­­Should you pay the CRA with your credit card?

Are you debating whether you should pay your taxes off with a credit card? This year, more than 6.5 million Canadians owe taxes, with an average balance of $6,990, according to the CRA’s 2023 personal income tax return statistics. ­

Paying your taxes off with a credit card could work to your benefit. However, there are also some considerable drawbacks to take into account. Below, I’ll discuss some of the pros and cons of paying the CRA with your credit card and outline some of the best alternatives.

HOW TO PAY THE CRA

Thankfully, the Canada Revenue Agency makes it incredibly easy for taxpayers to pay their debts. After all, the CRA wants to get paid.

For reference, here’s a comprehensive list of how individuals can pay taxes to the CRA.

Online

• 
  Third-party card processors (credit or debit card, PayPal, or Interac e-Transfer)
• 
  Your online banking portal
• 
  Pre-authorized debit (PAD) via your online banking portal
• 
  CRA My Payment via Interac (debit card only)
• 
  Wire transfer (if you don’t reside in Canada or don’t have a Canadian bank account)

In-person

• 
  Canada Post (debit or cash only)
• 
  Your bank or financial institution (debit or cheque only)

By mail

ADVANTAGES OF PAYING WITH YOUR CREDIT CARD

The easiest way to pay your taxes online is through the CRA My Payment system, which can be accessed through your CRA My Account or by paying through your bank account’s online portal.

However, the CRA has also partnered with PaySimply – a third-party online payment processor that accepts payments made through PayPal, debit, or credit cards.

As I mentioned, there are pros and cons to paying your taxes with a credit card. Let’s start with the advantages.

Instant payment

One of the most common reasons why taxpayers pay online with their credit cards is that the payment is processed instantly. If you’re running short on time, are having trouble logging into your CRA My Account, or are approaching your payment deadline, paying with your card online ensures your payment is processed quickly.

You can pay your taxes on time

If you’re one of the many Canadians experiencing financial hardship, you may not have cash available to pay your tax debt. While the CRA offers payment plans (more on this below), these may also result in added interest fees.

Paying your taxes off with one lump-sum credit card payment ensures your tax debt is handled on time so you can avoid any unpleasant interactions with the CRA.

Earn points and rewards

Even if you have the funds available to pay your tax debt, you may still benefit from paying your taxes with a credit card if you have a card that allows you to earn cashback or additional rewards.

For example, many cards offer new cardholder bonuses that award users travel rewards points, free credit, or additional cashback if they meet certain spending requirements within an allotted timeframe.

Paying off your taxes can be a great way to meet these spending requirements and cash in on your reward.

However, you should also weigh the online card processing fees against these rewards to see if it’s worth using your card.

DISADVANTAGES OF PAYING WITH YOUR CREDIT CARD

Paying your taxes off with your card may be beneficial. However, there are also some drawbacks you should be aware of before you make the decision.

Credit card interest

Credit cards are notorious for having high-interest rates, which is typically far higher than the interest imposed by the CRA on late taxes.

If you don’t plan to quickly pay your credit card balance off after using it for your taxes, you could end up in even more debt than you started with.

Costly processing fees

PaySimply, the CRAs third-party card processing partner, imposes a 2.5 per cent fee on all PayPal and credit card transactions. This means you’ll pay an extra $2.50 for every $100 you owe and $25 for every $1,000 you owe.

By comparison, bank account transfers are often fee-free and payments made via Canada Post have a flat fee that ranges between $3.95 and $7.95.

Impact on your credit score

If you don’t pay your credit card balance off before the end of the month, it could significantly impact your credit score. One of the key factors that determines your score is your credit utilization.

This measures the percentage of your total available credit that you’ve used and is calculated by credit bureaus monthly. Your credit score could be negatively impacted if your credit usage increases significantly due to a large lump sum tax payment.

ALTERNATIVES TO PAYING WITH YOUR CREDIT CARD

Here are a few alternatives to consider instead of paying your taxes off with your credit card.

Set up a payment plan

The CRA allows taxpayers to set up individual payment plans based on their income and expenses. Once a payment plan is created, the amount will be withdrawn monthly via a pre-authorized debit through your bank. If you go this route though, be aware that there might be interest payments that you’ll need to pay. It generally won’t affect your credit score if you decide to set up a payment plan.

Obtain a personal loan

Requesting a personal loan through your bank may be better than using your credit card. Personal loans often have lower interest rates than credit cards and may offer more favourable payment terms.

Making timely payments either in a lump sum or in separate amounts could also improve your credit history and help diversify your lines of credit, which could positively impact your credit score.

Reassess your tax returns with a professional

If you filed your taxes yourself, then there’s a chance that you may have made a few mistakes.

A CPA could help you identify tax credits and benefits you didn’t apply for, which could significantly lower your tax liability.

Tax debt relief and forgiveness

The CRA may offer tax debt relief and, in rare cases, forgiveness based on extenuating circumstances. However, nothing is guaranteed, and each case is reviewed in-depth before a decision is made. You must contact the CRA directly to discuss relief or forgiveness.

Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers on his Wealth Awesome website.