Canadian Online Poker Tax Thread

[jimmyfingers]

I'm not answering from any level of tax expertise, just common sense.

If you report your winnings at the tables as your income, yes rake is deductable, and you've ALREADY deducted it. If you sit at a table with $50, and leave with $60, I would call that $10 profit. If I paid $2 rake during that session, I actually made $12 before the rake. I've effectively deducted the rake already. Since I've deducted the rake, it only makes sense to me that rakeback would be taxable.

right, that all makes sense if you're in a situation where your winnings are taxable. in that situation i agree that winnings + rakeback should be taxed.

however, what if your poker winnings aren't taxable? should your rakeback payments be taxable then? and as a follow up, since we didn't deduct rake as an expense against our winnings, can we now deduct it against rakeback?

[Bobo Fett]

right, that all makes sense if you're in a situation where your winnings are taxable. in that situation i agree that winnings + rakeback should be taxed.

however, what if your poker winnings aren't taxable? should your rakeback payments be taxable then? and as a follow up, since we didn't deduct rake as an expense against our winnings, can we now deduct it against rakeback?

I wouldn't think rakeback would be taxable if your poker winnings weren't, but I couldn't say for certain.

You calculate your winnings without deducting rake? In other words, you add your rake paid back in to your winnings?

[jimmyfingers]

I wouldn't think rakeback would be taxable if your poker winnings weren't, but I couldn't say for certain.

You calculate your winnings without deducting rake? In other words, you add your rake paid back in to your winnings?

what i do practically isn't necessarily relevant when it comes to taxes.

the reason i'm asking about deductions and things is i'm wondering if there's a difference between the following two scenarios from a tax standpoint (again assuming the player's winnings aren't taxable):

1) player has a deal to pay no rake on a site.

2) player pays rake, but gets 100% of his rake back at the end of the month.

to me, the scenarios should be the same, meaning if the 100% rakeback payment is taxable then we should be able to deduct our rake as an expense so that it's equivalent to scenario 1). does that make sense?

[Bobo Fett]

what i do practically isn't necessarily relevant when it comes to taxes.

the reason i'm asking about deductions and things is i'm wondering if there's a difference between the following two scenarios from a tax standpoint (again assuming the player's winnings aren't taxable):

1) player has a deal to pay no rake on a site.

2) player pays rake, but gets 100% of his rake back at the end of the month.

to me, the scenarios should be the same, meaning if the 100% rakeback payment is taxable then we should be able to deduct our rake as an expense so that it's equivalent to scenario 1). does that make sense?

OK, I see where you're going with this now.

I think what you're missing is that the rake is already deducted from your winnings. Let's run a scenario through your two examples. Let's say you play for an hour, joining a table with $50 and you make $12, and that the rake for this time period worked out to be $2.

1) You pay no rake, so you leave the table with $62, and should be paying tax on your $12 profit.

2) You pay the $2 rake, so you leave the table with $60, giving you $10 to pay taxes on. You also get 100% rakeback of $2, so you are paying tax on $12 (10+2).

There is no need to deduct the rake, it came off your income in the first place. You pay the same tax in each scenario.

[jimmyfingers]

OK, I see where you're going with this now.

I think what you're missing is that the rake is already deducted from your winnings. Let's run a scenario through your two examples. Let's say you play for an hour, joining a table with $50 and you make $12, and that the rake for this time period worked out to be $2.

1) You pay no rake, so you leave the table with $62, and should be paying tax on your $12 profit.

2) You pay the $2 rake, so you leave the table with $60, giving you $10 to pay taxes on. You also get 100% rakeback of $2, so you are paying tax on $12 (10+2).

There is no need to deduct the rake, it came off your income in the first place. You pay the same tax in each scenario.

notice i mentioned the player does not pay tax on his winnings. meaning in the first case, he pays nothing.

in the second case, he definitely does not pay tax on the $10... what i'm wondering about is the $2.

[Bobo Fett]

Well, I'll defer to an actual tax expert on that part, but it's hard for me to imagine a scenario where rakeback would be taxable while poker winnings would not be. Not only that, but you're getting rake back...IE you're simply getting back something that you already paid.

[DonkEEE]

Hi TorontoCFE,

My poker profits from last year were in the 7 figure range, about half online, and half from live tourneys. I just got an opinion from a 2nd tax lawyer here in Ottawa, and they have both said after reviewing all of my facts, and making many comparisons to past cases, that I should not be taxed. Also, since I have their written opinions, I can never be charged with negligence.

I'm curious if anybody, particularly TorontoCFE, has a response to this as I've had three differing opinions myself. Two of those from tax lawyers.

[TorontoCFE]

Were you taxable, then the amount that would be income would be the difference between what you started with and what you ended with. If you start with $100 and end the year with $500, you have income of $400.

Non-cash items like free travel shuld be included in income at a fair market price, however you could also deduct them if they were related to the income producing activity so the net effect is 0 and you might as well not worry about it.
If you were such a high roller you were given a free car say, then it would be techically taxable if you "earned" it as a pro.

Rakeback is the same. It is taxable in the sense that if it helps you leave with more money, the extra money from rakebak would be taxable as additional income.

[TorontoCFE]

It depends on each unique set of circumstances.

I think most tournament winnings would be exempt unless you were a full-time circuit player.
Cash game earnings are entirely dependent on facts - I have always said 98% of players would not be taxable.

[TorontoCFE]

Rake back is always figured as part of your net results.

What you look at is how much you start the year with and how much you end the year with (adjusted for any deposits and withdrawals). How it got there doesn't matter.

Few people are taxable but those that are would have a taxable income based on their net results, bottom line.
Rake is automatically deducted as an expense. Rakeback if you get it then gets added to your final result.

It makes no difference whether you win $12 or win $10 and get $2 rakeback. For a taxable person, you pay based on $12 income.

[ryanghall]

Hello CFE. Interesting information you are giving, much appreciated.

I'm curious about something. I'm a full time high school teacher so I assume my poker winnings aren't taxable. If I gross $50K/year teaching, how much would I have to be making playing poker before it was taxable (I play mostly online sit and gos if that matters), or is there a limit at all?

Ryan

[sawseech]

That wasn't exactly what I said. Frequency is also, in and of itself, not the determining factor - despite what the taxman would like you to believe. Rather, I believe frequency is the tip off to cause them to investigate your winnings...

---------------------------

What is a business?
- Need to figure out what business income is and separate it from windfall gains.
- Subsection 248(1) defines business to include “profession, calling, trade, manufacture, or undertaking of any kind whatever and…an adventure or concern in the nature of trade but does not include an office or employment” (not exhaustive).

- case law has established that it is an organized activity carried on with reasonable expectation of profit.

The definiton of business is broad and encompasses more than what is traditionally refered to as a "business". Organization is a fundamental component of business...

Graham v. Green (Inspector of Taxes) [1925] T.C.
Facts:
- appellant betting on horses, large and sustained scale and made an income (means of living), was assessed to income tax and this was appeal

Issue:
- are winnings on bets “profits or gains”? or assuming the winnings themselves aren’t, are the aggregate of his winnings? Are the profits or gains a “vocation” or possibly a trade or adventure?

Held:
- mere receipt by finding an object of value or mere gift is not a profit or gain
- bet is merely an irrational agreement that one person should pay another on the happening of an event (no relevance between the event and acquisition of property), event doesn’t really produce it at all
- a bookmaker carries on a taxable vocation (calculates odds and quotes them), organizes an effort
- man who bets with the bookmaker is a mere better, he is not organizing an effort in the same way a bookmaker does
- habit of betting, there is no tax on a habit, not profits or gains, appeal allowed

Decision in favour of appellant (Good Citizen). Establishes that frequency of betting is in itself not a determining factor. Important criteria is "organization", which was lacking in this case.

Walker v. M.N.R. [1951] Exch. Ct.
Facts:
- farmer who attended horse races, earnings from owning horses and gained through betting

Issue:
- do gambling activities constitute a business?

Held:
- crucial point is was he betting for a hobby, pure amusement or systematically carrying on with a view to making money?
- Factors are he had an interest in several race horsed, had inside information from jockeys etc., for 10yrs he systematically attended all races, this constitutes a business or calling and monies are therefore taxable

Decision in favor of respondent (Evil Tax Man). Establishes factors of "organization", including financial interest, systematic approach, inside information (risk minimization).

M.N.R. v. Harry Edgar Morden [1961] Exch. Ct.
Facts:
- minister appeals from decision where income tax appeal board allowed respondent’s appeals from reassessments in relation to net gains from gambling activities
- owned a hotel, for a period the operation of hotel was not his only or main business interest, owned a racing stable and owned horses, trained and raced horses and placed bets
- his gambling activities up to 1948 were so organized and occupied that if continued through years in question it would have been income from a business
- submitted that in years in question his gambling was only occasional and nothing more than hobby

Issue:
- are these gains part of the respondent’s taxable income?

Held:
- to be taxable the gambling gain must be derived from carrying on a “business”
- casual winnings or occasional race bets are not subject to tax
- test is to look at intention, to conduct enterprise of a commercial character or to entertain himself (Lala Indra Sen)
- here no evidence that during years in question it was of commercial character
- while his bets were high sometimes and gains substantial no evidence of carrying on a business (was a hobby)
- appeal dismissed

Decision in favor of respondent (Good Citizen). Establishes that Dollar Value is not relevant. Intention, hobby or business is critical factor. Further establishes that it is possible to be in the business of gambling at one time, and in the hobby of gambling at another!

Epel v. Queen and Luprypa v. Canada I've provided a link to in the US thread.. here's a partial reproduction:

There is the case Epel V. Queen [2003] Tax Court Of Canada decided in favour of the Good Citizen. The Evil Tax Man was unable to demonstrate professional conduct, as Epel (our hero) did not study, practice, take notes, seek favorable playing conditions, access advantageous or priveleged information, and was drunk most of the time. And also the case Luprypa v. Canada [1997] where the Evil Tax Man did manage to demonstrate professional conduct. Included in the reasons for judgement in the Luprypa case:

a) He carefully managed the risks.
b) He was a skilled player.
c) He played Monday through to Friday each week.
d) He spent his afternoons playing snooker to perfect his skills.
e) He played inebriated opponents after 11:00 p.m. to minimize his risk.
f) He won most of the time earning, approximately $200.00 daily.
g) He drank alcoholic beverages only on weekends when not playing pool to give him a sober advantage over his inebriated opponents.
h) He was calculating and disciplined.
i) It was his primary source of income and he relied on this steady income.

Material was taken from these sources. (italics above are my own non-professional interpretations):
http://www.google.ca/url?sa=U&start=....doc&e=7781
and,
http://decision.tcc-cci.gc.ca/cgi-bin/si...&bouton.y=5

Clearly, there exist situations where it is absolutely clear the individual's conduct cannot possibly be classified as a hobby - therefore cannot be a non taxable windfall.

It appears, of themselves, frequency and dollar value are not determining factors; whereas, being organized and systematic with a reasonable expectation of profit are primary factors in the determination of "being in the business".

[DonkEEE]

It depends on each unique set of circumstances.

I think most tournament winnings would be exempt unless you were a full-time circuit player.
Cash game earnings are entirely dependent on facts - I have always said 98% of players would not be taxable.

I don't think Myst is a full time circuit player, but he played several tournaments last year with much success (dollar wise). He's also had a lot of success in cash games. He considers himself a poker professional and I don't believe that he works aside from poker. I'm just wondering what would make these two tax lawyers say that he shouldn't pay tax. Would also like to hear from Myst as the rationale the lawyers gave for their opinions.

[Alexos]

I have a couple question:

1) How does the government know how much you earned through poker, other than what you have wired/check dep./transfered from poker bank to local bank?

2) How can they know if you only played 1 tourney (Sunday Mil.) and won 6 figures, as opposed to grinding cash games 6hrs a day. The first would be windfall(or whatever its called) whereas the second would be "playing to profit"? How can they know?

Thank you very much.

[Alexos]

Also, should I start opening offshore accounts, make accounts in the name of family members, gf? anyone doing this??

lol, seriously