Gambler gambles with taxman -- and loses

National Post

2011-05-28



Frustrated by his former law firm’s unwillingness to admit him to the partnership for the second year in a row, Steven Cohen decided to leave his $200,000-a-year job as an associate lawyer in a large Toronto firm and pursue a career playing poker on a full-time basis.

On Mr. Cohen’s 2006 personal tax return, he included a “Statement of Business Activities” on which he reported income from “gambling activities” of about $81,000, which represented his winnings and offset this with about $203,000 consisting of “purchases” of $196,000 and business expenses of $7,000, resulting in a net loss of $122,000. The purchases, which Mr. Cohen referred to as “inventory,” were actually the total of the cash spent on his gambling activities.

In court, Mr. Cohen testified he has been playing poker since age 21 as a hobby, playing seven-card stud poker but transitioned to Texas Hold’em poker in 2005, where he became successful in small stakes games.

Before 2006, Mr. Cohen went to Vegas or Atlantic City once a year to play in live tournaments but also played with a group of friends monthly in cash games. During 2006, he testified that he played Internet poker six to eight hours a day, seven days a week, using four poker websites and logging moe than 2,500 hours of playing time that year. In 2006, he also participated in seven live tournaments.

The issue before the court was whether Mr. Cohen’s $122,000 loss from poker playing in 2006 was tax deductible.

If, as Mr. Cohen argued, he was considered to be engaged in the full-time business of poker playing as a professional poker player, his loss would be considered a business loss and therefore would be fully deductible against all sources of income.

On the other hand if, as the Canada Revenue Agency argued, Mr. Cohen was a “hobby gambler and was not in the business of gambling,” he would not be entitled to the business loss claimed.

Under the Income Tax Act, a “business” is defined to include “a profession, calling, trade, manufacture or undertaking of any kind” and includes “an adventure or concern in the nature of trade.”

Nearly a decade ago, the Supreme Court of Canada said that to determine whether an activity constituted a business, you must first determine whether there is a source of income.

As the highest court explained, “where the nature of a taxpayer’s venture contains elements which suggest that it could be considered a hobby or other personal pursuit, but the venture is undertaken in a sufficiently commercial manner, the venture will be considered a source of income for the purposes of the Act.”

The key issue in the case was whether Mr. Cohen’s gambling, which the judge said is “generally considered a personal activity with the professional players in a minority” was done in a sufficiently commercial manner as to constitute a source of income.

After a detailed legal analysis, the judge was unable to conclude that Mr. Cohen’s gambling activities fell within the definition of a business and his gambling loss was denied.

Mr. Cohen is now back to practicing corporate/securities law at his own boutique firm in downtown Toronto.