(Disclaimer: None of this is legal or tax advice. If you have legal or tax questions, consult a professional in your area.)
Sports betting, like death, seems always to be accompanied by taxes. At least that is how it is in the United States.
Indeed, American gamblers face quite unfavourable treatment from Uncle Sam just about every time tax season rolls around.
Canadians, however, had done much better come tax time, at least when they were gambling only casually, as opposed to as a full-time job.
There are many questions moving forward about how expanded online casinos and sports betting in Ontario will be taxed. But under the system scheduled to roll out starting April 4, it does not appear that bettors should expect much change at the start.
Taxing gambling in Canada
Traditionally, gambling winnings have been tax-free in Canada.
The idea was that the system, which the provinces or charitable organizations primarily operated, was effectively already serving as a taxing mechanism via the government’s operation of the facility and the favourable odds that the house has.
In the case of charities, the primary beneficiary was a charity; as such, they received favourable tax treatment.
The Income Tax Act
The Income Tax Act states in Section 40(2)(f), that the provisions ordinarily applicable to income taxation do not apply to:
“a taxpayer’s gain or loss from the disposition of
(i) a chance to win a prize or bet, or
(ii) a right to receive an amount as a prize or as winnings on a bet, in connection with a lottery scheme or a pool system of betting referred to in section 205 of the Criminal Code….”
What about a “gambling professional”?
Things have become murkier in recent years concerning professional gamblers. The leadership of the Canada Revenue Agency has periodically taken the position that some individuals who gamble as a profession should be taxed as though they are any other type of business.
According to an article by Jack Tadman in Canadian Gaming Lawyer Magazine, the Minister of National Revenue examines individuals:
- ability to profit consistently from gambling
- the amount of time devoted to the pursuit of gambling profits
If that was not vague enough…
The Minister’s test should be easy enough to apply, except that the courts have made clear that simply devoting time to gambling and winning a significant amount of money over several years does not in and of itself mean that a person is gambling professionally.
Leblanc v. The Queen
In 2006, the Tax Court of Canada decided a case involving the Leblanc brothers. The Leblanc brothers appealed their tax assessments from the Minister of National Revenue, who had determined that the brother’s sports wagering had constituted a business and thus, was subject to taxation.
The brothers were purchasing $200,000-$300,000 worth of Proline and mise-o-jeu parlay sports wager tickets per week at their peak. They reported losing most of the time (95%), but they also secured some significant victories. Over four years, the brothers were estimated to have wagered $52 million.
Playing at several retailers near the Ontario and Quebec border, and later online, they won all that back. Plus, Terry and Brian Leblanc netted about $5.52 million in winnings over four years.
In examining various historical cases where people were found to have been engaged in a business, the Tax Court found that the Leblanc brothers did not compare.
Three categories of gambling income
The Tax Court identified three categories of gambling income.
- Income by someone gambling from a pleasurable pursuit, is not taxable.
- Gains where the gambling was related to a business. For example, a horse trainer who bets on his own horse would be subject to taxation; and
- Gains where the person uses their skill to earn a living are taxable.
Regarding category three, the Tax Court cites two examples: The pool hustler who plays drunks; and the professional riverboat gambler.
What the Tax Court ultimately decided with regards to the Leblanc brothers was that:
“The appellants are not professional gamblers who assess their risks, minimize them and rely on inside information and knowledge and skill. They are not like the racehorse-owner, who has access to the trainers, the horses, the track conditions and other such insider information on which to base his wagers. Nor are they like seasoned card players or pool players who prey on unsuspecting, inexperienced opponents. Rather, they are more accurately described as compulsive gamblers, who are continually trying their luck at a game of chance.”
What we know about what is coming
We know that if Ontario launches an open market for sports betting and igaming on April 4, operators will be subject to a 20% tax on top of a licensing fee.
We also know that at least as of now, few Canadians will likely be subject to income tax on their winnings.
However, this does not mean that all gambling would not be subject to taxation. The Income Tax Act leaves room for taxation of professional gamblers.
Professional bettors who qualify for taxation would have income treated like business income under subsection 9(1) of the Income Tax Act.