who systematically structures payments to maximize personal rewards.

Conclusion

To maximize the value of loyalty points, it is essential to understand the tax implications of loyalty points earned from business expenses. Indeed, since the arrival of Chexy and its business program, earning points is easier than ever. Whether used for personal gratification, business optimization, or philanthropy, loyalty points can have a significant impact on your financial situation. Depending on your goals, the most popular credit cards are:

To ensure informed decisions, seek guidance from financial advisors, tax professionals, and legal experts who can provide tailored insights aligned with your unique circumstances. As you navigate the world of loyalty points and rewards, understanding their financial and tax dimensions is key to reap their full benefits.