Canadian Tax Law on Poker Winnings

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tax_on_poker_winnings

More and more Canadians are earning tidy sums playing poker on off-shore poker websites. They often practise incessantly, refine their skills using coaches and software programs, and participate in online forums dedicated to strategy. Many of these players spend 30 hours a week online playing against opponents from around the world.

At this time of year, winning poker players are reminded of a confounding tax position. Most Canadians believe, incorrectly, that lottery and gambling winnings are not subject to income tax. The conventional view is correct in that every budding poker player starts out playing casually and with “after tax” dollars. If a casual player wins, he wins without tax consequences; if he loses, he loses without tax consequences. At some point, however, under Canadian law, the tax consequences change for winning players.

Poker winnings are subject to tax if they are “income from a business.” So when does playing winning poker amount to a business? The Income Tax Act doesn’t provide an answer. And there’s no reported case explaining precisely when the net winnings of individual poker players are subject to income tax. In the entire body of reported Canadian case law on the related question of the taxation of gambling winnings more generally, there are only a few cases where individual gamblers have been found to be in the business of gambling. The upshot for poker players is that it’s probably in only unusually active, skillful and financially successful circumstances that they will face Canadian income tax liability on their winnings.

The central legal difficulty arises in determining at which point a taxpayer crosses the line from playing poker casually to playing professionally or as a business. Consider the incentives facing the player, and then the policy-maker.

A winning player would prefer to delay the transition from casual to professional. There’s the “tax free” aspect, of course, and there’s also not wanting to feel like a patsy by paying income tax when it’s not legally required. There’s a conflicting concern, though, facing a winning poker player. If that player takes too long in making the transition to professional, he may end up being subjected to back taxes, interest and penalties associated with not declaring poker winnings as income. That could prove extraordinarily costly and, in some cases, even lead to bankruptcy.

On the other hand, tax authorities shouldn’t be in a hurry to single out winning players. Consider what happens if the casual enthusiast crosses the line to professional player before it’s abundantly clear that he has, in fact, the requisite skill to be a winner. If the tax authorities are too aggressive in exacting income tax from winning players, they run the risk of too many losing players claiming they satisfy the conditions for being considered professional as well.

Under the Income Tax Act, an individual’s losses from a business may be set off against income from other sources, such as salaries or wages. The limited case law shows that tax authorities have indeed been hostile to claims by taxpayers that they are professional gamblers in circumstances where taxpayers are trying to deduct losses from gambling.

The Americans solved the problem by taking a “heads we win, tails you lose” approach. According to the Internal Revenue Code, taxpayers must report net lottery and gambling winnings as income. They can only deduct gambling losses against gambling income. This solution has the advantage of being certain and predictable. What it lacks is fairness; historically, this was embraced because gambling was considered a vice to be discouraged.

The Supreme Court of Canada has repeatedly insisted that, as a self-assessing system, Canadian income tax law should be certain, predictable and fair. It seems the current unarticulated approach to the taxation of poker winnings is uncertain, unpredictable and unfair.

Please let us know what you think by discussing in our forum.

(This article was republished with permission by author Professor Benjamin Alarie, Faculty of Law, University of Toronto. This article originally appeared in the Globe and Mail, March 2010. For additional information on the taxation of poker players in Canada, read the complete ebook on taxwiki.ca)

6 COMMENTS

  1. As a non drinker, but a card player I find that for the most part playing in the local league (which is primarily held in local eating/drinking establishments) what I have gained into the insight in the human condition has been for the most part an awakening. Canadian Tax Law does need to define the nuances. I do not claim to be the best poker player going by any means; my outlay when I participate has given me hours of pleasure, and like anyone else I personally know we all need outlets, especially when the economic future is not exactly bright, our rising stars in the Olympic Arena continue to make us proud, but I would like to acknowledge the mind set and skill that is required to do an endurance test like sitting through endless hours of watching for the tells from the other players, keeping a balanced head under duress with Camera’s ready to pick up and televise good calls and bad alike. We have some of the calmest and brightest players with the style that is unique to our proud heritage that no one can comfortably imitate. Endurance, intelligence, and integrity are some of the words I would use to describe some of our well known professional players. They step up to the plate each and every day, regardless of how well they feel, keeping the goal clearly focused. Every player goes on TILT, they do not need the uncertainty of someone leaving things ambiguous in the Tax department adding to a sudden Oh my Gosh, you are being audited because I saw you on TV.

  2. Until they make online gambling legal they should not be able to tax winnings. Until they define gambling as a game of skill they should not be able to profit from those skills. What is even more preposterous is that large investment firms, insurance companies, mortgage brokers, and anyone else tied to the large banks that are “too big to fail” are bailed out all the time when they write up “derivitaves” and those financial engines collapse. When they collapse WHO BAILS THEM OUT? That’s right. The tax paying citizen. So you expect me to pay the government when I win and I also have to pay them WHEN THEY LOSE? sorry. I could have easily thrown my money into a slot machine like the “too big to fails” and if I lose I don’t get bailed out. My money after taxes IS MY MONEY. If I use that money to by chance make more money you can’t have any of it. Unless you are going to be there to incur my losses like the “too big to fails” when I lose…you are not welcome to share in my recovery when I win.

  3. Are you insane Joe? My thinking is that there are too many players out here that have NO idea of the difference between what is LAWFUL and what is LEGAL. These are 2 different things. Living beings abide by natural LAW, corporations are bound to follow the LEGAL system. Are you dead or alive? Which system ought you to adhere to? Do no harm to other livings beings or follow the rules and regs that someone wrote on paper called Statutes and Acts? ink on paper is a storybook, a fictional tale. Jurisdiction is key. How many clues can i give you to have you go do some homework?

    Know thyself.

    I encourage all to review section 32 of the Canada act, and then section 52. That said, within the “legal” system, well that’s something entirely different.

    As a living being you are alive, and governed by what is “lawful”. As a “person” you operate in the view of the government as a “legal fiction” (ie you are a “corporation”, a dead entity, the opposite of a live being). Canada is NOT a land mass I am sorry to inform you, but rather it is a CORPORATION. The Mother Corp. The CROWN CORPORATION. And you/your birth certificate with its all UPPER CASE NAME is the dead entity fictional mini corps if u will….corps, corpse, coincidence? I think not.

    wake up people. WHY does a casino have to have PHOTO ID to claim winnings? A birth certifcate is needed to get a Passport/Driver’s licence, but a birth certificate contains NO photo. So is not the BC of greater value/power/weight/credibility than ANY photo ID? Show the BC to the cage manager and good luck getting him to release payment….cuz they’re “programmed” unable to think and process knowledge. They just do what they’re told. Slowly we can awaken them as well.

    I stand here before you with my BC and announce in my voice as i stand here before your very eyes and claim I am, here is the gift certificate the government gave me upon my birth…let any other man arrive here to claim this prize who can provide evidence to the contrary. that day shall never arrive, and so WHY I ask you then, would the casino NOT dispense your entitlement/prize payout w/o PHOTO ID? YOU CANNOT A NAME ON A PIECE OF PAPER. You ARE alive, living breathing blood and flesh, and the government can ONLY have power over you if you CONSENT to being the DEAD CORP. Start your own path to knowing everyone! ALLIN.

  4. n the late 1990s, online gambling gained popularity. Internet gambling websites had increased from just 15 websites in 1996, to 200 websites in 1997. A report published by Frost & Sullivan revealed that online gambling revenues had exceeded $830 million in 1998 alone..^;^

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