One important thing to note is that there is no official ‘gambling tax’ in Canada; however some winnings are taxed as income. Read below to learn pertinent information you need to know about each type of gambling profit, and whether or not it is taxable as income.
How Gambling Profits are Defined and Taxed
The CRA’s ‘Income Tax Folio S3-F9-C1’ states that ‘An individual’s gambling activities may result in taxable business income, or a business loss.’ The laws surrounding this are very case-specific as the commerciality of gambling can be tough to accurately determine.
Technically, someone’s gambling activities can be taxable – if they are determined to be a legitimate source of income. Seeing as very few people gamble for a living, or gamble as an act of business, cases in which gambling winnings are taxed as income are often exceptional.
An example of this stems from the case of Luprypa v. The Queen (1997) when a pool player was found to be challenging inebriated players to cash games whilst he was completely sober. As a result, his winnings were held to be taxable.
The CRA further cites that ‘The issue of whether a taxpayer’s activities are such that he or she can be considered to be carrying on a gambling business is a question of fact that can be determined only by an examination of all of the circumstances and the taxpayer’s entire course of conduct’.
Suggested CRA criteria for making a determination is as follows:
- ‘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.’
- ‘The extent of the taxpayer’s gambling activities, including the number and frequency of bets.’
The taxability of gambling profits is then broken down into various sub-sections including ‘Lottery schemes’, ‘Pool system betting’, and ‘Other schemes’. The ‘Other schemes’ section is further subdivided into ‘Employer-promoted contests’, ‘Internet, television, and radio programs’, and ‘Annuities as prizes.’
Read on for a brief summary of each gambling profit type, and whether or not it’s taxable in Canada.
Lottery Schemes
In the words of the CRA, ‘A lottery has been defined as a scheme for distributing prizes by lot or chance among persons who have purchased a ticket or a right to the chance.’ Essentially, a taxpayer can receive a prize of a certain amount or value, but it cannot be taxed as income or as a capital gain.
They also go on to cite that ‘If real skill or merit plays a part in determining the distribution of the prize, the scheme is not a lottery.’
Basically, a prize may be taxable if it’s determined to be business, property, employment income, or a prize stemming from an achievement. The lottery ticket retailers themselves must also include the amount or equivalent value of any winning ticket or prize commissions.
Pool System Betting
The CRA defines pool system betting as “…a pool on any combination of two or more professional athletic contests or events.” Simply put, pool system betting is when gamblers pool money and compete only against one another as opposed to against a sportsbook or ‘house’.
This type of betting is seen most often in horse racing betting, and all of the pooled money is divided amongst the players in the pool based on how they place.
In terms of its taxability, the degree of skill involved in making decisions at sports betting sites differentiates it from lottery schemes. Thus, it saves pool system betting from being subject to tax as it is not completely a matter of chance.
Other Schemes
The taxability of prizes that are not won through lottery schemes or pool system betting varies depending on the nuances at play. The CRA measures the tax implications of each prize based on considering the following factors:
- ‘When the prize has been received as a gift, it is not included in computing income at the time of receipt.’ It doesn’t matter whether skill and/or chance played a part in winning this prize.
- ‘The prize will be received as income where it is received by virtue of the recipient’s employment.’
- ‘Where the prize is not received as income and is not a gift…no amount will be included in income upon receipt of the prize’ as alluded to in the previous two bullet points.
- An example given following these factors cites ‘Such a situation would arise where the contestant has incurred a cost towards winning the prize such as purchasing a ticket or paying an entrance fee entitling the contestant to participation in the contest. In such a case, while there are no tax consequences resulting from receipt of the prize, any subsequent disposition of that prize may result in a capital gain or loss.’
At its core, all of this essentially means that most lottery schemes are considered ‘gifts’ and don’t require declaration with income reports. This mostly changes when a prize is won through skill, but even then it’s case-by-case and requires other variables such as when a prize is won due to a recipient’s employment.
Employer-Promoted Contests
The CRA defines employer-promoted contests as instances ‘Where an employer accustomed to awarding employees with a bonus establishes a scheme or giveaway contest in which the bonus or some amount in lieu of a bonus is divided among the employees as prizes following a draw.’
This particular scheme isn’t necessarily defined as a lottery. The nature of the prize and how it’s won can be a big deciding factor when determining if it will be treated as employment income and/or a win from a lottery scheme such as won on Canadian online lotteries.
The criteria laid out by the CRA which can characterize an employer-promoted contest as a lottery scheme is as follows:
- ‘Must account for only a small percentage of the participants in a scheme.’
- ‘Must not be given a favoured position in relation to the other participants.’
- ‘Must be subject to the same contribution requirements (if any) towards the scheme as other participants.’
Internet, Television, and Radio Programs
According to the CRA, ‘The value of a prize or other award received by a person for being at or participating in an Internet, radio, or television program is generally not included in income…” Often times, this can happen as the result of a random luck contest.
For example, through a radio draw where a random caller is selected and correctly answers a skill-testing question to achieve a prize. The person is considered to be in a ‘lucky seat’ as per the verbiage used by the CRA, meaning the use of ‘some minor degree of skill or knowledge’ to achieve the prize still doesn’t make it taxable.
This also applies to consolation prizes and any other type of merchandise or gift that someone can receive for simply being in a program. This can change if a prize or other award is won by someone who does so while being a party to some form of employment or business contract.
The CRA states that when ‘a professional actor, an entertainer, or some other person appears on a television show as a celebrity and receives a giveaway prize or wins a prize by skill or chance for appearing or participating in a contest on the show, the prize will be subject to tax as business or employment income.’
But again, this does not apply to most people.
Annuities as Prizes
The CRA states that an annuity ‘…includes an amount payable on a periodic basis whether payable at intervals longer or shorter than a year and whether payable under a contract, will or trust or otherwise.’
This category of gambling profits isn’t as common as the others, and in most cases, you will not have to pay tax on prizes that are annuities within a lottery scheme.
Conclusion
Now, you have the knowledge you need to navigate the waters of taxable gambling winnings in Canada. Many of these scenarios will likely never happen to you, but it’s always smart to remain prepared and to be proactive as opposed to reactive. Best of luck in your Canadian gambling journey!