If you play poker online, whether or not you have to pay tax on your winnings or can deduct your losses may depend on how often you play and what percentage of your total income comes from that gambling activity.
The Canada Revenue Agency's longstanding position on gambling profits is that "an individual may be subject to tax on income derived from gambling itself, if the gambling activities constitute carrying on the business of gambling."
Last week, the CRA released a technical interpretation responding to a taxpayer who inquired as to whether he had to include any profits he earned by playing poker on the Internet in his income for the year.
The taxpayer's letter explained that he learned the basics of how to play poker by watching videos and then began playing Internet poker. While at first his winnings were modest, they later became significant and he now devotes much of his time to playing online poker.
The CRA responded by reviewing the basis for taxation/non-taxation of gambling profits under the Income Tax Act. Under the act, a taxpayer's income for tax purposes includes "income from all sources." The traditional sources of income we typically think about are: employment, business, rental and investment income.
Gambling profits, including lottery winnings, however, are seen as a "windfall" and not income from a source and thus generally escape taxation. The CRA listed a number of factors that may indicate whether a particular payment constitutes a windfall. These include whether an individual had a specific expectation to receive the particular payment, whether there was an expectation such payments would recur, whether the payment was a "customary source of income for the taxpayer" and whether or not the payment was "earned" as the result of a pursuit of profit.
While the CRA concluded that, given the specific facts in the taxpayer's letter, it was likely that his gambling winnings could not be considered windfalls and therefore would be taxable as income from a gambling business, it cautioned that each case must be decided on its own facts.
Some of the elements that need to be considered in making such a determination include whether the individual has "special knowledge" or "inside information" that allows the taxpayer to reduce the element of chance, whether it is the taxpayer's intention to gamble for pleasure versus for profit as a way to make a living and the amount of time spent on gambling activities, as well both the number and frequency of bets.
The CRA concluded that if the main source of an individual's income comes from online poker gaming, that is taxable business income, compared to another taxpayer who perhaps has a full-time job yet may be "addicted" to poker in his spare time.