To the point
The financial implications of points earned through business expenses: explore tax considerations and strategies for maximizing rewards.
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, particularly those earned from business expenses, often go unnoticed.
This article explores the intricacies of exchanging 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:
- You earn 1.25X Membership Rewards (the most flexible form of loyalty point in Canada) on all purchases without any limit
- You have plenty of Amex Promotional Offers and annual credits
- You have free unlimited access to over 1,300 VIP Lounges in the world
- You can write off the annual fee on line 8871 to have it tax-deductible
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.
- Personal Usage: When using loyalty points earned with personal expenses for personal usage, such as a dream vacation or luxury items, tax concerns are typically negligible. These points often mirror discounts or promotions.
- Professional Usage: The scenario becomes more complex when loyalty points are earned through business-related expenditures and/or are utilized for work-related activities. The value of your business class flight may become a taxable income if the points were earned with your business.
Tax Implications for Employees
- Direct Expenses: Suppose you’re an employee who accumulates loyalty points through business-related spending, such as corporate travel. If your employer doesn’t control the points you’ve earned, you may need to report the fair market value of the rewards as taxable income.
- Business Credit Card Usage: Using your personal credit card for business expenses (where your employer reimburses you), thereby earning points, might trigger tax obligations. If your employer doesn’t control the points you’ve collected, you might be required to declare the fair market value of the received rewards as taxable income.
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: Utilizing both personal and business-related points to cover expenses can raise tax considerations. The sequence in which these points are used becomes significant, with the CRA generally assuming that business-related points are utilized first.
Alternative Uses for Loyalty Points
Loyalty points can be leveraged in diverse ways to avoid tax implications:
- Debt Repayment or Investment: Points can serve as a valuable asset for reducing company debts or investing in tax-efficient accounts, potentially yielding enhanced tax advantages.
- Charitable Contributions: Donating loyalty points to eligible charities can offer tax advantages for the company, provided their value can be reasonably appraised.
Bottom Line
Unravelling the intricacies of loyalty points’ tax implications earned from business expenses is essential for maximizing their value. Whether they are used for personal gratification, business optimization, or philanthropy, loyalty points can significantly impact your financial landscape.
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.
