The taxman can't touch your dream win

National Post

2010-10-30


Headed to the Ferrari dealership this morning? Or perhaps you'll be stopping by your local private jet broker after a champagne brunch?

If not, chances are you weren't a winner in last night's $50-million Lotto Max jackpot. While the odds of correctly selecting all seven out of 49 numbers drawn are a staggering 86 million to one, they are improved somewhat to one in about 29 million by the fact that the $5 ticket price gives you three chances at the jackpot.

I'll share with you that matching less than seven numbers pays significantly less than $50-million. The last time I played when the jackpot was that high, I managed to correctly select five out of the seven numbers, which, much to my chagrin, didn't pay out proportionately. My winnings amounted to a mere $116.90, but at least they were tax-free.

The basis for this non-taxability is that lottery winnings are not considered "income from a source" of employment, business or investment income and thus don't fall within the taxing purview of the Income Tax Act.

Earlier this year, the CRA responded to an interesting question posed by an employer concerning the tax implications of provincially run lottery tickets being given as gifts to its employees. The employer was particularly curious as to what would happen if it turned out that the employee ended up winning a prize as a result of the gift of an employer-provided lottery ticket.

Under the Tax Act, an employee is required to include in his or her income from employment "the value of benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment."

This broad wording catches nearly all benefits, including most non-cash benefits received by an employee. As a result, the CRA responded that an employee who receives a lottery ticket from their employer for performance-related reasons would be required to include the fair market value (FMV) of the lottery ticket in their income.

So, let's say our hypothetical employee hit it big last night on an employer-gifted Lotto Max ticket. Is her taxable benefit $5, the cost of the ticket, or $50-million, the jackpot prize?

According to the CRA, the FMV of the ticket is based on the "highest price obtainable in an open market by parties acting at arm's length." The CRA goes on to state that the FMV should be determined at the date of disposition of the ticket, which would be the date the beneficial ownership of the ticket was transferred from the employer to the employee, presumably before the draw took place.

As a result, the CRA (fortunately!) concluded that the taxable benefit would be the ticket's face value or $5.