Many Canadians partake in online gambling, in particular, online poker. Therefore, today I thought I would review some recent comments made by the Canada Revenue Agency (“CRA”) in regard to whether online poker earnings are taxable. In addition, I will briefly discuss a very significant Supreme Court of Canada decision that deals with the determination of the residency of trusts.
For you online poker players out there, the CRA was recently asked if income from playing poker online is taxable under the Income Tax Act.
The CRA responded in a technical interpretation (unfortunately, I have no link) that in general, online poker earnings are taxable only when earned from a business in the pursuit of profit. As with almost any CRA answer, there is always the caveat “that it is a question of fact” as to whether the poker profits related to a business.
Interpretation Bulletin IT-334R2 “Miscellaneous Receipts” discusses some of the factors to be considered in making the determination as to whether gambling winnings will be considered profits from a business. The CRA states:
“..an individual may be subject to tax on income derived from gambling itself, if the gambling activities constitute carrying on the business of gambling; The issue of whether or not an individuals 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.”
I would suggest that in respect to point (c) above, if a person has a full-time job, but plays online poker as a “hobby” at night, that would tend to be indicative that the income is not meant to provide a livelihood. However, if someone plays online poker all day and does not have a full-time job, that would tend to indicate that their online poker earnings are their way of making a living and thus is a business. Conversely, if you haven’t been successful in your on-line gambling activities, it will likely be very difficult to show that these losses are losses from a business and therefore deductible.
For a more detailed look at the issue, you may wish to download this paper on The Taxation of Poker Winnings in Canada by Benjamin Alarie.
Wealthy Canadians have been utilizing offshore entities in tax havens for years in an effort to reduce their taxes. The CRA has been chipping away at the use of these types of entities in recent years by making it more and more difficult and burdensome to maintain, report and administer these entities. From subjecting Canadian taxpayers to foreign reporting requirements (for example, forms T1135, T1134A and T1134B) to never ending Canadian legislative changes applicable to non-resident trusts and foreign investment entities, the CRA has been able to preserve some of its tax base by making it less attractive to move money offshore. Most recently, the CRA challenged the conventional wisdom on the residency of a trust in a case, St. Michael Trust Corp v. The Queen (also known as Garron and Fundy Settlement v. The Queen).
Offshore planning often utilizes foreign trusts because for tax purposes, a trust is taxable as a separate person. In addition, pursuant to a 1978 case, Thibodeau Family Trust v. The Queen, it had been held that the residency of the trustees determines the trust’s residency for purposes of the Income Tax Act. In the Thibodeau case, the court held that a trust was a resident of Bermuda and not Canada because the majority of the trustees were resident at all material times in Bermuda and the trust agreement only permitted a majority decision on all matters of trustees’ discretion.
The court’s findings in the Thibodeau case (and the CRA’s acceptance of the Thibodeau decision) lead to many Canadians setting up offshore trusts, often in Barbados, with local trustees who were in many cases just paid to be trustees in order for the trust’s residency to be classified as offshore (i.e. non-Canadian).
However, as mentioned above, recently the Supreme Court of Canada accelerated the CRA’s chipping away process by taking a sledgehammer to Thibodeau. In Garon (aka St. Michael Trust Corp.), the Supreme Court of Canada dismissed the principle that a trust was resident where the majority of trustees resided and replaced it with a test for determining residency based on where the exercise of the central management and control actually takes place.
This decision has implications for offshore trusts as well as trusts that have been set-up out of province. For example, many Ontarians have set-up trusts in Alberta (to take advantage of the lower tax rate in Alberta) with local Albertan trustees, while the management decisions are made and control of the trust is held by an Ontario resident, who may be one of a number of trustees, one of the beneficiaries and/or the settlor.
For more details, you may with to read this article by Vern Krishna in the Financial Post or this KPMG TaxNews Flash.
Online Poker
The CRA responded in a technical interpretation (unfortunately, I have no link) that in general, online poker earnings are taxable only when earned from a business in the pursuit of profit. As with almost any CRA answer, there is always the caveat “that it is a question of fact” as to whether the poker profits related to a business.
Interpretation Bulletin IT-334R2 “Miscellaneous Receipts” discusses some of the factors to be considered in making the determination as to whether gambling winnings will be considered profits from a business. The CRA states:
“..an individual may be subject to tax on income derived from gambling itself, if the gambling activities constitute carrying on the business of gambling; The issue of whether or not an individuals 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.”
I would suggest that in respect to point (c) above, if a person has a full-time job, but plays online poker as a “hobby” at night, that would tend to be indicative that the income is not meant to provide a livelihood. However, if someone plays online poker all day and does not have a full-time job, that would tend to indicate that their online poker earnings are their way of making a living and thus is a business. Conversely, if you haven’t been successful in your on-line gambling activities, it will likely be very difficult to show that these losses are losses from a business and therefore deductible.
For a more detailed look at the issue, you may wish to download this paper on The Taxation of Poker Winnings in Canada by Benjamin Alarie.
Residency of Trusts
Offshore planning often utilizes foreign trusts because for tax purposes, a trust is taxable as a separate person. In addition, pursuant to a 1978 case, Thibodeau Family Trust v. The Queen, it had been held that the residency of the trustees determines the trust’s residency for purposes of the Income Tax Act. In the Thibodeau case, the court held that a trust was a resident of Bermuda and not Canada because the majority of the trustees were resident at all material times in Bermuda and the trust agreement only permitted a majority decision on all matters of trustees’ discretion.
The court’s findings in the Thibodeau case (and the CRA’s acceptance of the Thibodeau decision) lead to many Canadians setting up offshore trusts, often in Barbados, with local trustees who were in many cases just paid to be trustees in order for the trust’s residency to be classified as offshore (i.e. non-Canadian).
However, as mentioned above, recently the Supreme Court of Canada accelerated the CRA’s chipping away process by taking a sledgehammer to Thibodeau. In Garon (aka St. Michael Trust Corp.), the Supreme Court of Canada dismissed the principle that a trust was resident where the majority of trustees resided and replaced it with a test for determining residency based on where the exercise of the central management and control actually takes place.
This decision has implications for offshore trusts as well as trusts that have been set-up out of province. For example, many Ontarians have set-up trusts in Alberta (to take advantage of the lower tax rate in Alberta) with local Albertan trustees, while the management decisions are made and control of the trust is held by an Ontario resident, who may be one of a number of trustees, one of the beneficiaries and/or the settlor.
For more details, you may with to read this article by Vern Krishna in the Financial Post or this KPMG TaxNews Flash.
The blogs posted on The Blunt Bean Counter provide
information of a general nature. These posts should not be considered specific advice;
as each reader's personal financial situation is unique and fact specific.
Please contact a professional advisor prior to implementing or acting upon any
of the information contained in one of the blogs.
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