Gambling and Taxable Implications in Canada
This article will examine gambling and taxable implications in Canada.
Tax Court Says Holding’em Liable for Taxes
In two recent 2023 decisions, the Tax Court of Canada found that two online Texas Hold’em Poker players’ activity fell within the definition of ‘business’ under subsection 248(1) of the Income Tax Act (the “ITA”), and therefore, the income they earned from that source was taxable. We have previously written about the taxability of gambling activity, which is available here. The following blog article provides some key takeaways and a summary of these recent decisions along with some comments from other related jurisprudence.
It is important to note that the determination of whether gambling (or any source of income) constitutes income from business, is a highly fact driven analysis and, as a result, you should consult with a lawyer for assistance with issues related to this determination.
Gambling and Taxable Implications Key Take Aways:
- Organized Activity: Courts have long been (and continue to be) focused on the organization of the individual taxpayer’s activity. Establishing a system that demonstrates intention to make a profit that is beyond a hobby will likely increase the chances of the activity generating income from a business and attracting tax liability.
- Frequency: As demonstrated in these cases below, the consistency and frequency of the activities are factors relevant to the Tax Court when determining whether income relates to business. However, previous cases such as Cohen v R, 2011 TCC 262, where a lawyer left his law practice to gamble full-time for up to 8 hours a day and was found not to be conducting his affairs in a manner that could constitute business, demonstrate that frequency is not a determinative factor.
- Winnings: As established in Radnojic v. The Queen, 2013 FC 916, merely demonstrating winning on its own is not sufficient for the CRA to establish a reasonable expectation of profit. However, as these cases below demonstrate, routine winnings flowing from an established system may establish a reasonable expectation of profit and income from business.
- Losses and Expenses: Finally, the cases below demonstrate the importance of keeping track of expenditures and losses related to the gambling activity. In the event that the CRA or the TCC find that the activity is generating income from business, a partial allowance to claim eligible business expenses or business losses may be used to reduce a gambler’s resulting tax liability.
Berube c. His Majesty the King, 2023 CCI 12
In this case, the taxpayer played online Texas Hold’em poker from 2008 to 2012 and generated significant winnings in these years. During this period, he played poker frequently ranging between 266 to 330 days in each year. The taxpayer’s poker winnings were his sole source of income in these years. The CRA reassessed the Taxpayer’s income and added his winnings accrued in each respective tax year. Consequently, the taxpayer appealed to the TCC.
The issue before the Tax Court was whether the taxpayer’s gambling activities were sufficient to constitute business, as defined within subsection 248(1) of the ITA. Favreau J. found that the taxpayer used various tools, such as, software, statistics, and subscription-based services, to increase his profit while minimizing his risk of loss to create a regular stream of income from his poker activities. Thus, the Taxpayer established an expectation of profit using his system. The Court also considered the high frequency of the activity, and the lack of an alternative sources of income. As a result, the Tax Court held that the taxpayer’s activities constituted a business, but allowed the appeal in part to allow for eligible business deductions.
It is important to note that the determination of whether gambling (or any source of income) constitutes income from business, is a highly fact driven analysis and, as a result, you should consult with a lawyer for assistance with issues related to this determination.
D’Auteuil c. His Majesty the King, 2023 CCI 3
Likewise, in this case the subject taxpayer was an online Texas Hold’em poker player that had consistently high winnings from 2008 to 2012. The taxpayer also played online poker frequently with an averages of 22 hours per week and 224.25 days played per year throughout the reassessed periods. Unlike, the taxpayer in Brube, here, the taxpayer did earn a relatively low employment income from another source of approximately $15k in 2009 and $10k in 2010. The CRA reassessed and increased the Taxpayer’s income for each year to account for his poker winnings, and the taxpayer appealed to the TCC.
Again, the sole issue before the Tax Court was whether the taxpayer’s poker-related activities constituted business under the ITA. Similarly, the Tax Court judge found that the taxpayer in this case was also leveraging various software and tools in a fashion that minimized risk while increasing profits to establish a regular stream of income and as a result held that the poker-related activities were business. Although, this taxpayer had a small source of employment income it was not significant to be considered his principal source of income. However, in this case, the Tax Court partially allowed the taxpayers appeal by allowing him to claim over $200k in business losses incurred in his 2012 tax year, in addition to his business expenses.
If you have any questions or concerns about gambling and its taxable implications, or any tax matter, give us a call today! We are here to help.
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions, you should consult a lawyer.
Bryant Godkin