Are poker winnings taxable?
That was the question that a B.C. taxpayer had to grapple with when he began playing online poker in mid-2003. By 2004, he began to accrue “significant winnings” and when he filed his 2003 tax return in the spring of 2004, he turned to his accountant for advice as to whether or not his online poker winnings were taxable and should be included on his return.
The accountant researched the issue and quoted the Canada Revenue Agency’s position on gambling profits, which dictates 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.”
The taxpayer interpreted this to mean that as long as he continued working at his “conventional job” which consisted of doing research on a contract basis for the government, he did not need to report his gambling winnings as taxable on his return.
In May 2004, however, he stopped accepting contract work and turned to online poker as his main source of income. Consequently, when he filed his 2004 through 2007 tax returns, he chose to “be safe” and included his gambling winnings as income on his return.
His reasoning was that it would be better to pay taxes on his winnings right away rather than risk facing a CRA reassessment later on if he omitted to report his winnings and the CRA concluded that they were indeed taxable. If he later determined that his winnings were tax-free, he would simply refile to get his money back.
As it turns out, it wasn’t that simple.
After the taxpayer discussed his tax situation with other poker players and conducted a review of relevant case law, he came to the conclusion that he should not be paying tax on his poker winnings. In 2011, he filed adjustments to his returns for the years 2004 to 2007, requesting a refund of the tax he paid in those years on his gambling income.
Under the Income Tax Act, the CRA has the ability to reassess your tax return within three years from the date printed on your Notice of Assessment. There is a special rule, however, that allows the CRA the “discretion” to reassess a taxpayer outside of the normal three-year period, but within ten years of the tax year in question.
The CRA chose not to exercise its discretion in favour of the taxpayer and refused to accept his adjustment requests. That’s why he took the CRA to Federal Court this past summer requesting that the court review whether the CRA’s decision to deny his adjustment requests was “reasonable” arguing “that he is essentially being punished for being a responsible citizen and for having faith in the system.”
The judge reviewed the evidence on both sides as well as the jurisprudence on gambling acknowledging that “gambling cases can be difficult to assess.” Nonetheless, the judge felt that in this case, the CRA’s exercise of discretion “lacks intelligibility and justification and, in my view, falls outside the range of possible, acceptable outcomes which are defensible in respect of the facts and law.
The Judge ordered the matter to be referred back to the CRA for reconsideration.