Lottery winners should love Canadian tax law

National Post


Marie and Kirby Fontaine, the couple from the Sagkeeng First Nation who won the first $50-million jackpot grand prize in Lotto Max, Canada's newest lottery, have a lot to be thankful for.

Not only did they win one of the largest jackpots in Canadian lottery history -- the odds of winning were one in about 29 million -- but the win is completely tax free, which is very different than the tax treatment south of the border.

The general rule is that gambling, wagering and lottery winnings are generally tax free in Canada unless the Canada Revenue Agency concludes that you are "carrying on the business of gambling" or, in other words, you are a considered to be a professional gambler.

Canadian tax policy has traditionally exempted gambling and lottery winnings from tax. An official explanation for such a policy can be found in the Department of Finance's "Tax Expenditures and Evaluations" companion document, published in 2004.

The report states that since the proceeds from the sale of lottery tickets are an important source of funds for provincial governments, charities and other not-for-profit organizations, "there is already a considerable element of implicit taxation of lottery and gambling proceeds."

How much money is the government actually forfeiting by not taxing lotto winnings? That's hard to say.

Years ago the government attempted to estimate the amount of lost revenues "given up" by not taxing gambling in Canada, but they stopped because the data on winnings is incomplete.

The report states that while there may be good information on payouts for government-run lotteries and bingos, data on payouts at casinos, video lottery terminals, horse racing and racetrack slot machines, which constitute an increasing share of total gaming revenues, is "fragmentary."

If the government were to begin taxing gambling and lottery winnings, it would presumably have to provide some type of deduction for the costs incurred to earn such income, such as the cost of lottery tickets purchased or the amount of the casino wager.

A further question is whether such a tax deduction would be restricted to lottery and gambling profits or available against all income sources, including employment and investment income.

Ontarians will recall that Premier Dalton McGuinty threatened to tax lottery and gambling winnings in 2004 to fight the province's growing deficit, but backed off.

As for the prospect of the cash-strapped feds going after lottery winnings to replenish their drained coffers, that's highly unlikely. Under federal- provincial agreements negotiated nearly 25 years ago, the federal government agreed to refrain from re-entering the field of gaming and betting in return for ongoing payments from the provinces.