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Old 10-04-2004, 10:13 PM   #1
4thstreetpete
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Canadian Online Poker Tax Thread

Hi guys, there seems to be a lot of confusion when it comes to paying taxes on online poker in Canada. Please keep all discussion regarding taxes in Canada in this thread for Canadian players (as well as people from abroad who may be contemplating moving to Canada or just interested in this subject).

First, I like to say that I am in no way qualified to give legal advice. From reading the various forums and researching with CCRA I have a few things to add.

I see a lot of posters here vehemently declaring that there are no taxes on gambling in Canada and that you don't have to pay taxes on gambling winnings. Trust me, I would like nothing better than to believe that this is true. However this only partially correct.

After reading the official website for the CCRA, (looking under "other types of income, ie gambling) they do bring up the subject of "reasonable expectation of profit". This is a very gray area, and is very vague. You can be taxed on carrying the business of gambling, as well as placing bets and wagering. A poster in the another thread stated that it does not necessarily have to do with how much you won but by the frequency of your activity. This is absolutely correct.

What does this all mean? Basically, if you're a for lack of a better term 'recreational player' then it's a fair assumption that you won't get taxed. However if you play very frequently and show a consistent profit for an extended amount of time, then you will fall into the dreaded category of "reasonable expectation of profit" and be deemed a professional gambler.

As far as I know no one has ever been busted for this, I could be wrong. However that doesn't mean that this won't happen in the future. Please remember that professional gamblers get taxed for their winnings and you're hardly unique in what you are doing.
If you make any considerable amount of money in poker and it seems like a lot of us in this forum do, it's best to consult with a qualified tax attorney to give you all the answers before you think about not paying your taxes on poker winnings.

If anyone have anything to add please feel free.

I know this is a sensitive subject but I would like to know of any canadian players who have paid taxes on their winnings in the past or have seeked legal advice on this subject, it would be of great help. Thanks.
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Old 10-04-2004, 10:45 PM   #2
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Re: Canadian Online Poker Tax Thread

I don't understand how the government could distinguish between professional and recreational players. Couldn't a person who plays for a living state that he got lucky in a tournament and won $x and is living off that, thus being a rec player that got lucky once? Your playing habits cannot be tracked can they? I'm curious about this too because I am a Canadian playing for a living while overseas.
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Old 10-04-2004, 11:10 PM   #3
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Re: Canadian Online Poker Tax Thread

Good thread. I am several of my friends are in this very precarious position - being pro players (i.e. having no other source of income) in Canada.

I recently talked to a tax lady as I filed my 2003 return. While she had not heard of someone playing poker online, she had handled professional gamblers before.

She referred me to:

Rev Canada link - Miscellaneous Receipts

Sections 3, 10 and 11 appear to have relevance to us.

The phrase "reasonable expectation of profit" seems to be the key phrase.

I have a couple questions:

1 - Since I have been making withdrawals from neteller straight into my Canadian Bank account I am leaving a paper trail of income. Does this mean I should declare this?

2 - I have made a couple withdrawals by using the Neteller Debit card - is this trackable by Revenue Canada?

3 - How would I convince Revenue Canada that poker winnings are a "windfall" and do not suggest a "reasonable expectation of profit"?

4 - Do I need to go to a tax attorney?

5 - Davidross, can you comment on this subject?
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Old 10-04-2004, 11:38 PM   #4
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Re: Canadian Online Poker Tax Thread

Interesting, thanks for posting this as I've been wondering myself.

I'm by no means an authority on the subject, but I always thought that lottery (and casino) winnings were NOT taxable in Canada.

I recently heard in the news that Dalton McGuinty (<-- liar, broken promises, liar, ...) said that he was going to try to tax (live) casino winnings. This leads me to believe that, currently, casino winnings are NOT taxed. And I further do not see how a disctinction would apply between "live" and "online" casinos.

After all, poker is merely a "game of chance," right?

Anyway, let's see what our authority has to say.... David Ross????
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Old 10-05-2004, 12:24 AM   #5
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Re: Canadian Online Poker Tax Thread

I'll eat my hat if anybody at Revenue Canada can prove beyond a doubt that any player has a reasonable expectation of profit from online gaming. Unless you're bringing in over $100K per year, I can't see them bothering with tracking you down.

Once I get to that point, I can hire someone to tell me how to protect my winnings.
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Old 10-05-2004, 12:59 AM   #6
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Re: Canadian Online Poker Tax Thread

Quote:
A poster in the another thread stated that it does not necessarily have to do with how much you won but by the frequency of your activity. This is absolutely correct.
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=10&q=http://clubs.law.uwo.ca/SUMMARIES/documents/incometax_223_edgar.doc&e=7781
and,
http://decision.tcc-cci.gc.ca/cgi-bin/sino/srch.pl?langue=en&database=en&method=simpl e&query=gambling&context=full&bouton.x =15&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".
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Old 10-05-2004, 01:06 AM   #7
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Old 10-05-2004, 01:16 AM   #8
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Re: Canadian Online Poker Tax Thread

Quote:
Interesting, thanks for posting this as I've been wondering myself.

I'm by no means an authority on the subject, but I always thought that lottery (and casino) winnings were NOT taxable in Canada.

I recently heard in the news that Dalton McGuinty (<-- liar, broken promises, liar, ...) said that he was going to try to tax (live) casino winnings. This leads me to believe that, currently, casino winnings are NOT taxed. And I further do not see how a disctinction would apply between "live" and "online" casinos.

Casino and lottery winnings are not currently being taxed here in Canada. The finance minister shot down the idea of taxing casino winnings basically because reports show that the amount of money collected from casino profits would barely put a dent on the defecit, it was too insignificant and wasn't worth their time to put all this in place. For Canada it just doesn't make sense, but for the U.S. that's a totally different story, there's too much money there to be made.

There is a BIG difference between live and online play. With live play it's almost impossible to prove how much you won or lose, with online it leaves a paper trail. If your bank notices something fishy, they may report it to the CCRA.

The term 'reasonable expectation of profit' leaves so much room for interpretation. You ask ten diffent people and would most likely get ten diffent answers. Remember, it's just guideline that is in place in the tax code and is not binded by the statutes of the law.

As always, it's best to get some legal advice.
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Old 10-05-2004, 01:30 AM   #9
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Re: Canadian Online Poker Tax Thread

Quote:
Revenue Canada doesn't have to prove anything. YOU have to prove you are not a professional gambler.

1) That you have a job other than poker.
2) You have a source of income other than poker.
3) Your primary source of income is NOT poker.
4) Your primary activity in your job is not poker


The term primary source of income pops up quite a bit. Now there's lots of people here that work a full time job, yet they make considerably more from playing poker (ie, those of us that play high limit games), how does that work then?

Would your full time profession be deemed your primary source of income and how what will they view your six figure poker winnings as?
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Old 10-05-2004, 01:32 AM   #10
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Re: Canadian Online Poker Tax Thread

You're right sumdumguy, there's lots of determining factors that go into it. That's why is so darn confusing.
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Old 10-05-2004, 01:41 AM   #11
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Re: Canadian Online Poker Tax Thread

Quote:
Good thread. I am several of my friends are in this very precarious position - being pro players (i.e. having no other source of income) in Canada.

I have a couple questions:

1 - Since I have been making withdrawals from neteller straight into my Canadian Bank account I am leaving a paper trail of income. Does this mean I should declare this?

2 - I have made a couple withdrawals by using the Neteller Debit card - is this trackable by Revenue Canada?

3 - How would I convince Revenue Canada that poker winnings are a "windfall" and do not suggest a "reasonable expectation of profit"?

4 - Do I need to go to a tax attorney?

5 - Davidross, can you comment on this subject?
I'm pretty sure Revenue Canada can access your neteller transaction history if they wanted to. Whether they do that or not is up in the air. If they do question you, you will have to explain it. On your bank statements it does link back to neteller and besides Neteller is a publically traded company located in Canada.

If you're pulling in say $500 a week on a consistent basis, I think you're going to have a pretty hard time convincing Rev Canada that it is a 'windfall'.

Which leaves me wondering. Would it be better to say cash out a huge amount say $50,000 every 6 months and try to claim that as a windfall? or you're better off cashing out a few hundred every week?
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Old 10-05-2004, 01:50 AM   #12
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Re: Canadian Online Poker Tax Thread

"3) Your primary source of income is NOT poker."

Is Primary defined strictly by monetary amount? Or say I work full time at McDonald's and make 15k a year. However, I made 16k at poker during the year. Do I have to pay taxes on poker (assume here poker winning are taxable)? Or is primary perhaps defined by time?
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Old 10-05-2004, 01:52 AM   #13
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Re: Canadian Online Poker Tax Thread

Thanks for the great info SDG!

Perhaps can you edit the links so the page doesnt expand right?
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Old 10-05-2004, 05:15 AM   #14
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Re: Canadian Online Poker Tax Thread

Article from The Toronto Star.

Credit for finding this article should go to David Ross.. I'm just the copy/paste grunt.

Gambling for an online poker rush
Millions being bet in virtual games

Opponents critical of offshore sites


SAN GREWAL
LIFE WRITER

For more than a century, men have gathered around tables to play "the cheating game." Poker.

Today, the adrenaline high that hits when dealt a pair of bullets (aces) on a big glimmer (money) pot, while masterfully picking up all the tells (physical cues) around the table, is just as commonly felt in front of a computer, while playing online poker.

As you can see, poker has its own language. For some, it's a religion. And in the past year, since maverick online player Chris Moneymaker, with alligator blood running through his veins, came out of nowhere to win the $2.5 million (U.S.) World Series of Poker tournament in Las Vegas, online poker has exploded.

Figures from the five largest online poker sites, all of which operate offshore, suggest more than 50 million people around the world now play regularly. Operating online gambling sites in Canada is illegal, but offshore sites are accessible here. National anti-gambling groups, such as Viva Consulting, have called for investigations into the legality of offshore sites operating in Canada.

Projected revenue from online poker operations this year is expected to be more than $1 billion (U.S.), compared to just over $300 million a year ago.

The target-market is 19- to 34-year-old males, and Canadians are second only to their southern neighbours when it comes to filling tables at worldwide online poker games.

The game's come a long way from its roots on Mississippi River gambling boats, when confidence men could smell a fish (bad player) from the other side of the delta to the recent celebrity profile of A-list Hollywood players such as Ben Affleck and Christopher Walken.

What may come as a surprise is that you get the same rush from a pair of cowboys (kings) at a casino table as you do online.

"If you know what you're doing and you know your opponents better than they know themselves, you can do well," says 31-year-old Greg Macklin of Toronto.

He's sitting in front of a laptop that's on a boardroom table at a public relations office where he's been invited to play at one of the largest online sites in the world, http://www.pokerroom.com.

The Swedish-based site was started in 1999 by two 27-year-old med school buddies who dropped out after realizing they could make more money playing poker at casinos around Europe — until they were banned from most of them for counting cards, a common technique not allowed at most casinos. The site has 2.5 million registered players worldwide.

Macklin is one of about 150,000 pokerroom players from Canada, which produces one of the largest number of professional tournament players worldwide.

"I started playing last winter. It's so much more convenient than driving two hours to and from a casino, and it's a lot less intimidating."

During the winter, when he does almost all of his playing, he spends four or five nights a week on the site, for three to four hours during the evening or, if he's feeling really lucky, in the middle of the night.

Unlike Macklin, who still considers himself an average part-time player, Rob Baillie represents the growing number of Canadians who approach online poker much more seriously.

"In September I'm up about $1,700 (U.S.)," says the 35-year-old who lives in Toronto. "I used to play for a living at a live card room here in Toronto. I gave that up when online poker came around."

And he adds the income is very "tax advantageous."

Canadians have to declare all income generated from online gaming, but according to Revenue Canada, income from online gaming is not taxable as long as it remains a hobby.

Baillie is now registered on more than 20 sites and plays up to 250 hands an hour. "That's a big advantage of online poker, the speed and the number of hands you can play. I usually jump around from table to table chasing the fish.

"When you play online professionally, you keep a book on all the players you come across so you know who the weak ones are."

He's only playing about three hours a day right now because he's looking after his 18-month-old daughter, but says he usually plays about six to eight hours a day. "Right now my daughter's my full-time job and online poker is my part-time job."

Back in the boardroom, Macklin has signed in and is playing a hand, looking for telltale tells — how long it takes the other online players to make their bet, whether they fold early, or always see a hand through etc. — you realize this is no longer a virtual world for him. It's very real.

And that's what worries Sol Boxenbaum, co-founder of Viva Consulting, a national non-profit organization based in Montreal that operates as a gambling watchdog.

"We're not anti-gambling," says the gambling critic. "Online poker has become a very, very big problem on campuses among university students."

He says his organization is particularly concerned with the inability to regulate offshore gambling sites. "Young people are emulating what they see on TV — they're playing poker on the Internet at home and at school.

"Even if the sites claim they don't let minors register, how can you regulate that online — anyone can register."

Which is true. For example, to register on http://www.pokerroom.com, players only have to scroll through a list of terms and then click a button.

When Macklin first signed up, he began winning right away. "After a few early losses when I started, I won about $500 (U.S.)," Macklin says. "I cashed out my account and got a cheque in the mail a week later."

He says other than the convenience, he appreciates the lack of showmanship, something that tends to intimidate a lot of players who try casino poker.

"I don't think I'm good enough right now, but I could see myself approaching this as a part-time job. There's a lot of money out there."

The site makes its money off what's called the rake, a very small share, 1 or 2 per cent, of the pot. It also makes money from tournaments that are constantly being held, which cost anywhere from $5 to $50 to play in. Prizes include money and entry into some of the largest poker tournaments in the world — which is how Moneymaker got his paid entry into the World Series of Poker last year.

Recent criticism alleges that online gaming sites are plagued by a new phenomenon called "bots." These card-playing robots, which can play dozens of games simultaneously, are allegedly being used by some sites to routinely beat players of all levels.

And though such allegations could seriously hurt the red-hot online poker industry, players such as Baillie are convinced the sites are fair.

"With all the money they are making, I doubt sites would risk a misstep that could ruin them. Word would spread very quickly — the online poker community is very close knit."

Rob Davies, a 29-year-old online poker novice agrees.

"At first I was a bit apprehensive," the Torontonian says. "Giving out your credit card over the Internet has a negative connotation and you're not sure if the game is completely random. But I've had no problems. All the verification of the practices can be read right on the sites."

Like Macklin, Davies says the convenience of online poker, being able to log on any time any place, is one of the main draws. "My problem in the past is I wouldn't know when to stop, foolishly playing when I was tired. Sometimes you have to know when you're not getting the cards, but it's hard to pack them in, especially when it's so convenient."

The inability to know when to stop — the addiction — is something that Patrik Selin, an executive with pokerroom.com, says the online poker community is aware of.

"We are linked to organizations that provide support for gamblers with a problem and we actively encourage our members to play safely. There's no doubt it can be a serious problem."

He's speaking by phone from Thailand, where he's vacationing, but lives in Sweden. Asked about the growth potential of online poker, he says, "Well, we have 25,000 new players coming online each week. I don't know how big this could get."

As for the popularity in Canada, he chalks it up to our climate and "a more sophisticated history of poker, similar to the U.S.

"Canada is our second-largest market."

And with prizes such as expense-paid entries into the World Series of Poker, every player's fantasy, Selin says the online game will probably get much, much bigger in Canada.

As for Macklin, it's a dream, like his playing style, that he tries to keep in check.

"I'm not good enough right now," he says. "I'll play online all winter and see how I'm doing. It's getting to the point where I can read hands fairly well, but it's too bad you don't get many tells off people playing online."

As soon as he says that, he adds, "Come to think of it, no one can read some of my tells either, I don't even know what half of them are. Maybe that's why I like playing poker online."

In the end, poker isn't about where you play, or who you're playing with, it's all about the cards.
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Old 10-05-2004, 08:29 AM   #15
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Re: Canadian Online Poker Tax Thread

Great article, thanks.

Quote:
In September I'm up about $1,700 (U.S.)," says the 35-year-old who lives in Toronto. "I used to play for a living at a live card room here in Toronto. I gave that up when online poker came around."

And he adds the income is very "tax advantageous.

Canadians have to declare all income generated from online gaming, but according to Revenue Canada, income from online gaming is not taxable as long as it remains a hobby.



So if you win $1700 a month every month, that still constitutes it being a hobby? I hardly think so. I just wished Rev Canada would make it more black or white. Either you tax it or you don't. For the record, I think taxing gambling winnings is absolutely ridiculous.
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Old 10-05-2004, 09:18 AM   #16
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Re: Canadian Online Poker Tax Thread

I am an accountant here in Toronto (while I am a forensic accountant now primarily, I have some experience in tax, especially gaming).
I can give a little advice if you have specific questions or scenarios.
I made a series of posts on this about two years ago.
There are a couple of recent cases of gaming income going to court in the last two years or so; almost exclusively involving sports betting.
I see there being perhaps dozens of cases in the next few years as there are more serious online players and the CRA take smore notice.
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Old 10-05-2004, 06:43 PM   #17
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Old 10-05-2004, 09:30 PM   #18
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Re: Canadian Online Poker Tax Thread

I think the problem you will run into is that there have been only a handful of cases that have gone to the courts over gaming income and as I've mentioned they have been primarily sports betting cases.
Because interpretations haven't been tested in court, they are up in the air and depend on the agent you are dealing with.
Saying you must report the income but they don't expect you to pay taxes on it is one of those fallacies like saying you only have to pay taxes on the income earned in Canada.
It's not true - the issue is clear - if it is a "windfall" suchas a lottery win, then it is nontaxable, otherwise it is taxed (like all income not specifically deductible) at your normal marginal rate.
Another misconception is that gambling wins are automatically taxfree.
That is not true. Gambling wins become taxable if they are not a windfall - which is:

Factors indicating that a particular receipt is a windfall include the following:

(a) the taxpayer had no enforceable claim to the payment,

(b) the taxpayer made no organized effort to receive the payment,

(c) the taxpayer neither sought after nor solicited the payment,

(d) the taxpayer had no customary or specific expectation to receive the payment,

(e) the taxpayer had no reason to expect the payment would recur,

(f) the payment was from a source that is not a customary source of income for the taxpayer,

(g) the payment was not in consideration for or in recognition of property, services or anything else provided or to be provided by the taxpayer, and

(h) the payment was not earned by the taxpayer as a result of any activity or pursuit of gain carried on by the taxpayer and was not earned in any other manner.

The factors above are based on those set out in the decision of The Queen v. Cranswick, (1982) CTC 69, 82 DTC 6073 (F.C.A.) and the current version of IT-213

That said, poker earnings would often not meet the windfall conditions b,d,e,f or h.

The onus would be on you to prove that these conditions did apply, but it would be difficult I think if you are a consistent winner and there is proof - like regular bank deposits.
Of course, each situation is unique, but here are the criteria they look at:
Gambling Profits

10. Profits derived from bookmaking or from the operation of any gambling establishment (carried on legally or otherwise) constitute income from a business. In addition, an individual may be subject to tax on income derived from gambling itself, if the gambling activities constitute carrying on the business of gambling; see the decision of MNR v. Morden, (1961) CTC 484, 61 DTC 1266 (Ex. Ct.). The issue of whether or not an individual's activities are such that he or she can be considered to be carrying on a gambling business is a question of fact that can be determined only by an examination of all of the circumstances and the taxpayer's entire course of conduct. Although no one factor may be conclusive, the following criteria should be considered in making the determination:

(a) the degree of organization that is present in the pursuit of this activity by the taxpayer,

(b) the existence of special knowledge or inside information that enables the taxpayer to reduce the element of chance,

(c) the taxpayer's intention to gamble for pleasure as compared with any intention to gamble for profit as a means of gaining a livelihood, and

(d) the extent of the taxpayer's gambling activities, including the number and frequency of bets.

In order for any activity or pursuit to be regarded as a source of income, there must be a reasonable expectation of profit. Where such an expectation does not exist (as is the case with most hobbies), neither amounts received nor expenses incurred are included in the income computation for tax purposes and any excess of expenses over receipts is a personal or living expense, the deduction of which is denied by paragraph 18(1)(h). On the other hand, if the hobby or pastime results in receipts of revenue in excess of expenses, that fact is a strong indication that the hobby is a venture with an expectation of profit; if so, the net income may be taxable as income from a business (IT-33R2)

To answer your questions, gambling earnings that are consistent would likely be taxable. In an audit, you would need to somehow prove that the income was just luck and not a income that you count on as regular and use a system to earn.

Since this is a new concern, it really is up in the air as to how an individual case will look, as it also comes down to the facts of the case.

My instinct is to report it and, since it would be business income, to be aggressive with looking for offsetting deductions (internet costs, travel expenses, Card Player subscription, etc.)
I've seen that approach work in the past with a client. You avoid tax evasion risks since you are declaring the income and can minimize the taxes payable. perhaps to nothing. It may trigger other issues like quarterly tax installments if the poker winnings are high enough. If its 2,000 / year, then you can take a chance but anything over 10,000 / year and you're playing with fire.

Let me know if you have any other questions or advice specific to a situation. I can cite cases if useful.
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Old 10-05-2004, 09:32 PM   #19
TorontoCFE
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Re: Canadian Online Poker Tax Thread

I forgot to mention that the current hot issue is the "reasonable expectation of profit" issue.
That has now been dropped and there need only be a genuine attempt to earn profit.
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Old 10-05-2004, 10:37 PM   #20
4thstreetpete
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Re: Canadian Online Poker Tax Thread

Hello, TorontoCFE. Thanks for the advice. If you're in the Toronto area, I may want to get in touch with you sometime in the near future to get some legal advice. I will of course pay you for the services.

I will be reporting all my income from poker simply because it's just way too much for me not too ,it's in the six figure range so I'm not taking any chances.

Also, what about the very first year that you show a profit in online poker? I heard somewhere that the first year that you show a profit is pretty much tax free, however if you win the following year you should be reporting it since it shows a pattern of consistent profit and you would therefore be deemed a professional gambler.
But even then, they could always revisit prior years tax history.
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Old 10-05-2004, 11:42 PM   #21
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Re: Canadian Online Poker Tax Thread

TCFE,

Thank you for all your (free) advice in this thread. I have a couple questions if you dont mind indulging me.

1. If a player uses a non-canadian bank to withdraw his/her earnings to, does RevCan have any proceedures to find that information or arbitrarily estimate someone's (in the event of an audit) income?

2. If a poker player has a job that pays 50K a year and that player makes 100K on the side playing poker, is it still a hobby if it takes less time than their real job but makes more money?

3. Would a person who makes a large amount each year be better off withdrawing it all at once yearly (as opposed to monthly) so its treated like a windfall?

Thanks for any further advice you can offer.

Tuco.
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Old 10-06-2004, 09:04 AM   #22
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Re: Canadian Online Poker Tax Thread

Well, to answer your questions (normally I attach the standard disclaimer that this advice is general and may not apply to individual situations so check with proper advisors but I don't like sounding like a lawyer, I prefer direct answers):

1. Canada Revenue Agency can find out about offshore / foreign accounts. However, they need to have a reason to look for one and ask for it from the other government. Relations with the US are much closer and there is some question as to whether there is routine data sharing there (for anti-crime purposes).
That said, they would have to have a reason to suspect something was going on. That would either come from a tip or an audit. In the case of an audit, the auditor is free to estimate your income (if there is reasonable proof it exists) and then the onus shifts to you to prove the estimate is unreasonable - auditors have quite broad power (in the past, an auditor estimated my client's tax due at $700,000 and we had it reduced to $25,000, but we still had to pay up and try to get the money back later).
I could go on and on about how what would make them suspicious or how one can defend oneself, but that is really best left to individual cases. Besides, I am in no way advocating tax evasion. The truth is that it is pretty unlikely the CRA would find out, but if they did then you could face not only tax liabilities but tax evasion charges.

2. One issue that people used to look at was how much time you spent on your hobby. In my opinion, it wouldn't be considered much of a factor any more. It really boils down to expectations. If you meet the factors I mentioned above, then it will be considered a business. Did you know that if you buy stocks, assuming they will quickly go up and intending to hold them for a little while and quickly making a few bucks, is actually considered a business and not a capital gain? - it all comes down to intentions.

If you approach poker as a source of income, I think it's taxable. By definition, a hobby is something you do without expectations of profit. Even if you spend one hour a day playing 200-400 poker, if you know you can beat the game and you pay your mortgage with your winnings, then I believe CRA will come looking for its share some day. The relative share of your income, whether it's 80k job, 10k poker or 10k job, 80k poker, doesn't matter.

3. I thought about this last night. If you make a large withdrawal / deposit, you may get your bank reporting you to FINTRAC, just like a CTR in the US, under the Anti Money Laundering / Terrorist Financing Act. Large deposits will stand out, especially if the bank doesn't know your income source.

On the other hand, if you make your money in large multitable tournaments, then you have a better arguement that it is a windfall and not a business. The problem is that it would be up to you to prove that. Tax-wise, you'd have a better position winning the WSOP and that's it for the year then winning $5 million playing 4 hours a day every day.
If I am making $50-200k/yr at poker, then I may look at setting up a CCPC (small private corporation) with its own bank account, depositing funds there and then paying yourself a salary. Then the poker earnings are taxed but at the lowest possible rate, you can control how much money gets to you and in what form, it is all legal and above board and prevents tax evasion charges - but thats just me.

If you really don't want to declare the income, that's up to you but it carries a risk - not much of one now, but the risk will grow in the next 2-5 years.
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Old 10-06-2004, 09:15 AM   #23
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Re: Canadian Online Poker Tax Thread

When you are talking about a six-figure poker income, you are definitely safer than sorry. If you have substantial other income, then putting that at risk is not worth it.

I have seen no evidence that earnings the 1st year are treated differently than later years. CRA doesn't care that it's your 1st time making big bucks. It may take them more than a year to catch on, but legally the liability is the same. The facts may be stronger the longer you've been at it, but they will still want their cut of every year.

As for being a professional gambler, I've always said "good, call me that". Then you can deduct a lot potential expenses EVEN WHEN YOU HAVE A LOSING YEAR. If you have a bad year, well then poker losses can be offset against your day job earnings. You can't do that if it's considered just a hobby. If I decide to turn pro and give up my day job, I'd love for CRA to think of me as a pro gambler.

I am in the Toronto area (west end).
While I normally do not do public tax work, I don't mind helping you out.
My day job is as a CFO for a smaller, high-tech company and I do investigative & forensic accounting projects on my own.
Poker is really my 3rd income, but at least I have the poker player's perspective in these matters.
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Old 10-06-2004, 06:59 PM   #24
Equal
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Re: Canadian Online Poker Tax Thread

First of all, thank you for all the detailed replies TCFE. Actually that goes for everyone here - I think this is the first tax thread I have read that has really got some great information in it.

Quote:
then I may look at setting up a CCPC (small private corporation) with its own bank account, depositing funds there and then paying yourself a salary. Then the poker earnings are taxed but at the lowest possible rate, you can control how much money gets to you and in what form, it is all legal and above board and prevents tax evasion charges - but thats just me.
This option interests me. Can you shed some more light on some of the advantages to this?
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Old 10-06-2004, 08:44 PM   #25
TorontoCFE
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Re: Canadian Online Poker Tax Thread

Thanks for the nice words.
I think the CCPC route is the best (from my perspective as an accountant and a poker player). I would consider it once you have a regular gaming income in the six-figure range or close to it.

I can outline the mechanics of how it works if someone really wants to go that direction, but essentially the benefits are:

- the bank account is in the corp name, creating a separation between you and the gaming activities. This can be useful if for some reason you don't want people to know you are involved in it (reputation, bitter divorce, business reasons) - it also allows better tracking of gaming income / losses

-you pay yourself a small salary (I'd say $1/yr to minimize payroll taxes and get max benefits), unless you have no day job, then it may make sense to pay yourself up to 80k salary to generate RRSP room. This RRSP room lets you invest earnings for the future and defers current taxes.

-You can deduct all kinds of reasonable, poker related expenses - if an online player, your internet fees, a portion of your home costs (if a place is used only for playing poker online), travel costs to play - a long list almost the same as if its you personally but it looks much cleaner to CRA if done in a corp name.
-The rest of the poker income is taxed when earned at the CCPC rate, about 20%, better than your personal tax rate.

-If you want to get the poker winnings from the corp to you for personal use, you can then choose to remove them as salary, dividends or a capital gain (even as a loan but then it gets complicated). Salary would cost you the most in tax and dividends likely the least and you have freedom to leave profits in the corp forever, pay only the 20% tax when earned, until you need the money and then take the money out later, at a tax-advantageous time.

- If you have a spouse or kids with little/no income, you can give them some shares in the corp and pays them dividends (assuming they know about the poker money). If it's their only income, there would be no taxes payable on it beyond the 20% the corp already paid, thereby lowering your tax total tax liability.

-You have legal protection, if you are acting in the corp's capacity; it has legal responsiblity and not necessarily you. This might be useful in extreme or risky situations.
I'm not sure it would ever be useful for me if I went that route, but if you want to lease a car in the company name or travel to exotic locales, then I can see it being useful.

-the corp would also be available to use in other business opportunities that come up in the future. Working through a corporate structure is the most flexible arrangement possible.

I see the ability to split income and decide on the timing and nature of the income as extremely attractive. It means you can play by the rules and pay the minimal amount of tax legally possible.

I haven't seen anyone using this structure yet (though there may be a lot out there) but I've toyed with it for a couple of years. It may throw CRA for a loop, but once they catch onto the potential of cracking down on gaming income, I bet it will be a popular and accepted tax planning method.

of course, there is a downside:
- cost to incorporate: about $1,000 once

- cost to prepare a corp tax return every year: depends on accountant, about $500/yr.

-occasional legal expenses to maintain the corp books - less than $1,000/yr.

-you have to keep books and records, but of course you should have these as well for yourself in case of an audit.

These costs really aren't too bad when you look at the flexibility you gain. Again, you need a decent regular gaming income to make it worthwhile but if you are in the six-figure range or close, then I'd recommend it (it's what I would do personally).

For the record, this advice can vary or be inappropriate in a given person's situation.
There are many other tax issues to take into consideration and you should spend an hour or two talking with a good advisor to see what you should do. I would need to look at a person's total financial picture to firm up any recommendations.

While I didn't really intend to solict any business, I am ready to help out with general questions and I am willing to discuss individual situations if desired.
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