Close your eyes. Now picture a Canada where people can write off their poker losses against their other sources of income. Now open your eyes and return to reality. Because our card playing and dice throwing brethren could never possibly be allowed to write off their gambling losses, a consistent system could never permit for their gambling winnings to be taxed.
While the above policy perspective is not the reason given by the courts, they have consistently narrowed the circumstances in which gambling winnings will be taxed.
The law has developed in such a way that gambling winnings (legal or otherwise) are by default non-taxable. Those winnings will only be treated as taxable business income if a certain threshold of planning and business-like systems are found to exist. The courts however have held that this threshold is a high one.
The often cited example of a gambling winner turned tax court loser was “sausage maker and proprietor of hot dog stands” Alvin Luprypa. Alvin liked to hustle pool to supplement his meat-centric income streams. In its 1997 ruling, the Tax Court found he had a system, approached the business of gambling in a professional manner and treated his pool winnings as taxable for reasons including that:
- He carefully managed the risks.
- He was a skilled player.
- He played Monday through to Friday each week.
- He spent his afternoons playing snooker to perfect his skills.
- He played inebriated opponents after 11:00 p.m. to minimize his risk.
- He won most of the time, earning approximately $200 daily.
- He drank alcoholic beverages only on weekends when not playing pool to give him a sober advantage over his inebriated opponents.
- He was calculating and disciplined.
- It was his primary source of income and he relied on this steady income.
The factual situations where the Tax Court has found a similar laundry list of factors to allow it to treat gambling winnings as taxable income have been few and far between.
The Recent Development
So what is new on the subject? It may come as a surprise that despite the high threshold set out above, many poker players have been declaring and paying tax on their gambling winnings. This paradox either is a result of outdated and nonbinding CRA policy statements or a general fear of the CRA letter in the mail. They would rather pay the tax than comfort themselves in the protection offered by the courts.
As you may know, we live in a country where one does not have the right to amend previous tax returns to correct them, but can send the paperwork in nonetheless and hope the CRA applies their discretion to accept it. So what happens when a poker player who incorrectly paid taxes on his winnings, attempts to amend his returns, and is rejected? Radonjic v. Canada Revenue Agency happens. I played a small background role in this case which resulted in the Federal Court of Canada admonishing the Taxman for a decision that “lacks intelligibility and justification and …falls outside the range of possible, acceptable outcomes which are defensible in respect of the facts and law.”
What We Can Do
We work with accountants to adjust past tax returns in the situations faced by Peter Radonjic. If you know a poker player who wants to reverse the taxes they voluntarily and incorrectly paid on their past poker winnings, you should forward them a copy of this article. In fact, a short window exists for gambling winnings declared in respect of 2012. This window allows us to side step the CRA’s discretion on whether to review the issue, and force them by law to apply the law to the facts. While they from time to time do not apply the law to the facts correctly, further appeal rights are available. For all other years, we can coordinate on the requests to adjust the old tax returns and provide advice on how they can protect themselves on a go forward basis.
Tags: Article; Individual Tax Planning; Jeff Glasner; Tax Disputes