Betting companies have reported that rising interest in the World Cup has been matched by a surge in soccer wagers.Pressmaster/iStockPhoto / Getty Images
Tax disputes over gambling winnings are nothing new, according to Toronto tax lawyer Jeff Kirshen.
Look back through decades of legal decisions and you’ll find cases centred on taxpayers’ activities at the racetrack or the casino, he says.
These days, much of the action occurs online – as any advisor with younger clients active on sports betting apps and prediction markets can attest. But the risk of falling foul of the Canada Revenue Agency (CRA) remains constant.
“There is a common misconception out there in which people think that just because they’re gambling, it’s not taxable,” says Mr. Kirshen, principal at Kirshen Tax Law in Toronto.
In fact, he says the tax treatment of betting proceeds has little to do with the precise type of gambling activity. Instead, it comes down to whether the winnings can be characterized as a non-taxable “windfall” or a taxable “source of income.”
The Supreme Court of Canada recently shed light on when gambling winnings may cross the line and become taxable after refusing to hear the case of three poker players who were reassessed for failing to include millions of dollars won at tournaments as part of their income over several tax years.
The decision endorsed an earlier ruling by the Federal Court of Appeal in which the judicial panel concluded the taxpayers intended to make a profit from playing poker and their activities were “sufficiently commercial” to constitute a source of income, noting they had relied on the cash to fund their lifestyle.
“The bottom line is that if you’re looking to ensure that your gambling winnings are not taxable, then you can’t be doing it in a way that resembles a business,” Mr. Kirshen says.
Here’s what to know about the tax treatment of profits (or losses) in some other types of common online accounts.
Sports betting
Canada has been gripped by World Cup fever this summer and many betting companies have reported that rising interest in the tournament has been matched by a surge in soccer wagers.
According to Toronto tax lawyer David Rotfleisch, the poker case provides a good template for sports bettors. While each taxpayer’s situation will require its own fact-specific review, he says judges assessing the taxability of winnings will look at several factors, including the player’s profit and loss history, the level of skill required to play, any risk-minimization strategies employed and the amount of time devoted to the activity.
As a result, genuinely recreational punters can expect their World Cup winnings to remain tax-free, he says.
“If your approach is systematic, methodical, organized and significant in volume, that’s when it’s more likely to be taxable,” Mr. Rotfleisch says.
On the flip side, bettors who declare their winnings as business income may be able to claim tax deductions for losses in down years, as well as legitimate expenses related to their gambling business. But Mr. Rotfleisch says they shouldn’t expect an easy ride from the CRA, which will want to see evidence of the time commitment and profit-driven strategy that can demonstrate the operation is more than just a hobby.
“You may well win in Tax Court, but you’re guaranteed a fight when you try to deduct losses,” Mr. Rotfleisch says.
Mr. Kirshen says proving losses may also be difficult. “Lots of gamblers don’t keep great records, which is always your best defence [against] any issue with CRA,” he says.
Prediction markets
Apps such as Polymarket and Kalshi have brought prediction markets into mainstream consciousness, and not always for the right reasons: the burgeoning industry has been beset by suspicions of insider trading, while Polymarket is currently serving a two-year ban imposed by the Ontario Securities Commission for improperly allowing residents of that province access to their platform.
Still, Wealthsimple Inc. is taking a chance on the idea and recently partnered with Kalshi to offer a limited suite of prediction market contracts related to economic indicators, financial markets and climate, with the blessing of the Canadian Investment Regulatory Organization.
The tax treatment of prediction market profits, however, remains something of a Wild West, since the CRA has yet to weigh in with specific guidance.
“We don’t have any legislation or case law to work with, so it’s very much up in the air,” Mr. Rotfleisch says.
In addition, the way prediction market contracts are structured – yes/no propositions on a particular outcome that pays out a fixed amount only when the proposition is met – adds an extra wrinkle to any argument that prediction market profits are gambling windfalls.
“If you buy a contract for one outcome and then trade that contract, it begins to look more like commodity or derivative trading,” Mr. Rotfleisch says.
Taxpayers who generate profits via their trading of prediction market contracts may be able to argue for their taxation as capital gains to benefit from the 50-per-cent inclusion rate, he says, rather than business income, which is taxed in full.
In these cases, the CRA conducts a separate fact-specific assessment to distinguish between capital gains and business income, taking into consideration factors such as the frequency of the taxpayer’s transactions, the length of time they hold the contracts, their knowledge of the markets and the time they spend on the activity.