Tax on Canadian’s gambling winnings

http://pokerati.com/2011/04/taxation-of-gambling-winnings-in-canada/

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this paragraph is of limited assistance and raises more questions than it answers; section 205 of the Criminal Code was repealed in 1985.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