In Germany, wins are taxable since July 2012 by 5% of the winnings (profit). In Canada gambling income is not generally taxable. If the gambling activity can be considered as a hobby, the income is not taxable. If the gambling is carried out in businesslike behaviour, then the income is taxable and losses deductible. It is useful, therefore, for taxpayers to understand how gambling income and losses are taxed under the Income Tax Act of Canada. Income from Gambling. Are gambling winnings a 'prize' under the Income Tax Act? Money received as scholarships and bursaries or 'a prize for achievement in a field of endeavour ordinarily carried on by the. This rendered gambling the largest entertainment industry in Canada. For this reason, taxpayers should understand how gambling income and losses are taxed, according to Canadian law under the Income Tax Act of Canada. Gambling Income. Are gambling winnings considered to be a 'prize' under the Income Tax Act?
Taxation of Gambling Winnings in Canada
Time for a blog post about taxes. How are gambling winnings in Canada generally taxed? 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.
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 suggests that the tournament would not withhold on any payments to that non-resident. Indeed, there appears to be no withholding obligation for such a payment to a non-resident in the Act. (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.
[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.).
Closest casino to limon colorado hotels. [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.
[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.
[9] See for example R. v. Poynton (1972), D.T.C. 6329 (Ont. C.A.).
During the recent summer Olympic Games we learned that Canadians, Americans and athletes from other countries receive a financial bonus for each medal they win, the size of the bonus depending upon the colour of the medal. This income is also taxed, a fact that is stirring legislators in the U.S. this fall to propose a tax exemption for Olympians. Some decry another tax break for multi-millionaire NBA professional basketball players and other heavily-sponsored athletes. If these earnings are taxable, what deductions might be claimed to earn this income?
Also circulating is the myth that American athletes are even taxed on the metallic value of those same medals. While this is a reasonable technical interpretation of the U.S. Tax Code, and the Canadian Income Tax Act, this is not happening, if only because the economic value of the mineral content in the medals is rather paltry. In the lead-up to the 2000 Olympics in Sydney, it was also feared that Australian tax authorities would levy tax on these bonuses as income derived from performance that took place in Australia. That did not happen either.
Tax policy ignites passions and debates because, in the process of raising money for public purposes, incentives and disincentives toward various economic activities are created. Infrequent events, such as skill-based Olympic medals or luck-based lotteries can be ramped up from occasional 'prizes' to something akin to a regular business. This article examines the Canadian tax treatment of income from winning and losing – not from athletic competition but from gambling.
In 2010, according to Statistics Canada, $13.7 billion in net revenue was generated from government-run gaming activities, rendering gambling the largest entertainment industry in this country. It is useful, therefore, for taxpayers to understand how gambling income and losses are taxed under the Income Tax Act of Canada.
Income from Gambling
Are gambling winnings a 'prize' under the Income Tax Act? Money received as scholarships and bursaries or 'a prize for achievement in a field of endeavour ordinarily carried on by the taxpayer' is taxable (s.56). What the Act calls 'windfalls' – occasional lotteries and sweepstakes, for example – are not taxable. 'Prescribed prizes' awarded for meritorious achievement in the arts, sciences or public service are also exempt from taxation. This explains why income from a Nobel or literary prize would be non-taxable, but Olympic income (which is not art, science or public service) is taxable.
Canadians who gamble seriously, even for a living, could have their winnings taxable as 'prizes' (although no judicial decisions yet confirm that) or more likely as income from business. Taxable income encompasses total income from four sources – office, employment, business and property (s.3 (a)). While notions of office, employment and property do not readily apply to gambling activity, business is defined as 'a profession, calling, trade, manufacture or undertaking of any kind whatever . . .'(s. 248(1))
When gambling is business, one's 'income (and loss) for a taxation year from a business … is the taxpayer's profit (and loss) from that business … for the year.' (ss.9(1) and 9(2)) Given the broad definition of a business, what is the basis for determining when a gambling activity is in fact and in law a business?
Governing Principles: 'Reasonable Expectation of Profit' or 'Pursuit of Profit'?
Are Casino Winnings Taxed In Canada
The Supreme Court of Canada stated in the 1978 case of Moldowan v. The Queen:
In order to have a 'source of income' the taxpayer must have a profit or a reasonable expectation of profit. … Whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking.
This 'REOP' test determined if a taxpayer could deduct losses from business. A problem arose because the REOP test did not distinguish between regular business activities and personal hobbies. This 'type of activity' issue, which relates to taxation of gambling gains and losses, was resolved a decade ago in the 2002 Supreme Court of Canada case of Stewart v. Canada.
As an experienced real estate investor (which some say is itself a form of gambling), Brian Stewart borrowed large sums of money to purchase four condominium units as rental properties in 1986. Owing to unfavourable economic conditions, his rental income was less than projected. Stewart claimed losses of $27,814, $18,673, and $12,306 between the years 1990 and 1992, representing significant interest expenses on his loans. His claims were disallowed by the Canada Revenue Agency, based on the REOP test. The courts concluded that Stewart's flawed investment model did not have a reasonable chance of earning a profit.
The Supreme Court of Canada ruled that the 'REOP test is problematic owing to its vagueness and uncertainty of application; this results in unfair and arbitrary treatment of taxpayers. As a result, ‘reasonable expectation of profit' should not be accepted as the test to determine whether a taxpayer's activities constitute a source of income' (para 47). The Court adopted a new two-part approach, known as 'the pursuit of profit test':
(i) Is the activity of the taxpayer undertaken in pursuit of profit, or is it a personal endeavour? This first stage of the test searches for a source of income; and
(ii) If it is not a personal endeavour, is the income source a business or property? This second stage categorizes the source as either business or property (para 50).
Applying the pursuit of profit test, the Court ruled Stewart was entitled to claim his losses because his real estate investment was undertaken solely for the pursuit of profit even if his business model was flawed.
Application of the Pursuit of Profit Test to Gambling
Are Casino Winnings Taxed In Canada 2020
When is gambling undertaken in pursuit of profit and when is it a mere personal endeavour? There is a clear personal entertainment return on gambling which may outweigh the realistic expectation of winning, but thrill and pleasure are sought in business too.
In the 2006 case of Leblanc v. The Queen, the Leblancbrothers won an average of $650,000 per year between 1996 and 1999 by gambling on sports lotteries in Ontario and Quebec. The brothers wagered $10 to $13 million per year, developed a computer program to analyse bets, and negotiated a 2-3% discount from ticket retailers. The Canada Revenue Agency treated this gambling operation as a business, 'because it was managed and organized with the object of realizing a profit (para 7).' However, the Tax Court, acknowledging 'that certain types of gambling can in some circumstances be a business but it is a rare circumstance (para 36),' characterized these gambling activities as a personal endeavour (para 48):
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.
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 suggests that the tournament would not withhold on any payments to that non-resident. Indeed, there appears to be no withholding obligation for such a payment to a non-resident in the Act. (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.
[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.).
Closest casino to limon colorado hotels. [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.
[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.
[9] See for example R. v. Poynton (1972), D.T.C. 6329 (Ont. C.A.).
During the recent summer Olympic Games we learned that Canadians, Americans and athletes from other countries receive a financial bonus for each medal they win, the size of the bonus depending upon the colour of the medal. This income is also taxed, a fact that is stirring legislators in the U.S. this fall to propose a tax exemption for Olympians. Some decry another tax break for multi-millionaire NBA professional basketball players and other heavily-sponsored athletes. If these earnings are taxable, what deductions might be claimed to earn this income?
Also circulating is the myth that American athletes are even taxed on the metallic value of those same medals. While this is a reasonable technical interpretation of the U.S. Tax Code, and the Canadian Income Tax Act, this is not happening, if only because the economic value of the mineral content in the medals is rather paltry. In the lead-up to the 2000 Olympics in Sydney, it was also feared that Australian tax authorities would levy tax on these bonuses as income derived from performance that took place in Australia. That did not happen either.
Tax policy ignites passions and debates because, in the process of raising money for public purposes, incentives and disincentives toward various economic activities are created. Infrequent events, such as skill-based Olympic medals or luck-based lotteries can be ramped up from occasional 'prizes' to something akin to a regular business. This article examines the Canadian tax treatment of income from winning and losing – not from athletic competition but from gambling.
In 2010, according to Statistics Canada, $13.7 billion in net revenue was generated from government-run gaming activities, rendering gambling the largest entertainment industry in this country. It is useful, therefore, for taxpayers to understand how gambling income and losses are taxed under the Income Tax Act of Canada.
Income from Gambling
Are gambling winnings a 'prize' under the Income Tax Act? Money received as scholarships and bursaries or 'a prize for achievement in a field of endeavour ordinarily carried on by the taxpayer' is taxable (s.56). What the Act calls 'windfalls' – occasional lotteries and sweepstakes, for example – are not taxable. 'Prescribed prizes' awarded for meritorious achievement in the arts, sciences or public service are also exempt from taxation. This explains why income from a Nobel or literary prize would be non-taxable, but Olympic income (which is not art, science or public service) is taxable.
Canadians who gamble seriously, even for a living, could have their winnings taxable as 'prizes' (although no judicial decisions yet confirm that) or more likely as income from business. Taxable income encompasses total income from four sources – office, employment, business and property (s.3 (a)). While notions of office, employment and property do not readily apply to gambling activity, business is defined as 'a profession, calling, trade, manufacture or undertaking of any kind whatever . . .'(s. 248(1))
When gambling is business, one's 'income (and loss) for a taxation year from a business … is the taxpayer's profit (and loss) from that business … for the year.' (ss.9(1) and 9(2)) Given the broad definition of a business, what is the basis for determining when a gambling activity is in fact and in law a business?
Governing Principles: 'Reasonable Expectation of Profit' or 'Pursuit of Profit'?
Are Casino Winnings Taxed In Canada
The Supreme Court of Canada stated in the 1978 case of Moldowan v. The Queen:
In order to have a 'source of income' the taxpayer must have a profit or a reasonable expectation of profit. … Whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts. The following criteria should be considered: the profit and loss experience in past years, the taxpayer's training, the taxpayer's intended course of action, the capability of the venture as capitalized to show a profit after charging capital cost allowance. The list is not intended to be exhaustive. The factors will differ with the nature and extent of the undertaking.
This 'REOP' test determined if a taxpayer could deduct losses from business. A problem arose because the REOP test did not distinguish between regular business activities and personal hobbies. This 'type of activity' issue, which relates to taxation of gambling gains and losses, was resolved a decade ago in the 2002 Supreme Court of Canada case of Stewart v. Canada.
As an experienced real estate investor (which some say is itself a form of gambling), Brian Stewart borrowed large sums of money to purchase four condominium units as rental properties in 1986. Owing to unfavourable economic conditions, his rental income was less than projected. Stewart claimed losses of $27,814, $18,673, and $12,306 between the years 1990 and 1992, representing significant interest expenses on his loans. His claims were disallowed by the Canada Revenue Agency, based on the REOP test. The courts concluded that Stewart's flawed investment model did not have a reasonable chance of earning a profit.
The Supreme Court of Canada ruled that the 'REOP test is problematic owing to its vagueness and uncertainty of application; this results in unfair and arbitrary treatment of taxpayers. As a result, ‘reasonable expectation of profit' should not be accepted as the test to determine whether a taxpayer's activities constitute a source of income' (para 47). The Court adopted a new two-part approach, known as 'the pursuit of profit test':
(i) Is the activity of the taxpayer undertaken in pursuit of profit, or is it a personal endeavour? This first stage of the test searches for a source of income; and
(ii) If it is not a personal endeavour, is the income source a business or property? This second stage categorizes the source as either business or property (para 50).
Applying the pursuit of profit test, the Court ruled Stewart was entitled to claim his losses because his real estate investment was undertaken solely for the pursuit of profit even if his business model was flawed.
Application of the Pursuit of Profit Test to Gambling
Are Casino Winnings Taxed In Canada 2020
When is gambling undertaken in pursuit of profit and when is it a mere personal endeavour? There is a clear personal entertainment return on gambling which may outweigh the realistic expectation of winning, but thrill and pleasure are sought in business too.
In the 2006 case of Leblanc v. The Queen, the Leblancbrothers won an average of $650,000 per year between 1996 and 1999 by gambling on sports lotteries in Ontario and Quebec. The brothers wagered $10 to $13 million per year, developed a computer program to analyse bets, and negotiated a 2-3% discount from ticket retailers. The Canada Revenue Agency treated this gambling operation as a business, 'because it was managed and organized with the object of realizing a profit (para 7).' However, the Tax Court, acknowledging 'that certain types of gambling can in some circumstances be a business but it is a rare circumstance (para 36),' characterized these gambling activities as a personal endeavour (para 48):
The appellants [the Leblanc brothers] are not professional gamblers who assess their risks, minimize them and rely on inside information and knowledge and skill. They are not like the racehorse-owner, who has access to the trainers, the horses, the track conditions and other such insider information on which to base his wagers. Nor are they seasoned card players or pool players who prey on unsuspecting, inexperienced opponents. Rather, they are more accurately described as compulsive gamblers, who are continually trying their luck at a game of chance.
The same result obtained in 2011 for Stephen Cohen in a Tax Court of Canada decision in Toronto. Cohen claimed that he was engaged in the full-time business of poker playing and ought to be entitled to claim losses of $121,991.43 during the 2006 taxation year. He had logged more than 2,500 hours of playing time, entered frequently into tournaments, and studied the game through books and seminars. The Tax Court judge denied Cohen the deduction of his poker losses on what was arguably a mistaken application of the Stewart 'pursuit of profit' test – that there was an element of personal consumption to the gambling. The judge said that poker, 'generally recognized as a gambling activity, is not an activity that I or many courts before me, could find has no personal element. (para 18)' It probably did not help Cohen's case that he was also working for at least part of the year as a lawyer at a 'large Toronto law firm' and had been a hobby poker player for a dozen years prior.
The last judicial decision, by the Federal Court of Appeal in the case of Tarascio v. Canada, was issued in January of 2012. Guiseppe Tarascio, a technician in the employ of Bell Canada in Toronto, said he earned income through a wide range of gambling activities ('horses, slots, casino games, and lotteries') undertaken during evenings and weekends. In his income tax returns in 2002 and 2003, he claimed net business losses of $40,950 and $56,000 respectively after deducting gambling losses from his winnings. These deductions were disallowed because the gambling activities did not constitute a business.
Three reasons were given for denying business status to Tarascio's gambling.
- While he had books and records of his gambling activity, these records were prepared to support his position in Tax Court. They were, therefore, 'of little value in proving that he was conducting a business.'
- Secondly, it was not a business 'because he loved the thrill of gambling.'
- Finally, he had 'little by way of a systematic method for gambling and spent no time practising his skills.' His appeals to the Tax Court and the three-judge Federal Court of Appeal were dismissed.
Conclusion
The Income Tax Act and the judicial decisions interpreting and applying it fail to provide a predictable framework for analysing the taxability of gambling wins and losses in the context of a business. This is not surprising, since the 'pursuit of profit test' was not developed with gambling businesses in mind. The three cases described in this article all involved taxpayers seeking to deduct gambling losses and it was easy to deny all of them.
The reasons for denying 'business' status to occupation gamblers were variable and deviated from the 'pursuit of profit test,' which admittedly is itself highly subjective. All business activity presumably enjoys a combination of both 'pursuit of profit' and 'personal endeavour' elements. Investment in real estate – while risky, speculative and by nature a gamble – is consistently viewed as a traditional business. Casino or card gambling, on the other hand, regardless of the risk, is not generally viewed as a business, as much as it is seen as a diversion or entertainment.
This leads to distorted analysis and double standards. Some forms of gambling are arguably as tactical and strategic as some forms of business. Imagine any other commercial venture been disqualified as a business simply because the business person maintained poor books and records, 'loved the thrill of' the business too much, or was not 'systematic,' spending too little 'time practising his (business) skills.'
We predict that if and when the Canada Revenue Agency someday seeks to tax significant gambling winnings of which it is aware, it will discover greater interpretative ease to designate these net winnings as income from a business. In doing so, a new analytical precedent will be created, nuanced perhaps around the dichotomy of chance versus skill. For example, lotteries and slot machines, being essentially games of chance, might be non-taxable personal endeavours. Poker and other card games may be more skill-based (but this is debatable) and tax-worthy. In any event, the line-drawing here will be a complex and inherently arbitrary exercise.
Until then, the Agency and the tax courts remain secure in the knowledge that more gamblers over the long term lose money than make it. They will disregard occupational gamblers seeking tax deductions as 'compulsive gamblers, who are continually trying their luck at a game of chance', imply that authentic business gamblers must 'prey on unsuspecting, inexperienced opponents' (Leblanc), or dismiss them as 'hobbyists' (Cohen) or mock them with language like 'lifelong gambler . . . he says that gambling is his calling' (Tarascio). They will continue to deny the deduction of significant, documented gambling losses on the unarticulated grounds that gambling is insalubrious, unproductive and not to be encouraged as a matter of policy, except as a potentially-ruinous, highly regulated (barely legal) entertainment activity. This conceptual approach logically holds that losses voluntarily incurred in gambling, itself still a pejorative pursuit, should not be subsidized by other Canadian taxpayers.
To conclude, today in Canada gambling winnings and losses are unlikely to be characterized by the tax authorities and courts as prizes or income or loss from business. Consequently, they are neither taxable nor deductible. This is good news for those few taxpayers who do gamble and end on the positive side of the ledger.
Indeed, that is a happier tax result than winning an Olympic medal.
