Texas Hold 'Em Or Taxes Hold 'Em? Taxes And Gambling In Canada

• Published date: 11 July 2023
• Subject Matter: Media, Telecoms, IT, Entertainment, Tax, Sport, Income Tax, Corporate Tax, Gaming
• Law Firm: Borden Ladner Gervais LLP
• Author: Ms Laurie A. Goldbach, Richard Eisenbraun, Michael Akins and Greg Rafter

Gambling is receiving increased attention in Canada due to a number of factors, including concerns born during the COVID-19 pandemic and a new legislative framework under the Safe and Regulated Sports Betting Act,which allows licensed entities to conduct and manage betting on a single sporting event or athletic contest.

Increased access to advanced online betting tools and smartphone apps, as well as the success of iGaming Ontario revenues, made it clear that gambling is a growth industry in Canada.

We review taxes and gambling in Canada, specifically the tax treatment of gains and losses from poker, in light of Canada Revenue Agency (CRA) guidance, applicable legal tests, and a recent quadrilogy of decisions: Duhamel c. La Reine (2022 CCI 66), Fournier Giguère c. Le Roi (2022 CCI 132), D'Auteuil c. Le Roi (2023 CCI 3) and Bérubé c. Le Roi (2023 CCI 12).

These cases have collectively blurred once-apparent lines determining whether a taxpayer is operating a business for income tax purposes. They worsen the odds for poker players who consistently make profits from their activities and will potentially be a source of frustration and confusion for Canadian gamblers, moving forward.

Key takeaways

? In contrast to Duhamel, the cases of Giguère, D'Auteuil and Bérubé suggest the development of a results-based approach to the taxation of gambling activities, meaning individuals with profits are more likely to be taxed than those with losses.

? The primary factor for determining "commerciality" in cases decided against the taxpayer appears to be the ability of a player to make a profit.

? The cases are inconsistent in their treatment of profit-sharing agreements and how their presence is weighted as a risk-mitigating factor.

? Use of third-party software for online play has received a significant amount of judicial attention, though there has been little in-depth discussion of how, exactly, such applications are used to increase a player's profit.

1. Shuffle: Tax treatment of gambling activities

A taxpayer must consider the applicability of Sections 3 and 9 of the Tax Act when determining whether gambling activities are taxable.

Section 3 of the Tax Act requires that taxable income be determined by calculating the total of all amounts of income from a source inside or outside Canada, including the taxpayer's income for each office, employment, business and property.

Section 9 requires that income derived from a business "is the taxpayer's profit from that business or property for the year."

In gambling activities, the question becomes whether the taxpayer is operating a business. As a general rule, winnings from gambling are not taxable, as they do not come from a source of income (for example, a business). However, if gambling winnings are received as part of business income or in the context of a business activity, then those winnings are taxable.

The results of this characterization can be tax-efficient for two reasons:

1. Gambling winnings are not taxable if they do not constitute a business source of income;
2. Gambling losses are deductible if the gambling activities constitute a business.

All levels of the Canadian judiciary have addressed the characterization of gambling activities, but recently there have been a significant number of decisions related to Texas hold 'em poker (generally referred to here as poker). These cases will form the foundation for virtually all poker-related tax disputes moving forward and will have important implications for the taxation of gambling-related activities generally.

2. Big and small blinds: Relevant legal test

Defining business income under the Tax Act is historically a moving target and jurisprudence has grappled with this definition in a variety of gambling-related activities. In Stewart v. Canada, the Supreme Court of Canadaused the following test to distinguish personal from commercial activities:

"Does the taxpayer intend to carry on an activity for the purpose of making a profit and is there evidence to support this intention?"¹

This legal test is both subjective and objective and aims to distinguish between personal and commercial activities, with the latter being subject to the Tax Act. Subjectively, the Court asks whether there is an intention to make a profit. Objectively, the Court asks whether there is evidence and features of commerciality. Given the nature of gambling activities and the fact that participants are usually motivated to make a profit, Courts have stated that "the intention to make a profit is not decisive in the study of the commerciality of this type of activity since all players are motivated by the pursuit of profit."²

Paraphrasing Duhamel, to conclude that there is a business source of income, it must be apparent from the evidence that the activity in question was carried out in accordance with objective standards of conduct expected of a serious businessperson.

3. The deal: Factors in determining commerciality

Moldowan v. The Queen (a non-gambling case) provides a non-exhaustive list of objective factors that assist the Court in determining whether gambling activities support the taxpayer's intention to make a profit. These include:

• Statements of profit and loss for prior years
• Taxpayer training
• The path the taxpayer intends to take
• The ability of the person to make a profit³

Risk management or risk mitigation also serves as an important factor. In particular, "the courts consider that risk-taking is an inherent characteristic of any income-generating activity and that it is rather risk minimization or risk management that is likely to make this activity a source of income.⁴

Typically, to find commerciality, there must be a clear system that involves a business plan, training, capacity to make a profit and some mechanism to mitigate risks. Giguère, in particular, states that "the criterion of risk minimization in the analysis of the taxpayer's operation of a business" is an important factor "likely to make this activity a source of income.⁵

Perhaps the most contentious factor raised by the four recent gambling cases we examine in this article is the frequency of gambling activities. The oft-cited Leblanc v. The Queen, an earlier case, found that "Gambling-even regular, frequent and systematic gambling-is something that by its nature is not generally regarded as a commercial activity except under very exceptional circumstances."⁶

There must be more than just luck, hope or a desire to win; there must be a planned and reasonable expectation of making a profit that follows business-like conduct.⁷ While the frequency of...