Have you ever watched an episode of The Price is Right from south of the border and been shocked at a contestant’s choice of prize? When faced with the option of an all-expenses around the world trip or a cash sum of $20,000, why do they always choose the cash?
The reasoning behind it is all down to financial commitments. In the United States almost everything you can think of is taxable, including money made on game shows and the lottery. On average US citizens have to pay 49.5% tax on any winnings made on a game show, the lottery or through gambling- that includes non-cash prizes too.
With a cash prize the winner can simply write off half of their winnings and send it to the tax department. Conversely, for a trip around the world the winner would have to pay the monetary value of that prize in taxes, making it unaffordable.
Similarly gamblers in Las Vegas keep a record of all their receipts so that they can offset their losses against their winnings when they face the taxman. Fortunately in Canada, the government isn’t so eager to grab a slice of every dollar that comes your way.
Having said that, there are still some quite taxing, tax laws in Canada surrounding gambling winnings. Read on to find out how much of your betting windfall will have to go to the Canadian Revenue Agency.
What gambling activities are taxable in Canada?
Casino Games
There is no distinction between land-based and virtual gambling in Canada. The distinction made by the Canadian Revenue Agency (CRA) comes in the form of skill and chance.
Games of chance such as roulette, blackjack and baccarat all have tax-free winnings for players, so Canadians are free to play at an online casino without the fear of losing their winnings to the government. Whereas games like poker full under the umbrella of skill games, and thus winnings are taxable.
Lottery & Scratch Cards
Just like roulette, blackjack and baccarat winnings obtained from lotteries and scratch cards are exempt from tax as they rely purely on chance and luck.
Sports Betting
Canadian law becomes somewhat contradictory when it comes to the tax laws relating to sports betting. In general winnings are not taxable as the outcomes are thought to rely on chance and luck.
However, if a person uses inside knowledge or intelligence to win their sports bet, they will be required to pay tax on their winnings. Although they will also be prosecuted as insider betting is illegal.
Skill vs Chance – The Grey Area
Superficially there is an easy distinction to make between games of chance and games of skill. If practice and strategy greatly increases your success rate in a particular game, it will be classed as a game of skill by the CRA.
That means that games with a strong house edge will be considered as games of chance, as no amount of practice can consistently tip the odds in your favour.
The CRA’s arbitrary definition between chance and skill becomes somewhat blurred when players start to make large sums of money. For example if a player came up with a way to consistently turn a profit at a game of chance, their earnings would then be viewed as taxable.
As soon as a gambling activity can be said to constitute a source of income, it becomes taxable. That is the case for any form of gambling, even sports betting where you may turn a consistent profit from betting on the favourites.
Case Precedent
Much of the current laws governing gambling incomes have been derived from Luprypa v The Queen, a ground breaking court case from 1997. As the defendant Luprypa was charged with earning taxable income from playing pool in bars.
Luprypa would hang around bars and challenge inebriated patrons to wagered games of pool. The government alleged that this gave him an advantage over his opponents and therefore made it a game of skill rather than one of chance.
The case was awarded in favour of the state and Luprypa was forced to pay tax on his weekly pool profits of $1,000. This case was a defining moment for the CRA, providing them with a precedent to pursue gamblers who relied on skill, or an edge in their gambling pursuits.
Gambling Companies Tax Obligations
In Canada the corporate tax rate for the vast majority of Canadian gambling suppliers stands at 10%. This rate is applicable to most companies with large turnovers, whereas smaller, locally based establishments would be subject to a tax rate of 15%.
The overall gross gambling yield of Canada in 2018 stood at just over $15 billion, meaning that tax revenues for the industry should stand somewhere between $1.5 and $2 billion. Unfortunately that is not the case as many gambling companies currently operating in Canada are based abroad.
Confusing laws that have restricted online gambling companies to basing themselves in a small geographic area of the country have led to an influx of overseas providers. Technically these companies are forbidden from operating in Canada, but as they are not based in the country these laws are rarely enforced.
Gambling Regulation Improvements
Whilst the state of gambling is fairly healthy in Canada, there are several areas in which it could improve. As touched upon above, it would be wise of the government to lift the current restrictions on Canadian online gambling companies.
Not only would that allow the government to effectively tax the sector but it would provide the economy with the indirect boost of increased jobs. Further to this Canada could look to Britain as a model when it comes to making the most from the gambling industry.
In the UK not only is the country’s £15 billion a year revenue subject to stringent tax laws, but a percentage of that is also directed to gambling charities. It’s just one way that the British government has attempted to counteract the negatives associated with gambling in order for it continue thriving.
