This post is going to take a much deeper dive into the taxation of gambling in Canada. As we all should know, lottery winnings are not subject to tax in Canada, but that is just the tip of the iceberg. Let’s look much deeper into gambling, legal and illegal, and see where it switches from being tax-free to taxable.
No - Canadians do not have to pay taxes on gambling winnings from horse racing, sports betting, lotteries, online casinos and any other games of chance. However, if you earn interest on your winnings, you must legally declare that on a T5 form. This interest is taxable. Should you be caught not paying taxes on this, you could be fined. “Taxpayers can deduct gambling losses only up to the amount of their gambling winnings,” says Leddy, “and only if they itemize their deductions.” For example, if your gambling winnings totaled $5,000 in the tax year, but you lost $6,000, you can only deduct $5,000 of those losses.
Gambling profits
Gambling winnings. You must report your gambling winnings even if Wisconsin income taxes are not withheld. If you are a Wisconsin resident and paid a net income tax to another state or the District of Columbia on gambling winnings, you may be entitled to claim a credit for net income tax paid to the other state on your Wisconsin income tax return. You can win a lot of money gambling in the United States. Of course, that means you’re also subjected to a casino winnings tax. If you’ve made a trip to the U.S. And your gaming winnings are high enough or you win a prize and take the cash equivalent, the IRS will deduct 30% off of your winnings.
The Canada Revenue Agency (CRA) has long held that profits derived from bookmaking or from the operation of any gambling establishment (carried on legally or otherwise) constitute income from a business, and the courts have upheld many decisions which confirm that earnings from illegal operations or illicit businesses, such as illegal gambling and fraudulent business schemes, are not exempt from tax.
Income earned from operating gambling establishments – legal or illegal – is taxable.
If a Taxpayer gambles as a way to earn a living, and not just for fun, the CRA may determine that the income gained is not tax-free, but rather is taxable as business income or a business loss.
This would be the case if the gambling activities constituted a source of income (that is, carrying on the business of gambling), and that has been a challenge for the CRA. Games of pure chance, like lotteries, lack the badges of trade to which the traditional tests of business activity can be applied.
The CRA and the courts have relied on these traditional tests to determine the existence of a business which include an evaluation of a taxpayer’s profit-making purpose (that is, pursuit of profit) and the commerciality of a taxpayer’s activity.
It might be fair to state that gambling is always undertaken in pursuit of profit. Nobody gambles to lose money, do they?
This very topic was addressed in Balanko v. Minister of National Revenue [1981], where the court stated that gambling with a view to profit is an intention, “shared by all who gamble, and the presence of the intention to win or make money in gambling, which is there in all who gamble, does not lead to a conclusion that all who gamble, or even all those who gamble frequently, are carrying on a business.”
What that really says, is that people gamble to make money and that making money (or trying to make money) doesn’t mean it’s their business, and that legal determination is what prevents the CRA from forcing successful gamblers to pay tax on their winnings.
Usually the frequency and systematic nature of an activity would be indicative of a business.
In addition to the definition of business in subsection 248(1) of the Income Tax Act, the traditional common law definition of business is “anything which occupies the time and attention and labour of a man for the purpose of profit”, see Smith v. Anderson, (1880) 15 Ch. D. 247.
In a much more recent decision, the Tax Court of Canada went on to state in Leblanc v. The Queen ,2006 TCC 680, 2007 DTC 307, that:
Such a definition would usually be unexceptionable when one is talking about a commercial activity. If applied literally and mechanically it would include the activities of a person who consistently and regularly placed bets on horses, or played the lotteries or the gaming tables. It would mean that the gambling activities in every case that I have cited would be a business, yet we know that this is not so. Gambling – even regular, frequent and systematic gambling – is something that by its nature is not generally regarded as a commercial activity except under very exceptional circumstances.
There are some exceptional cases, which are noted in the Leblanc case, where gambling activities have been held to be taxable. These cases relate to taxpayers who applied inside information, knowledge and skill to their activities. An example of inside information, knowledge and skill was confirmed in a court case from 1997, Luprypa v. The Queen, where a pool player who in cold sobriety would challenge inebriated pool players to a game of pool. He would win, and the courts informed the CRA that these winnings are taxable.
The issue the CRA has to determine is whether a taxpayer’s activities are such that he or she can be considered to be carrying on a gambling business, and that can only be determined through an examination of all of the circumstances and the taxpayer’s entire course of conduct.
Although no single factor may be conclusive to make that determination, the CRA considers the following criteria in making their determination:
- the degree of organization that is present in the pursuit of this activity by the taxpayer,
- the existence of special knowledge or inside information that enables the taxpayer to reduce the element of chance,
- the taxpayer’s intention to gamble for pleasure as compared with any intention to gamble for profit as a means of gaining a livelihood, and
- the extent of the taxpayer’s gambling activities, including the number and frequency of bets.
What this tells us is that when effort, frequency, and intention to earn a profit increases, so does the chance that the CRA will determine that the winnings are no longer tax-free.
Canadian Tax Expert @ TurboTax. Former CRA employee.
With more than 20 years’ experience helping Canadians file their taxes confidently and get all the money they deserve, TurboTax products, including TurboTax Free, are available at www.turbotax.ca.
Related Posts
Any sudden influx of unexpected cash is defined as a windfall. If you have recently received a windfall, such as a large inheritance or lottery winnings, you may be wondering how your taxes might be affected.
Types of Windfalls
According to the Canada Revenue Agency, windfalls include several different types of unexpected payments, such as:
- gifts
Windfalls also include:
- disability or death benefits paid on behalf of war veterans
- life insurance benefits received after the loss of a loved one
Strike payments, GST/HST Credits, and Canada Child Benefit (CCB) payments may also be considered windfalls.
Cra Gambling Winnings Taxable
Difficulties in Defining Various Windfalls
Some items, such as gifts from relatives, are easily defined as windfalls.
Others are more subjective and harder to categorize. For instance, if a boss gives his employee a gift, it may be classified as a taxable bonus rather than as a non-taxable windfall. Cash awards or near-cash awards such as gift cards are almost always considered to be taxable employment benefits. This means the award will be considered as part of your income and should be reported on your T4- Statement of Remuneration Paid in Box 40. Your employer will deduct income tax, Canada Pension Plan (CCP) and in some cases, Employment Insurance (EI) premiums on this type of award or prize.
Currently, much of the criteria used for defining windfalls is drawn from an old court case regarding a cash payment made to a shareholder. The shareholder argued that the payment was not taxable, but when the CRA disagreed, the case was taken before the Federal Court of Appeals.
Ultimately, the court classified the payment as a non-taxable windfall and created a list of criteria defining windfall for future taxpayers. According to the court, the money was a windfall because the taxpayer made no organized effort to obtain or solicit it, and he had no expectation that it would be made. Additionally, the payment was from a non-customary income source, and it was a one-time payment with no foreseeable recurrence.
Reporting Windfalls
Cra Gambling Winnings Gambling
According to the CRA, windfalls are not taxed, and taxpayers do not have to report them on their income tax returns.
However, though the Canada Revenue Agency (CRA) does not tax a windfall itself, you may need to pay taxes on any income that is generated if you invest that money in a non-registered investment or account.
For example:
- You put your lottery prize in the bank, any interest earned on that account will be taxable.
- You invest some of your inheritance in stocks or mutual funds, any dividends earned on the investments will be taxable. As will any Capital Gains you may make when you dispose of or sell the investments.
For this reason, if you do plan on investing your winnings, you may want to consider investing in your Tax Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) if you have the available contribution room. This TurboTax article explains further Paying Taxes on Investments.
Exceptions for Professional Gamblers
Gambling and lottery winnings are considered non-taxable windfalls unless they are earned by professional gamblers.
In the case of professional gamblers, the winnings are considered to be coming from customary income sources, and as such, they are taxable. Professional gamblers are defined as those who gamble frequently to earn their livelihood, rather than those who gamble infrequently for fun. If you have special knowledge about the game that reduces the element of chance that may also classify you as a professional gambler and you may be required to pay taxes on your winnings.
Professional gamblers may deduct gambling losses from their winnings, however, they may not claim more losses than winnings and create a Non-Capital Business Loss.
Special Considerations for Lawsuit Awards
Lawsuit awards are also considered as non-taxable windfalls as long as they are not related to business or property losses.
For example, if you win an award in a personal injury case, you do not have to report that as income or pay tax on it. However, if you win a lawsuit on behalf of your business, that is not considered a windfall.
Canada Revenue Agency has a complete list in this article – CRA: Amounts that are not taxed.
With more than 20 years’ experience helping Canadians file their taxes confidently and get all the money they deserve, TurboTax products, including TurboTax Free, are available at www.turbotax.ca.