Should you pay your tax bill with a credit card?
Each spring, as April 30 approaches, those who owe taxes must to decide how to pay the balance owed to the Canada Revenue Agency (CRA). As of 2013, paying by credit card is an option -- but is it a wise one? Here's a look at two scenarios where you might be tempted to use plastic -- along with the potential pitfalls to consider.
The CRA accepts payments via mail, debit card, online banking and wire transfer. It does not let taxpayers pay the agency directly by credit card, but in 2013, a third party, online payment provider Plastiq Inc., introduced a workaround that lets taxpayers use the credit card of their choice.
It may sound convenient, but charging your tax bill could have a few more complications than charging a vacation or a piece of furniture. When you're paying a merchant directly with a credit card, the merchant typically absorbs the fees associated with accepting credit cards. But, when you pay through Plastiq, the website automatically charges a 2.5 per cent service fee (instead of charging the merchant) and adds this to your total bill. For instance, if your total tax liability is $5,000, you'd pay $125 in fees.
considering Plastiq? Here are two reasons you might be, and
what you should consider with each before settling on it.
Scenario 1: You're collecting
credit card rewards
If you're a rewards hound, you may like the idea of collecting miles or points on the money you pay to the CRA. But think carefully about
the value of those rewards and whether they'll earn enough to
outweigh the 2.5 per cent fee (many cashback cards pay 1 to 2 per cent).
rewards points programs won't likely be that generous," says Melanie Buffel, a Vancouver-based money coach with Money
Coaches Canada. "If they're airline points, it really depends on the value of the flights that you're flying. Different routes will have different valuations, and that can change day to day."
you carry a balance on a rewards credit card, then
interest payments combined with the 2.5 per cent fee would almost certainly cancel out the value of points or miles, so Buffel advises consumers to keep things simple.
"If you're turning yourself into a pretzel, it's really not worth your time," she says.
Scenario 2: You can't afford to
pay all your taxes at once
If you can't afford your entire tax bill, a credit card might seem like a good way out. You pay the tax bill when it's due, then make payments on the card over time. But consider other options besides credit for paying the CRA.
"You can pay your taxes with online banking or debit card," says Caroline Battista, a senior tax analyst with H&R Block Canada. "You can apply to set up a payment plan with the CRA and then you can pay them off slowly over time."
The CRA's current interest rate for payment plans is 5 per cent, which could be less than you'd pay with a credit card (not even counting the 2.5 per cent Plastiq fee).
"If you were to run the math on that, I think it would be best to arrange a payment plan with the CRA," says Bob Elliott, a CPA and senior manager with accounting firm Grant Thornton. "A lot of clients say 'I don't have the money to pay.' It's not illegal to owe the CRA money, but there are penalties for not filing on time. It's better to file and have a balance owing."
File late more than once and the penalties get even higher, so it's best to file on time, even if you can't pay your entire tax bill at once. But in most cases, you will be better off financially if you skip the credit card option and pay the CRA directly.
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