Credit Card Rewards Not Related to Spending: Taxable?

The CRA has long held the position that credit card rewards based on an amount spent are discounts, not income (unless they are rewards received personally as a result of spending on a corporate credit card). But what about a reward or bonus for simply opening an account, or for referring a friend who opens a new account? Clearly, the receipt of such rewards increases wealth and thus is income in an economic sense, suggesting a higher ability to pay tax. These amounts are taxable and subject to third-party reporting in the United States. The Canadian case is less clear, and probably depends on the specific facts of the taxpayer's situation, but it leans toward non-taxable status.

A New York Times article of February 22, 2019 notes that US credit card issuers paying such bonuses (for example, American Express) issue IRS form 1099-MISC to those who receive more than US $600 in rewards. The issuers appear to be complying with a US Tax Court decision, which held that the value of an airline ticket bought with frequent flier miles that were received as a premium in exchange for opening a bank account must be included in income (Shankar and Trivedi v. Commissioner of Internal Revenue, 143 TC no. 5, August 26, 2014).

In Canada, no specific guidance on this issue can be found in the statutes, case law, or CRA opinions. The best argument for taxability is that the activity of generating these rewards is a business, which would be more persuasive if the amounts were large (for example, above the US threshold) and recurring; this is more likely apply to referral fees, rather than to account-opening fees. This distinction of business versus non-business income is clearly present in Income Tax Folio S3-F9-C1 ("Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime"), at paragraph 1.26. In essence, a prize or other award received by a person for being at or participating in an Internet, radio, or television program is generally not included in income unless the person is a professional actor, entertainer, or celebrity receiving an appearance fee (in which case it could be business income or employment income).

One argument for non-taxability is that the amount is a windfall (The Queen v. Cranswick, [1982] CTC 69, 82 DTC 6073 (FCA), and paragraph 1.2 of the Folio S3-F9-C1). However, one of the usual tests for being a windfall is that the taxpayer had no enforceable claim to the payment, and that determination would depend on the facts: was there a clear promise of a reward, and perhaps of a specific amount, or was the reward given gratuitously?

Another argument for non-taxability is that paragraph 3(a) of the Act states explicitly that a taxpayer's income for a year is all income from a source, and rewards do not fit under any of the sources enumerated in section 3 (except possibly a business, as noted above). Rewards also do not fit any of the amounts named in part I, division B, subdivision d (sections 56 to 59.1), for which the subdivision title is "other sources of income." They could be an unenumerated source of income, but the SCC has been reluctant to assign anything to this category (see Fries, [1990] 2 SCR 1322; Schwartz, [1996] 1 SCR 254; and Benjamin Alarie, "The Taxation of Winnings from Poker and Other Gambling Activities in Canada," a 2011 article in the Canadian Tax Journal). Alarie notes that the US Internal Revenue Code uses an accretion concept of income, which generally taxes gains regardless of whether a gain has a "source" in the Canadian sense. Hence the US courts might be more willing to tax these reward amounts than Canadian courts would be.

Jin Wen
Grant Thornton LLP, Toronto
jin.wen@ca.gt.com



Canadian Tax Focus
Volume 9, Number 2, May 2019
©2019, Canadian Tax Foundation