If you are a Canadian and you have won the lottery or some Canadian dollars on slot game at the casino your winnings are tax free. But there are few things to take care of as this is true but to some extent specially if you win a huge sum.
When it comes to winning lotteries in Canada such as Lotto Max or 649 or winnings from a sweepstakes or lottery sponsored by a charitable organization, they all are generally tax-free. Everything from your local hockey team’s 50/50 draw to the Big Brothers/Big Sisters travel lotto vouchers is included in the windfall category and therefore exempt from tax.
The Canada Revenue Agency (CRA) does not require you to pay tax on the winnings themselves. However, as with most other types of income, you will be subject to tax on any money your windfall generates. If you simply put your millions in the bank, only the interest your money makes will be taxable.
Winnings in Casinos
If you score big from a Canadian casino, your winnings will be treated the same as other lotteries and usually remain tax-free.
However, over the past few years, CRA has begun to examine its policies for professional gamblers, classifying “winnings” as business income and therefore taxable like any other business income. At the same time, this also means professional gamblers can claim business expenses. For example, if you’re considered to be a self-employed professional poker player under this theory, you could deduct all of your travel expenses, tournament fees, etc. from any winnings. If you didn’t win enough to cover the expenses, you’d be able to claim a business loss.
Winnings at your Workplace
Prizes won from your place of employment aren’t always tax-free. Cash awards or near-cash awards such as gift cards, are almost always considered to be taxable employment benefits. This means the award will be considered as part of your income. Your employer will deduct income tax, Canada Pension Plan and in some cases, even Employment Insurance premiums on this type of award.
Winnings at Las Vegas and US Casinos
Heading south of the border to strike it rich in a casino, or pick up a US Powerball ticket may be tempting, but the US Internal Revenue Service (IRS) has a different approach to your lottery winnings than the CRA, and considers all winnings to be taxable.
As a Canadian winning a US lottery you would still be responsible for American tax obligations. With a lottery winning you would have to file a US tax return. Also if you hit the jackpot at a casino, a good chunk of those winnings to be withheld by the casino to ensure your tax obligations are met before you even leave the country. Even if you win big from your own home on a US online poker site, for example, your big score will be considered to be American income and taxed accordingly.
What does Canada Revenue Agency say about gambling winnings and taxes?
Profits derived from bookmaking or from the operation of any gambling establishment (carried on legally or otherwise) constitute income from a business. It is clear from various decisions of the courts that earnings from illegal operations or illicit businesses, such as illegal gambling and fraudulent business schemes, are not exempt from tax.
An individual’s gambling activities may result in taxable business income or a business loss. This will be the case if the gambling activities constitute a source of income (that is, carrying on the business of gambling). Determining the commerciality of gambling can be challenging. Games of pure chance, like lotteries, lack the badges of trade to which the traditional tests of business activity can be applied. Traditional tests to determine the existence of a business include an evaluation of a taxpayer’s profit-making purpose (that is, pursuit of profit) and the commerciality of a taxpayer’s activity. However, gambling is always undertaken in pursuit of profit and is an intention, “shared by all who gamble, and the presence of the intention to win or make money in gambling, which is there in all who gamble, does not lead to a conclusion that all who gamble, or even all those who gamble frequently, are carrying on a business.”
Usually the frequency and systematic nature of an activity would be indicative of a business. In addition to the definition of the traditional common law definition of business is “anything which occupies the time and attention and labour of a man for the purpose of profit”
Such a definition would usually be unexceptionable when one is talking about a commercial activity. If applied literally and mechanically it would include the activities of a person who consistently and regularly placed bets on horses, or played the lotteries or the gaming tables. It would mean that the gambling activities in every case would be a business, yet know that this is not so. Gambling – even regular, frequent and systematic gambling – is something that by its nature is not generally regarded as a commercial activity except under very exceptional circumstances.
There are some exceptional cases, which are noted in Leblanc, where gambling activities have been held to be taxable. However, these cases relate to taxpayers who applied inside information, knowledge and skill to their activities. For example, in Luprypa v. The Queen ,  3 CTC 2363, 97 DTC 1416, a pool player who in cold sobriety would challenge inebriated pool players to a game of pool was held to be taxable on his winnings.
The amount or value of a prize received by a taxpayer from a lottery scheme is not taxable as either a capital gain or income. This will be the case unless, due to the circumstances applying to the lottery scheme, the prize can be considered to be income from employment, business or property, or a prize for achievement. Lottery ticket retailers who sell winning tickets must include in their income the amount or value of any prize commissions they received from a provincial lottery corporation. For more information, see Lottery Prize Commissions.
No taxable capital gain or allowable capital loss results from the disposition of a chance to win or a right to receive an amount as a prize in connection with a lottery scheme. However, for the purposes of computing any tax consequences after receiving a prize, a winner in a lottery scheme is deemed to have acquired the prize at a cost equal to its fair market value at the time of acquisition..
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. If real skill or merit plays a part in determining the distribution of the prize, the scheme is not a lottery (unless it is based essentially on chance and the degree of skill is minimal).
Pool system betting
No taxable capital gains or allowable capital losses arise from the disposition of a chance to win a bet or a right to receive an amount as winnings on a bet in connection with a pool system of betting. The nature of pool system betting is such that the only winnings are in the form of cash from the respective pool. Consequently, no additional capital gain or loss tax consequences could arise on subsequent disposition of the winnings and thus it is not necessary to deem the winnings to have been acquired at fair market value.
The CRA considers a pool system of betting to be a pool on any combination of two or more professional athletic contests or events. The fact that a degree of skill is involved in the selection of the outcome of the contest or event distinguishes it from a lottery scheme.
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, the scheme is not a lottery. The prizes are considered to be employment income taxable. However, there may be circumstances in which the value of an employer-promoted prize won by chance will not be treated as employment income but will be considered a win from a lottery scheme.
Internet, television, and radio programs
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 when
- it is awarded through a draw because, for example, the person is in a lucky seat or has a certain brand of merchandise at home. The treatment does not change even though the person may have to demonstrate some minor degree of skill or knowledge before being eligible to receive the prize, or
- the prizes that go to winning contestants, the consolation prizes that go to losing contestants, or the merchandise gifts given to all participants are all that the person receives for appearing in the program.
If you are US citizen playing in Canadian Casinos what does IRS say about your winnings
If you play the ponies, play cards or pull the slots, your gambling winnings are taxable. You must report them on your tax return. If you gamble, then understand the following in mind
- The Gambling income- Income from gambling includes winnings from the lottery, horse racing and casinos. It also includes cash and non-cash prizes. You must report the fair market value of non-cash prizes like cars and trips.
- Payer tax form- If you win, then the payer may give you a Form W-2G, Certain Gambling Winnings. The payer also sends a copy of the W-2G to the IRS. The payer must issue the form based on the type of gambling, the amount you win and other factors. You’ll also get a form W-2G if the payer must withhold income tax from what you win.
- Report your winnings- You normally report your winnings for the year on your tax return as “Other Income.” You must report all your gambling winnings as income. This is true even if you don’t receive a Form W-2G.
- How to deduct losses- You can deduct your gambling losses on Schedule A, Itemized Deductions. The amount you can deduct is limited to the amount of the gambling income you report on your return.
- Keep gambling receipts- You should keep track of your wins and losses. This includes keeping items such as a gambling log or diary, receipts, statements or tickets.
The IRS clearly states that if gambling and winning is your source of income you have gambling winnings to report. You must include the full fair market value of your non-cash winnings along with your total cash winnings as “other income” on Form 1040.
Also you can deduct your gambling losses. Gambling losses are deducted as “Other Miscellaneous Deductions” on Form 1040, Schedule A. In order to claim gambling losses you must be able to itemize deductions. The amount you deduct for gambling losses cannot exceed the amount of gambling winnings you report.
Engaging in gambling activities as a trade or business is considered self-employment. This system cannot determine self-employment income and/or expenses.
If you wish to find out whether you need to file the income tax return ad fill the form W2G IRS has given a questionnaire which will help you to know it better. Start this interactive session and find from this virtual tax assistant about your gambling wins and taxes.
So you see for a US player the winnings are taxed back home and as Canadians you are lucky that most of your winnings won’t be taxed.