Earlier this year, the Canadian Revenue Authority (CRA) made changes to how businesses must record and report credit card transaction fees. Let’s look at the history behind this decision and how it will affect Canadian merchants and business owners going forward.
Up until recently, it was illegal for Canadian business owners to charge their customers transaction fees for credit card usage. Credit card companies charge between 1-3% on the cost of each transaction. Under the old regulations, these fees were absorbed by the business, increasing their expenses and reducing profits. As of October 2022, because of a lawsuit between Visa, Mastercard, and a collection of Canadian businesses, Canadian businesses are now allowed to pass these charges, up to 2.4% of the transaction cost, on to their customers. Quebec is the exception: consumer protection laws prohibit merchants from charging credit card fees to consumers there.
Because of this change, businesses began collecting a small amount of extra revenue: the purchase amount from the sale, plus the credit card fee from customers who paid with credit. Of course, with a potential new revenue source, the CRA wanted to know: are those credit card processing fees subject to GST/HST?
This question ended up as a lawsuit between the Canadian government and the revenue authority: Canadian Imperial Bank of Commerce vs the Queen, 2021. The CRA wanted the right to tax credit card surcharges, but they lost the case.
The end ruling of the case is that credit card surcharges are not part of a business’ revenue. They are a payment for a separate service that the business is offering to its customers: the privilege, or convenience, of paying with a credit card. This means that these surcharge payments fall under financial service payments, which are exempt from GST/HST.
Here is where the 2023 changes come in: the Canadian Revenue Authority wanted to change the definition of financial services to exclude credit card surcharge revenue, making these payments eligible for GST/HST.
This was done by creating a special exception in the Excise Tax Act. Because of this change, all credit card surcharges paid on or after March 29, 2023 are now subject to GST/HST.
Other forms of financing charges, such as one-time financing charges on sales paid in installments, are still exempt from GST.
What does this mean? While 2.4% may not seem like an enormous amount of money on any given transaction, let’s look at some of the implications for this budget change.
Suppose a customer puts a $100 purchase on a credit card at a business that includes surcharges. This brings the total purchase amount to $102.40. Assuming a 5% GST, the tax on the surcharge portion of the transaction would be an additional $0.14 – in addition to any GST on the $100 purchase itself. In provinces like Ontario with a higher HST rate, these amounts would be even higher. It is clear why the CRA wants to capitalize on this revenue source – it is estimated that this change will add $195 million to the Canadian national budget.
Businesses that include these credit card surcharges are now required to report and remit GST/HST on these transactions. Any businesses that owe GST on these transactions will be issued an invoice.
For further information or more guidance, you can contact the Canada Revenue Authority or speak with one of our tax experts.
References
Application of the GST/HST to Credit Card Surcharges – Canada.ca
What You Need to Know About Canada’s New Credit Card Fee – NerdWallet.
https://www.freshbooks.com/blog/credit-card-surcharge-canada
Tax Insights: 2023 Federal budget ─ GST/HST and financial institutions | PwC Canada
