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Gambling Gains
FROM: JUL-AUG 2007 | BY VERN KRISHNA
Logic and tax law are not always synonymous. For tax purposes, income includes virtually all forms of gains. Thus, we tax gains from day trading shares as income. However, we do not tax gambling gains as income if they are not from a commercial venture. Gambling gains are considered non-taxable windfalls – unexpected or unplanned – even if they are from regular and habitual activity.
A recent decision of the Tax Court of Canada involving two high-stakes gamblers analyzes gambling and non-taxable gains. The Court concluded that the taxpayers’ gambling activities defied all logic. They bet with reckless abandon and hoped for the best.
The simplicity and bravado of the taxpayers was remarkable. High school graduates with no formal post-secondary education, they worked as window washers and cultivated a taste for gambling on sports lotteries. The taxpayers lost on about 95 per cent of their bets. Nevertheless, they continued to bet $200,000 to $300,000 weekly. They kept their winning tickets in cookie jars – at least until they were robbed. Then they invested in a safe.
They bet on long-shot games – significantly increasing their potential payouts, but also significantly increasing the risk of loss. The taxpayers did not have any rational system. An expert testified that their style was to make “sucker bets.” Nevertheless, as an English judge once said: “There is no tax on a habit.”
The CRA argued that the gains from their wagering activities constituted business income because they managed and organized their activities to realize a profit. Frequency of gambling, however, is not indicative of carrying on a business; it is merely a symptom of addiction. The CRA also argued that the taxpayers had a system because they were successful and won on a few long-shot bets.
Fortunately, the Tax Court saw through the fallacy and gave the two taxpayers their biggest and most logical win. Thus, unlike drinking and smoking, sports gambling in Canada is one of the few activities not subject to sin taxes.
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Vern Krishna is counsel, Borden Ladner Gervais, LLP and executive director, CGA Ontario Tax Research Centre, Ottawa.