"In this world nothing can be said to be certain, except death and taxes." Benjamin Franklin.
Well Mr. Franklin you may be right about the first part, but when it comes to poker earnings, the certainty of taxes is well, not so certain. 2005 was a banner year for me; I turned a profit in my first year of play. Faced with the prospect of my 2005 tax preparation I found myself wondering if my profit was taxable. I know many Canadian poker players are wondering the same thing. I went to great lengths to find sound answers to my questions so I want to share what I have come across with all of you.
Over the next five articles, l will look at a facet of poker that is important but most of us neglect—the business side of poker playing. In this article, l will be looking solely at the tax implications attached to poker winnings, regardless of the amount y0u have won or lost. I think you will find this a relevant read.
After a few searches on Google and poker forums, I decided to go to the source and clicked my way to the Canada Revenue Agency (CRA) website. The bulletin that deals with gambling profits is named 334R2 (sounds like a riveting read I know); there are three sections that seemed relevant: windfalls, gambling profits, and profit from hobbies. After sifting through a plethora of legal tax jargon and thoroughly confusing myself, I decided to enlist the help of some great tax minds. Working in the financial services industry, I had no shortage of people to call; l managed to get Tim Cestnick on the phone. Tim is one of Canada's most respected experts and public speakers in the area of tax and personal finance, his articles appearing regularly in the Globe and Mail.
The first and most obvious question I posed was how does Revenue Canada view poker winnings? Tim pointed out, "Revenue Canada has written some information; you might want to get a copy of interpretation bulletin 334R2." Without knowing I had already read. I really was hoping he could bring this down to a level I could understand.
"334R2 talks about various sources of income and one of those sources it talks about is gambling profits. What it does say is that 'an individual may be subject to tax. Normally the general rule of gambling and what we call windfall amounts (lottery winnings) are not normally taxable, But, "Cestnlck explained, " an individual may be subject to tax on income they get from gambling if the gambling activities constitute carrying on the business of gambling." Finally I felt like l was getting somewhere!
Cestnick argues that, "If you are considered to be in the business of gambling then you are stuck, you have a problem." (Now remember, don't shoot the messenger) lf I am indeed in the 'business of gambling' then the profits are considered business income. Business income in Canada is of course taxable. So how would Revenue Canada determine if my poker playing is the business of gambling? A question Revenue Canada says can only be determined when they look at all of the facts of the individuals situation! No one factor is conclusive by itself but Revenue Canada considers the degree of organization in pursuit of the activity (poker), the existence of special knowledge, intention (are you playing poker merely for fun, or to gain your livelihood), and the extent of your poker activities including the number as well as frequency of your bets.
This is not looking good, as I have been multi-tabling online for the better part of 2005. Number and frequency of bets, is the CRA serious? When Mr. Cestnick looks at those four criteria, the thing that becomes obvious is that, if anybody who is gambling regularly, is good at it, is making money and is trying to make money, it could be argued that they are carrying on a business. Therefore, winnings will not be tax-free. Tim appeared to contradict that general sentiment among poker players, throughout the chatter I had come across. Among recreational poker players, poker earnings were the same as lottery winnings. Tim asserts, Basically if you buy a lottery ticket and you win, that's tax free, that's a windfall. Gambling is almost more of a job, more of a business." Ok Tim, that is clear. What I hear him saying is that if you win any amount, the size of the dollar amount doesn't matter so much. Tim went on to make things even more clear, " lf you are winning any amount regularly, because you play regularly, that is really going to be considered a business."
So as a recreational player with a fulltime profession, what are the chances that Revenue Canada would audit me? Tim's words of caution are very resonating. The reality is it's still early in the game, so we haven't seen how Revenue Canada will respond, yet. There are a few areas where Revenue Canada has in fact stepped up their audit procedures in recent years. Jewelry stores and restaurants especially, when it comes to the earnings of servers, as a lot of them in the past never reported their tips, are audited a lot. This could very well be the next industry that Revenue Canada decides they want to target, if the dollars are big enough and they think it is justified. The reality is that the chances of facing an audit might be slim now, but the possibility is there. With seven years to revisit your income tax filing, that chance is greatly compounded.
Although Mr. Cestnick provides a compelling argument, it is not the only opinion out there. l also contacted a much—respected local tax attorney. The attorney was of the ideology that an argument could be made in court saying poker winnings should be considered a windfall and therefore not taxable. What l think is essential for all of us to do is to consult with a chartered accountant (CA). Be prepared to visit more than one CA to find a like-minded professional. You will want someone to defend your position, should it need defending. Make sure the CA can clearly explain the consequences of your actions and will put their name to your income tax submission.
Keep in mind Revenue Canada has seven years to audit you. The last thing anyone would want to face is an audit you are ill prepared for. Next months topic will be structuring your poker business, how to account for expenses and what deductions can be claimed.
Tim Cestnick holds the following designations: CA, CPA, CFR and TEP. I extend my utmost appreciation and respect for Tim's time and wealth of knowledge. More information on Tim is at http://www.timcestnick.com. Paul Randall works as an associate from the Cambridge head office of Daniel P. Reeve and Associates Inc.—a full service financial firm found at http://www.millionaireinyou.com.
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