An Overview

A Canadian taxpayer’s income includes all income from a productive “source” inside or outside of Canada, according to section 3 of the Canadian Income Tax Act. A list of productive sources of income is provided in Section 3, including:

1. employment;
2. office;
3. property; and
4. business.

Income can still come from other sources, though. The Canadian Income Tax Act neither defines nor specifies any potential additional sources of income. According to Canadian tax courts, a source of income should possess one or more of the following characteristics:

• It periodically recurs;
• It entails a planned endeavour, action, or pursuit on the part of the taxpayer;
• It entails a transaction on a market;
• It results in an enforceable right to compensation; and/or
• There is a desire for profit where there is a business or property source.

Following these guidelines, Canadian tax courts have typically agreed that unanticipated gains, gifts, inheritances, strike pay, and lottery winnings are not regarded as “sources” for the purposes of income tax. The measurement of gambling winnings, however, is increasingly challenging. The tax courts have noted that determining whether a taxpayer has a source of income necessitates determining whether that person planned to engage in a profitable activity. Gambling may or may not be regarded as a business for the purpose of pursuing profit, with any profit being taxable income, depending on the specific manner in which a taxpayer engages in gambling.

This article will first examine the legal concepts that guide gambling tax — how gambling winnings are classified for taxes purposes in Canada. After that, it will discuss how intent affects whether gambling winnings are taxable and how to distinguish between “businesslike” behaviour and legitimate business success. In addition to offering some extra tax advice on how you can be proactive in avoiding conflict with the Canada Revenue Agency (“CRA”) when you take your gambling activities seriously, this article will discuss the case law that specifically applies to poker.

When is Gambling Considered a Hobby vs a Business under Canadian Tax Law?

In the important case Stewart v Canada, 2002 SCC 46, the Supreme Court of Canada laid down simple criteria to establish whether a Canadian taxpayer earns income from a business. The Stewart test is divided into two parts:

• Is the action of the taxpayer one that is carried out for personal gain or one that is intended to make a profit?
• If not for personal gain, is the income coming from a property or a business?

If a taxpayer’s activity falls under the first part of the test and there are indications that it is a hobby or other type of personal pursuit, the activity will only be taken into account as a source of income if it is conducted in a sufficiently commercial manner. When the first component of the test is met—that is when the taxpayer engaged in gambling with the intention of making a profit then the second component of the test will nearly always be meaningless because the only actual source of income would be from business, not from property.

An activity must be primarily motivated by the desire to profit for it to be considered commercial in nature. Again, given the nature and aim of gambling, it is almost probable that there is a subjective goal to make a profit. It still depends on the facts to determine if the taxpayer’s primary goal is to make a profit.

“Businesslike” Behaviour: The Way Gambling Must be Carried Out

The taxpayer’s gambling must also be conducted in accordance with objective standards of businesslike behaviour in order to be considered a source of income. Gambling will be regarded as a business activity and any wins or losses will be treated as taxable income or business losses if the taxpayer’s gambling activities were commercial in nature and conducted with businesslike behaviour.

It’s crucial to distinguish between the idea of a successful venture and the idea of businesslike behaviour. A taxpayer’s venture does not have to be a business producing taxable income just because there is evidence of profit. It would be inappropriate to assume that all profitable ventures are businesses and that unsuccessful ventures were not sufficiently run in a businesslike behaviour, as this would ignore the taxpayers’ subjective motivations. In the Tax Court of Canada case Leblanc v. The Queen, 2006 TCC 680, this was clearly stated. The two taxpayers in Leblanc were brothers who made numerous large-scale purchases of sports lottery tickets. The bets the brothers placed totalled about $50 million, with a profit of about $5 million. The brothers also hired helpers to go to various vendor locations and buy tickets, and they attempted to negotiate with ticket sellers to receive discounts for large purchases. The Tax Court of Canada, however, found that the brothers’ venture did not adhere to the objective standards of businesslike behaviour. The court specifically found that the brothers lacked a system to reduce risk or raise their chances of winning when they gambled. The court concluded that the brothers gambled extravagantly and carelessly and only by good fortune did they succeed.

On the other hand, the Tax Court did discover evidence that suggested the taxpayer acted with a businesslike behaviour in the case of Luprypa v. The Queen, [1997] 3 CTC 2363. The taxpayer in Luprypa was an expert pool player who earned about $1,000 per week playing staked pool games against bar patrons. That taxpayer carefully controlled his risks, concentrated on a task at which he excelled, and used a strategy to increase his winning chances. He would specifically play staked games only after 11:00PM and would target drunk bar patrons while staying completely sober. Additionally, he would consistently practise playing pool in the afternoons to improve his abilities. The court determined that the taxpayer acted in a businesslike behaviour by applying his knowledge and skills to the pursuit of profit, and as a result, the earnings were considered taxable income.

How are Poker Winnings Taxed in Canada?

Poker is unique among gambling games in that it is generally believed that skilled players can greatly increase their chances of winning and can play consistently for a profit. A significant Canadian tax law case that specifically addresses the taxation of poker winnings is Cohen v. The Queen, 2011 TCC 262. The taxpayer in Cohen was a former lawyer who turned to the world of professional poker after quitting his job. To increase his chances of winning, he initially read books and articles on poker strategy and math. According to the taxpayer’s testimony, his strategy involved playing against amateurs and winning a lot of low-stakes games. The taxpayer attempted to deduct from his income business losses totalling about $121,000. The CRA contested his deductions on the grounds that the taxpayer was a hobby poker player and not engaged in the gambling business.

When determining whether there was evidence that the taxpayer was engaged in a poker business, the tax court in Cohen looked at five major factors:

1. Prior year’s profit and loss experience;
2. Training for taxpayers;
3. The actions that the taxpayer intends to do;
4. The venture’s ability to generate a profit; and
5. The additional elements from Luprypa.

In Cohen, the court determined that the taxpayer had never gambled professionally before and had only recently begun his professional poker career. In addition, the judge determined that although there was some evidence the taxpayer studied poker strategy and went to a poker conference, he did not receive any special instruction and that neither his knowledge of poker nor his level of ability was remarkable or above that of an average poker player. The tax court contrasted the taxpayer’s situation to that of a hobbyist chess player, noting that even if such a person would possess enough game theory books to fill a sizable library, they would not be considered a professional chess player. The taxpayer’s approach of playing low-stakes games to reduce risk was rapidly abandoned as he started to play high-stakes games with more experienced players, according to the court’s findings. It also emerged that there was no overarching business plan.

The Tax Court judge also determined that there was no evidence to support the taxpayer’s claim that he had a business plan, maintained a budget, or kept accurate records of the number of games he played or the amount he won in any given game – all of which were inconsistent with a venture with the potential to be profitable. The elements in Luprypa, which partly overlapped with the first four categories, were also taken into account by the court. The court found that the taxpayer lacked special talent and that there was no proof of a strategy that would have increased his chances of success and decreased his risk. As a result, the tax court determined in Cohen that the taxpayer’s poker activities were not carried out in a manner that was sufficiently businesslike, and as a result, the taxpayer’s claimed losses were denied.

In D’Auteuil c. Le Roi, 2023 CCI 3, the taxpayer produced the opposite outcome. Due to the taxpayer’s failure to declare his poker winnings as business income in D’Auteuil, his tax liability for the tax years 2008 to 2012 was reassessed. During those years, the taxpayer made nearly $5 million playing online poker, which he reinvested to increase his potential earnings. The taxpayer employed software to keep track of both his actions and those of his opponents in order to determine which players would be more advantageous to play against. In order to continue to be a competitive player, the taxpayer studied theory while not playing poker. Both the CRA and the taxpayer gave their own expert testimony in court, each saying that the taxpayer’s skills were more akin to those of a lucky enthusiast than a smart businessman.

The question of whether poker could be considered a game in which skill beats chance was largely ignored by the tax court. The tax court reiterated that the Stewart decision should be followed when determining whether a taxpayer operated a business. In other words, the issue would be whether the taxpayer’s actions were done for personal reasons or with the intention of making a profit. Additionally, as was reiterated in later decisions, the context of the taxpayer would be taken into consideration when deciding whether the taxpayer had a deliberate and reasonable expectation of making a profit as opposed to merely a subjective anticipation of profit. The court found that after taking the taxpayer’s activities into account, they were significantly more planned out than those of an enthusiast or a hobby player. He focused almost entirely on poker, working to lessen his risks and increase his profits. The tax court came to the conclusion that the taxpayer had a subjective intention to profit and that his poker winnings were taxable business income on the basis of a balance of probability. 

Tax Pro Tip – Gambling Loss Claims Come with Additional Risks

If a Canadian taxpayer doesn’t create or employ a method to reduce risk and increase the likelihood of winning, his or her      poker activities will almost never be considered a business that generates taxable income. There must be more to the system than what an enthusiastic hobbyist would employ.

Even though this provides some relief for recreational and casual gamblers in Canada, it does present more risks for those who want to claim their gambling losses as part of an organized gambling business. The high bar of acting in a businesslike behaviour must be attained in order to deduct non-capital losses incurred by running a gambling business. What objective evidence can be used to demonstrate that the taxpayer had those subjective goals will be largely based on the taxpayer’s subjective intentions and what those objectives were. It is insufficient to merely assert that you intended to run a business in response to a CRA tax audit. Instead, it will be the taxpayer’s responsibility to show that there was an adequate organized attempt to gamble in a businesslike manner to support the claim for deduction of those losses.

As a result, you should see an expert tax lawyer in Toronto immediately if you are a Canadian taxpayer considering deducting your gambling losses from your taxes or are otherwise examining your career prospects in the gambling industry. Getting a professional tax opinion on whether your gaming is considered a business under Canadian tax law can not only help you make sure you file your taxes correctly, but it may also save you from additional fines if the CRA later challenges that filing. Speak to one of our knowledgeable Canadian tax lawyers right away to avoid receiving a large tax bill as a surprise or failing to submit a claim for a legitimate business loss.

FAQs:

What does Canadian tax law Mean by the “Source Theory” of Income?

According to Section 3 of the Canadian Income Tax Act, all income from Canadian and foreign sources is subject to taxation for residents of Canada. For the purposes of Canadian tax law, an income source must possess one or more of the following characteristics: (1) it occurs on a periodic basis; (2) it entails an organized effort, activity, or pursuit on the part of the taxpayer; (3) it involves a market exchange; (4) it inevitably leads to an enforceable claim to payment; and/or (5) there is a profit-seeking motive wherever a business or property source is involved. For the purposes of Canadian income tax, lottery winnings are not regarded as “sources,” but winnings from gambling activities might be if, among other things, there is sufficient organized effort and a primary goal to pursue profit.

When Might my Winnings from Gambling be Considered Taxable Business Income?

To evaluate whether a Canadian taxpayer is receiving income from a business, the Supreme Court of Canada established a clear test in the landmark case Stewart v. Canada, 2002 SCC 46. The Stewart test is divided into two sections:

• Is the action of the taxpayer one that is carried out for personal gain or one that is intended to make a profit?
• If not for personal gain, is the income coming from a property or a business?

It will be determined that a Canadian taxpayer has income from a gambling business if the gambling activities were conducted with a commercial objective, the taxpayer’s main goal was to earn a profit, and the activities were conducted with a businesslike intent.

When May my Poker Activities be Considered a Business?

In Cohen v. The Queen, 2011 TCC 262, the Tax Court of Canada outlined five key considerations to take into account when deciding whether a Canadian taxpayer is engaged in a poker business:

1. Prior year’s profit and loss experience;
2. Training for taxpayers;
3. The actions that the taxpayer intends to do;
4. The venture’s ability to generate a profit; and
5. The additional elements from Luprypa.

After the Cohen decision, a Canadian taxpayer’s poker activities will almost never be considered a business operation producing taxable income unless the taxpayer creates or employs a system to reduce risk and increase the likelihood of winning. Additionally, the system must be more advanced than what a dedicated hobbyist would employ.

Disclaimer:

“This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the articles. If you have specific legal questions, you should seek the advice of a lawyer.”