Winning poker players face a tough decision every April—to report or not to report. If they choose not to report their poker winnings as income, they may be on the wrong side of the tax law. If they are found to be professional poker players, they will face interest and penalties in addition to the tax they would otherwise have had to pay on their net winnings. Moreover, they may forever face a higher risk of unpleasant tax audits from the CRA. On the other hand, if they report their poker winnings as income, the CRA will be happy for them to pay tax on their winnings. But by volunteering to pay, they may regard themselves as patsies. The taxation of gambling winnings is a grey area in tax law, and no self-respecting poker player wants to be a patsy.
With a recent judgment by the Federal Court in Radonjic, tax matters are now a little more certain, predictable and fair for winning poker players. Of course, Canadian gamblers have long known that generally their losses are not deductible and gains are not included in income. The grey area surrounds an idea that the courts have also embraced, which is that professional gamblers are taxable on winnings. The courts have yet to find that a poker player is a taxable professional, leaving winning players in the confounding dilemma of deciding whether to report or not to report. This is where the recent Federal Court decision in Radonjic (2013) comes in to clarify matters.
Peter Radonjic had started playing poker full-time in 2003 and was winning. To be better safe than sorry, shortly thereafter he decided that he would include his poker winnings as income on his tax return, which he did for several years. After discussion with other poker players, Radonjic had a change of heart. In 2011 he filed amended tax returns with the CRA for the years, requesting that the income tax he had paid be returned to him on the basis that his poker winnings had not been taxable income. The CRA refused. Radonjic unsuccessfully exhausted the CRA appeals process before successfully challenging the decision in Federal Court.
In the Federal Court judgment in Radonjic, Justice Russell made a number of clarifying observations. First, as a matter of logic, Justice Russell explained that the fact that a taxpayer at poker won is not evidence that a taxpayer had a system to win at poker. Second, playing poker on a computer on an intense and regular basis over an extended period of time is not itself evidence of a system to win at poker. Third, he explained that most poker players study, practice and try to improve their skills. If an online poker player attempts to improve and wins, it does not mean they have devised a system to win at poker. Fourth, cutting back on other work and income while winning at poker is no indicator of a system to win at poker. Being able to work less is one of the fruits of successful gambling, just as having to work more may be one of the results of unsuccessful gambling. Finally, poker players will as a practical matter need to keep records to prove the source of funds for tax purposes; having records does not indicate anything about the character of the underlying gambling activity. Justice Russell has narrowed the grey area for winning poker players.
The conceptual challenges for the Minister with respect to the taxation of gambling gains of poker players are now substantial. Prior to Radonjic, it was clear that there is a strong legal presumption that gambling winnings and losses are beyond the reach of the Canadian income tax. This presumption now appears to be stronger in the aftermath of Radonjic. The challenge for the government relates to showing that an individual poker player is carrying on the business of playing poker professionally when the Minister cannot validly rely on the player’s winning record, the player’s intense play over a long period of time, the player’s attempts to improve, the player’s reliance on gambling for a livelihood, or the player’s keeping (or not keeping) of records. It is difficult to imagine how the government would be able to demonstrate that a poker player is a professional without relying on any of these considerations.
Things just got a little bit more certain, predictable and fair for winning poker players.
