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Can you pay your taxes with a credit card?

“We do not accept credit cards either for any type of tax payment — period,” barked the unfriendly property tax collector at Toronto City Hall. My question was whether I could use my credit card to pay property taxes in a lump sum or for recurring automatic deductions.

It’s the same story for income taxes. The Canada Revenue Agency also refuses credit card tax payments.

In the United States, the Internal Revenue Service happily accepts credit cards via special third-party processors. The IRS website even encourages cardholders with statements like “taxpayers may earn miles, points, rewards or money back from the credit card issuer.”

The credit card way
There is a way around the CRA ban on direct credit card disbursements. Canadians can simply deposit cash advances from their cards into their financial institution accounts — and use money from those accounts for tax payments.

Still, paying taxes with plastic via the cash-advance route can be expensive. Most credit cards charge higher annual percentage rates (APRs), like 21.5 per cent, for cash advances, plus fees equal to 1 per cent of the financed amount. After one year, cash advance expenses on a $10,000 tax payment can amount to $2,250 or more. Fail to make minimum monthly payments, and you trigger a myriad of credit card penalties that can significantly lower your credit score.

Worse ways to approach taxes
Paying your taxes with a credit card isn’t the only costly route. Withdrawing money from your Registered Retirement Savings Plan (RRSP) can incur up to 40 per cent in additional taxes, depending on province of residence. Payday loans are another prohibitively expensive route.

Not paying your taxes by the April 30 deadline can also result in financial headaches. The CRA charges daily compounded interest starting May 1 and imposes a late-filing penalty. That charge equals 5 per cent of the tax amount due, plus an additional 1 per cent for each full month that your payment is late up to 12 months. Failing to pay taxes for a year transforms the $10,000 tax bill into an $11,700 unpaid debt.

Better taxpaying options
Paying a tax bill from a home equity line of credit is a better option, given that HELOC interest rates are currently as low as 3 per cent. Annual interest costs on a $10,000 tax bill are roughly $300.

Perhaps the best option is the CRA’s own electronic payment service called My Payment. Taxpayers can automate negotiated payments directly to the CRA from their online banking accounts. Currently, the prescribed interest rate on amounts owed to the CRA on overdue taxes is reasonable at 5 per cent.

With cost-saving options like these, I don’t need to use my credit card, at least not for paying taxes — period.

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