Can merchants charge a credit card fee in Canada? What you need to know

In Canada, merchants can charge customers an extra fee for using credit cards. This practice, known as a surcharge or convenience fee, allows businesses to offset the costs associated with credit card processing. These fees can vary depending on the type of credit card and the merchant's agreement with their payment processor.

However, merchants must follow specific regulations and guidelines to ensure transparency and fairness in their transactions. Understanding these rules is crucial for businesses and consumers to navigate the landscape of credit card surcharges effectively.

What is credit?

Credit refers to the ability to borrow money or access goods or services with the understanding that you'll pay for them later. There are different credit types, such as revolving, installment, and open credit. When you make purchases, it shows up as a pending transaction before being processed. Exceeding your credit limit can result in your card being declined.

Understanding credit card fees in Canada

What are interchange fees?

Interchange fees are charges a merchant's bank pays to the cardholder's bank every time a credit card transaction is processed. These fees are set by credit card networks, such as Visa and Mastercard, and are intended to cover the costs of handling and risk management associated with credit card transactions.

Interchange fees compensate the issuing bank for the costs of credit card services, including credit risk, fraud prevention, and transaction processing. The fee typically consists of a percentage of the transaction amount plus a fixed fee. For example, an interchange fee might be 1.5% of the transaction value plus $0.10 per transaction.

Interchange fees can vary based on several factors, including the type of card used, the nature of the transaction, and the merchant's industry. Higher interchange fees can increase the cost of accepting credit card payments for merchants. Some businesses choose to pass on these costs to consumers through surcharges.

Can merchants charge surcharges?

Yes, merchants in Canada can charge surcharge fees on credit card payments, but there are specific rules and guidelines they must follow to ensure transparency and fairness. These surcharges, also known as convenience fees, are intended to help businesses offset the costs associated with credit card processing.

Permissibility

Since 2022, merchants in Canada have been allowed to apply surcharges to credit card transactions. This change followed a settlement between merchants, Visa, and Mastercard, which gave businesses the right to pass on processing fees to consumers.

Disclosure requirements

Merchants must disclose the surcharge amount before the transaction is completed. The surcharge must be stated separately on the receipt, ensuring consumer transparency.

Surcharge limits

The surcharge cannot exceed the merchant's actual cost of accepting the credit card, typically up to a maximum of 2.4% of the transaction value. Merchants cannot profit from the surcharge; it should only cover the processing costs.

Customer awareness

Merchants must inform customers about the surcharge policy at the point of sale, both online and in physical stores. Signage should be prominently displayed, and online notices should be clear and conspicuous.

Card type considerations

Different types of credit cards may have varying processing fees. Merchants may apply surcharges only to certain cards with higher fees, such as premium or rewards cards.

Consumer rights

Consumers have the right to be informed about any surcharges before completing a transaction. They can use alternative payment methods, such as debit cards or cash, which typically do not incur surcharges.

How do credit card processing fees work?

Merchants incur credit card processing fees when they accept credit card payments. These fees cover a variety of services and are typically shared among different entities involved in the transaction process.

Assessment fees

Assessment fees are charged by the card networks to the acquiring bank for the privilege of processing card payments through their network. These fees help cover the cost of maintaining and improving the card network infrastructure. The assessment fee is typically a small percentage of the transaction.

Payment processor fees

These are fees charged by the payment processor for facilitating the transaction between the merchant and the acquiring bank. Payment processor fees cover the cost of technology and services provided by the payment processor. They can be a flat fee per transaction, a percentage of the transaction amount, or both. Some processors also charge monthly or annual fees.

Foreign transaction fees

Foreign transaction fees are charges imposed on credit card transactions outside the cardholder's home country or in a foreign currency. These fees can apply to in-person purchases made abroad and online purchases from international merchants.

How do credit or debit cards affect surcharges?

Credit card transactions generally incur higher processing fees for merchants due to the risks and costs associated with credit. These include interchange fees, assessment fees, and payment processor fees. Because of these higher fees, merchants are more likely to pass on a surcharge to customers who pay with credit cards. This surcharge helps merchants offset the additional cost of processing credit card payments.

Merchants must disclose any surcharges for credit card transactions clearly before the purchase is completed. These surcharges are typically a percentage of the transaction amount, up to a maximum of 2.4% in Canada. Despite the potential for surcharges, many consumers prefer using credit cards due to rewards programs, travel benefits, and purchase protections.

Debit cards

Debit card transactions usually have lower processing fees compared to credit cards. The funds are directly debited from the cardholder’s bank account, reducing the risk and cost for the issuing bank and the payment processor. Due to the lower costs associated with debit card transactions, merchants are less likely to impose surcharges on debit card payments. In many cases, no surcharge is applied at all.

If a surcharge is applied to debit card transactions, merchants must disclose this clearly before the purchase is completed. However, this is less common. Using debit cards online and in-person can be a better choice for consumers who want to avoid surcharges and manage their spending more directly, as they are using their own money rather than borrowing on credit.

Legal and contractual considerations

Merchants must adhere to their agreements with payment processors and card networks, which outline the conditions under which surcharges can be applied. These agreements often distinguish between credit and debit card transactions. In Canada, specific provinces may have additional regulations regarding the application of surcharges, which can affect credit and debit card transactions.

Consumer choice

Consumers should know potential surcharges when choosing between credit and debit cards. Checking with the merchant about additional fees before completing the transaction can help avoid unexpected costs. Opting for debit cards over credit cards can help consumers avoid surcharges, especially for larger purchases where the surcharge on a credit card could be significant.

Impact on businesses

Businesses must balance the need to cover processing costs with the potential negative impact on customer experience when applying surcharges. Transparent communication and offering multiple payment options can help mitigate any negative perceptions.

How does GST/HST apply to credit card transactions?

When you use a credit card to purchase goods or services, GST or HST is typically included in the total price. The merchant collects this tax and remits it to the government. The applicable rate of GST (5%) or HST, ranging from 13% to 15%, depending on the province, is based on the location of the sale and the nature of the goods or services.

Fees that merchants pay to credit card companies, like interchange and assessment fees, are considered a cost of doing business and generally do not include GST/HST. Fees that consumers might incur directly from their credit card issuer, such as annual fees, late payment fees, and foreign transaction fees, may be subject to GST/HST. The credit card issuer must clearly state whether these fees include GST/HST.

If a merchant applies a surcharge for credit card payments, this surcharge is typically subject to GST/HST. The surcharge becomes part of the total taxable amount of the transaction.

Businesses can claim input tax credits (ITCs) for the GST/HST paid on expenses incurred during their commercial activities, including fees paid to credit card companies. It allows businesses to recover the tax paid on these expenses. Proper documentation, such as receipts and invoices that indicate the GST/HST paid is required to claim ITCs.

Purchases made with foreign merchants may not include Canadian GST/HST. However, imported goods may be subject to GST/HST and other import duties upon entering Canada. If your credit card issuer charges a foreign transaction fee, GST/HST may apply to this fee if the issuer is Canadian and the cardholder resides in Canada.

Businesses must ensure that their invoicing and receipts comply with GST/HST regulations, clearly showing the tax amount and rate applied to each transaction, including any surcharges. Financial services, such as credit card transactions, are generally exempt from GST/HST. However, ancillary fees may still be taxable.

Consumer rights and credit card surcharges

When merchants decide to apply surcharges on credit card transactions, they must adhere to specific disclosure requirements to ensure transparency and fairness.

What merchants must disclose

Merchants must inform customers about the surcharge before the transaction is completed. It means providing clear and conspicuous notice at the point of sale, whether in a physical store or online.

In physical stores, signs should be prominently displayed at the entrance and the checkout area, indicating that a surcharge will be applied to credit card transactions. For online transactions, the surcharge information must be displayed on the payment page before the customer finalizes their purchase.

Surcharge amount

Merchants must clearly state the surcharge amount. This can be a percentage of the transaction value or a fixed fee. The surcharge must be presented as a separate line item on the receipt or invoice. The surcharge should not exceed the merchant's cost of accepting credit cards, typically capped at a maximum of 2.4% of the transaction value in Canada.

Alternative and options

Merchants should inform customers about alternative payment methods that do not incur surcharges, such as debit cards or cash. This helps customers make informed choices about how they wish to pay.

Compliance

Merchants must comply with any additional provincial regulations or restrictions related to surcharges. Some provinces may have specific rules governing the disclosure and application of surcharges. Merchants must adhere to the rules set by card networks like Visa and Mastercard, which may have their requirements for surcharge disclosures.

Transparency on receipts

The receipt provided to the customer must show the base transaction amount, the surcharge applied, and the total amount charged. This breakdown ensures that the customer understands how much they are paying in surcharges.

Customer queries

Merchants should be prepared to answer customer questions about the surcharge, including why it is being applied and how the amount is determined. Providing clear and accurate information helps maintain customer trust.

Credit card surcharge limits

Credit card surcharges are additional fees that merchants may apply to transactions made with credit cards to offset processing costs. In Canada, there are specific limits and guidelines governing these surcharges to ensure fairness and transparency.

Maximum surcharge amount

The surcharge applied by merchants cannot exceed the merchant’s cost of accepting credit cards. This typically translates to a maximum surcharge of up to 2.4% of the transaction amount in Canada. The cap on surcharges is influenced by agreements between merchants and card networks. These agreements often set maximum limits to prevent excessive surcharging.

Surcharge calculation

The surcharge is usually calculated as a percentage of the transaction amount. For example, if the surcharge is 2%, and the purchase amount is $100, the surcharge would be $2, making the total $102. Some merchants may apply a fixed surcharge amount, though this must be disclosed and not exceed the overall percentage limit compared to variable transaction amounts.

Strategies for avoiding surcharges

For consumers

Debit cards typically have lower processing fees for merchants compared to credit cards. Therefore, they are less likely to incur surcharges. Since debit card payments are directly linked to your bank account, they are less costly for merchants to process.

Cash transactions don't involve processing fees, so merchants cannot impose surcharges on cash payments. Using cash can help you avoid additional costs associated with credit card surcharges.

If you're travelling internationally, using credit cards that do not charge foreign transaction fees can help you avoid additional costs. This can be particularly useful for avoiding extra charges on foreign purchases.

Some businesses may not apply surcharges on credit card transactions. Look for merchants who do not add extra fees for card payments. Before making a purchase, especially with a credit card, ask the merchant if any surcharges apply and if there are alternative payment options available.

For businesses

Work with payment processors to negotiate lower transaction fees. This can reduce the need to apply surcharges to customers. Consider different pricing models, such as interchange-plus, which can offer more transparency and potentially lower overall costs.

Provide customers with various payment options, including debit cards, cash, and digital wallets, which may not incur surcharges. Businesses can absorb the cost of credit card processing fees as part of their business expenses rather than pass these fees on to customers.

Offer incentives for customers to use payment methods that do not incur surcharges, such as discounts for using debit cards or cash. If surcharges are necessary, ensure they are disclosed to customers before completing the transaction. This transparency helps manage customer expectations and avoids surprises.

Credit card rewards and benefits

Credit card rewards vs. cash back are key incentives for many consumers who choose to use credit cards for their purchases.

How surcharges affect credit card rewards

When a merchant applies a surcharge to credit card transactions, it increases the total cost of the purchase and diminishes the rewards earned. For example, if a credit card offers 1.5% cash back on purchases and a merchant adds a 2% surcharge, the net reward percentage is effectively reduced.

Rewards are typically calculated based on the pre-surcharge transaction amount. This means the surcharge does not count toward earning rewards. The additional cost from the surcharge can reduce the overall return on the rewards earned from the purchase.

If the rewards earned from using the credit card are less valuable due to surcharges, it may affect your strategy for maximizing rewards. For instance, paying a surcharge may make it less attractive to use a credit card for certain purchases. Not all merchants apply surcharges to credit card transactions, so using your credit card at businesses that do not impose surcharges can help maximize rewards without additional costs.

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