Home > Canada, Gambling Tax Basics > Taxation of Gambling Winnings in Canada

Taxation of Gambling Winnings in Canada

[Introductory note from taxdood: Join me in welcoming gamingcounsel as a guest author at Taxes in the Back. Be sure to check out his impressive mini-bio at the end of the post.***]

Brad Polizzano has written about US taxation rules as they affect non-resident gamblers. What about the rules in Canada? What if you play in a poker tournament in Canada? Are those winnings taxable? Does it matter if you’re a professional poker player or not?

In each case it will depend on a factual determination of whether you are carrying on the business of being a poker player or a gambler.

Source Income

Very generally, the “income” in respect of which one is taxed in Canada is one’s “income from source” as set out in the Income Tax Act[1] (the Canadian equivalent of the Internal Revenue Code). What is income from source? It is a productive source of revenue from an office, an employment, a property, a business, or (without limiting the generality of the foregoing) an “other source.” Income from betting or wagering isn’t from an office or employment, and it’s not conceptually like the rents, interest, royalties, or dividends that come from property. The courts in Canada have demonstrated a reluctance to extend tax liabilities to cover unenumerated sources (the “other source” referred to above) of income; it’s unlikely that any gambling activities would be included in unenumerated sources.

That leaves income from business. When one carries on business in Canada, whether as a resident or a non-resident, one is generally taxable on the profit associated with that business. So, can a gambler be carrying on the business of gambling? The answer is that it’s conceptually possible, but it’s not easy.

In order to carry on business as a gambler based on the decided cases, one has to carry on a business with a fairly high level of skill. The two most prominent cases where a person was found to be taxable on gambling winnings involved a professional golfer who made money wagering on his own performance in matches[2] and a snooker player who hustled drunks in money games.[3]

There is an old paragraph of the Act called “right to a prize” that provides as follows: “a taxpayer’s gain or loss from the disposition of (i) a chance to win a prize or bet, or (ii) a right to receive an amount as a prize or as winnings on a bet, in connection with a lottery scheme or a pool system of betting referred to in section 205 of the Criminal Code, is nil.”[4] While this language appears straightforward, this paragraph is of limited assistance and raises more questions than it answers; section 205 of the Criminal Code was repealed in 1985.

Lotteries, Games of Chance & Sports Betting

It’s safe to say that a person in Canada winning a lottery prize or winning at a game of pure chance (e.g., craps, roulette, or slots) is not subject to Canadian income tax on those receipts and, in fact, no modern reported case that I am aware of has found such receipts to be taxable. This makes intuitive sense as it would be difficult to imagine anyone actually making a commercial living based on pure chance.[5]

What about sports betting? In perhaps the leading case on the taxation of gambling winnings in Canada right now,[6] these kinds of winnings were not held to be taxable. The taxpayers in that case played the provincial sports lotteries. Even though they were financially successful, devoted themselves to the activity full-time, and had an organized and systematic approach to playing the lotteries and comparing posted odds to the Vegas odds, the court concluded that they were compulsive gamblers “continually trying their luck at a game of chance.”

The Poker Situation

Poker, however, provides an interesting possible counterpoint. Again, for most people, and certainly for the casual player, there will be a presumption against taxation of poker winnings as they will not be from a business. But what of the professional[7] poker player? Although there is no remotely recent case holding that a professional player is taxable on her profits from poker, it’s possible to see how such a case could be made by the government. Among other indicia, if a resident in Canada is successful in poker with solid and consistent profits from the activity over a number of taxation years, has no material income-earning occupation other than playing poker (or related to playing poker – sponsorships, for example), and is a student of the game and works at learning and improving her game, then it seems likely that that resident would be classified as carrying on the business of being a professional poker player and be taxable on her profits from the game.

One difficulty is that making an actual determination like this would be extremely difficult. Where is the tipping point at which a taxpayer makes the leap from an amateur player to a professional sufficiently devoted to poker, consistently winning, and making good money? These things are much easier to nail down in theory than in practice. This is part of the reason that the Canada Revenue Agency is reluctant to assess people as having income from carrying on the business of playing poker; if business profits are taxable, then business losses can be also used to reduce income from that business and (in the case of individuals) from other businesses or from employment. If the government gets overly aggressive with taxing poker players, it could eventually find that it results in a net drain on Canada’s tax revenues.

How could the tax laws in Canada apply in a land-based poker tournament being held in Canada pursuant to applicable provincial laws and regulations? This is an interesting question. An amateur player would likely not be taxable, but let’s assume that a professional poker player who is resident in Canada wins such a tournament. Again, based on an analysis that the player has the hallmarks of a professional poker player discussed above, those winnings would likely be included in the player’s income from a business.

What of a United States resident professional player winning such a tournament? Non-residents are generally taxable on income earned from carrying on a business in Canada, and “carrying on business” in this context is broadly defined.[8] However, the Canada-US Income Tax Convention (the “Treaty”) provides that where a US resident is carrying on business in Canada, the business profits are taxable by Canada only if the US resident is carrying on business through a permanent establishment. Permanent establishment in the Convention is an inclusive definition, which means the examples given are not exhaustive – things can be permanent establishments even though they’re not specifically itemized. However, this enumerated list includes structures and relationships like a branch, an office, a factory, a construction site, and an agent in Canada habitually exercising authority to conclude contracts in the name of her principal. It’s highly unlikely that a non-resident coming to Canada and playing in one land-based tournament and then leaving the country would be seen to have a permanent establishment in Canada.

Therefore, it doesn’t appear that a US professional playing at a Canadian land-based tournament would be subject to tax in Canada under the terms of the Treaty, which also means that the tournament would not withhold on any payments to that non-resident. (In each case of a non-resident, it will be important to know what her home country’s tax convention with Canada says, if in fact the two countries have signed one.)

Income Derived From an Illegal Source

One other comment should be made: If one has income from an illegal activity, in Canada that income is still generally taxable even though ill-gotten.[9] Accordingly, players and gaming operators (including poker operators and players) committing offences under the Criminal Code, whether in bricks-and-mortar facilities or online, may still very well be taxable on their activities. Given that criminals often hide their incomes, this note is more technical and of less practical use to most people.

***

Stuart Hoegner is an attorney and an accountant in Toronto, Canada practicing exclusively in gaming law. His clients include the owners of top Internet poker brands, skill games operators, casinos, auction sites, bookmakers, media companies, professional poker players, and entrepreneurs in the gaming and social media sectors. He is @GamingCounsel on Twitter.


[1] R.S.C. 1985, c. 1 (the “Act”). There is an excellent and recent article addressing the income tax aspects of poker in Canada: Income Taxation of Poker Winnings in Canada by Benjamin Alarie. Alarie addresses many of the issues in much more detail than I do here. However, I will also talk about non-residents participating in land-based poker tournaments, which Alarie did not discuss.

[2] Dowling v. R., [1996] 2 T.C.J. No 301 (T.C.C.).

[3] Luprypa v. R. (1997), D.T.C. 1416 (T.C.C.).

[4] Paragraph 40(2)(f).

[5] This ignores any possible ‘breaking’ of the provincial lotteries or some other way of systematically reducing or eliminating the odds of losing. See the interesting article in Wired by Jonah Lehrer for some perspective on this. This could, at least conceptually, make a “random” game, if pursued systematically and consistently, a business or adventure or concern in the nature of trade for tax purposes.

[6] (2007), D.T.C. 307 (T.C.C.).

[7] By this I don’t mean a professional in the sense that one is regulated by a governing body to which one pays dues, has professional insurance, etc. I use the term more loosely to describe any individual that receives income that is compensation for or attributable to the individual’s activities as a player in a sport or activity.

[8] See s. 353 of the Act.

[9] See for example R. v. Poynton (1972), D.T.C. 6329 (Ont. C.A.).

Categories: Canada, Gambling Tax Basics Tags:
  1. Cody
    March 7th, 2011 at 14:54 | #1

    Awesome to see some Canadian tax content somewhere online for us gamblers. Hope to see some more!

    Thanks gamingcounsel!

  2. jsteere2002@yahoo.com
    March 7th, 2011 at 21:27 | #2

    Taxdood,

    I have a simple but fundamental tax question on gambling. One of my friends, let’s call him Jim, plays slots extensively. He has been issued numerous w2g’s that document most of his winnings. He is under the impression that because he also lost funds during the sessions for which he recieved the w2g’s, that he only has to report his net gain for those sessions, not what’s listed on the w2g. Is this a correct?

    • March 7th, 2011 at 21:44 | #3

      He is correct.

      If filing as professional gambler, Jim can simply net the wins and losses from his slot sessions and report the resulting figure on his Schedule C, if it is 0 or greater.

      If filing as a recreational gambler, he can net losses against wins that were incurred in the same session. If an overall loss was incurred in any session, which is very likely, these losses must be reported as an itemized deduction on Schedule A. The key is to separate each session, total all of the winning sessions and report the total on line 21 as “other income,” and total all of the losing sessions and report as an itemized deduction. See this post for more about the tax implications facing recreational gamblers.

      But that’s the easy part. One of the biggest problems gamblers face when tax time comes is documentation. If Jim reports the losses and the IRS selects his return for audit, the auditor will almost certainly ask for documentation for the losses. That’s because his reported gambling figures won’t match the amounts on the W-2Gs that the IRS will have on file. See this post for more about recordkeeping gambling activity.

  1. No trackbacks yet.

COMPENSATION DISCLAIMER: Please note that Taxes in the Back has financial relationships with some of the merchants mentioned here. Taxes in the Back may be compensated if consumers choose to utilize the links located throughout the content on this site and generate sales for the said merchant.