Some things in life are worth fighting for — especially poker winnings.
A court case has awarded poker champion Jonathan Duhamel US$8,944,310 following a decade-long legal battle with the Canada Revenue Agency (CRA).
The Quebec poker player won the World Series of Poker Main Event in 2010 but almost immediately was slapped with a huge tax bill, more than halving his earnings.
Generally, gambling winnings are not taxable in Canada, but the CRA said this was an exception. The Tax Court of Canada has officially disagreed, which means Duhamel gets to keep all his poker winnings tax-free.
First Canada poker player to win WSOP Main Event
In his career, Duhamel has won three World Series of Poker (WSOP) championships – known as bracelets.
But the 34-year-old’s breakthrough moment happened in 2010 in Las Vegas when he became the first Canada poker player to win the WSOP Main Event. He pocketed nearly US$9 million from the victory and continued to play successfully, realizing net winnings.
Are Canada gambling earnings tax-free?
Generally speaking, gambling, wagering and lottery winnings are tax-free in Canada.
The only exception is if the CRA concludes a person is “carrying on the business of gambling.” According to them, Duhamel was doing just this.
The CRA argued the Boucherville-native’s poker-playing extended well beyond just a hobby. Instead, Duhamel operated a business due to his repeated yearly success and earnings.
And under the Canada taxation law, “business income” is fair game for taxes. The CRA promptly reassessed Duhamel for his net poker winnings from 2010-12 and demanded that he pay the following:
Duhamel’s ‘business income,’ as per the CRA
|Year||Net Winnings from Poker Tournaments|
Duhamel: Poker is a game of chance
Duhamel’s court argument for keeping his earnings tax-free centred around two main points:
- Poker is a game of chance.
- Poker was nothing more than a hobby or leisure activity for him.
Previous case law states poker gambling activities are only business income if the taxpayer had a “predominant subjective intention” to profit from the activity. The other key element is whether or not the activity was done “in accordance with the objective standards of a serious businessman.”
Duhamel contested he was no businessperson when it came to poker because he lacked three key elements:
- Poker training
- Definable system to defy chance
- Specific strategy to win
He claimed playing poker “does not give rise to any expectation of profit in the medium or long-term.”
Duhamel’s relationship with PokerStars
For its part, the CRA pointed to a 2010 deal Duhamel inked with the largest online poker site in the world, PokerStars. The company controls roughly two-thirds of the total online real money poker market.
Duhamel’s deal with PokerStars required the gambler to act as their spokesperson and participate in promotional events. PokerStars paid Duhamel $1million in 2010 for online and face-to-face tournaments, too. The payouts continued until 2015 (although at lower amounts).
Because of that, the CRA said the relationship – and agreements – clearly established Duhamel’s poker activities went “well beyond mere entertainment and constitute a business of a commercial nature…particularly following the conclusion of the PokerStars Agreement.”
Source of income, method weighed in court
Other factors were also taken into consideration. Perhaps the largest was if Duhamel’s poker-playing was done in a “sufficiently commercial manner” to constitute a “source of income.”
If the CRA could establish this, Duhamel would have had to pay millions in taxes.
Typically, the starting point to determine a “source of income” is to establish whether or not a taxpayer’s behaviour was made “in the pursuit of profit” or was personal. But because gambling (including poker) inherently is played in the “pursuit of profit,” the judge noted this couldn’t help determine its commercialism. Other factors to be considered include:
- Risk-management skills
- Mitigation strategies
- Knowledge and skills
Experts can’t prove whether poker is skill or luck
With millions on the line, the court examined everything under the sun. A few of the notable elements included:
- Poker skills
- Future career path
- Profits, losses
- Long-term profit likelihood
- Risk management or mitigation system
Experts also took the stand. Their job was to prove whether or not No-Limit Texas Hold-em — the game Duhamel won his cash in — was a game of skill or luck. In the end, neither could convince the courts one way or the other.
On the balance of probabilities — the standard used in civil court — the judge ruled Duhamel passed the test. His poker gaming activities “were not carried on in a sufficiently commercial manner to constitute a source of business income for the purposes of the (Tax) Act.”