The upsurge in interest in all things poker-related has sort of passed me by, like a lot of other trends and fashions. But, because I am a tax nerd, I have asked myself why it is that those who make a living playing poker, or who make some money at it anyway, don’t seem to pay tax on their winnings? I suspect that the answer can be found in Cohen v R, 2011 TCC 262.
It seems clear that, in theory, someone who takes up poker as a profession could be subject to tax on his or her winnings. In Interpretation Bulletin IT-334R2, the CRA says the following:
In addition, an individual may be subject to tax on income derived from gambling itself, if the gambling activities constitute carrying on the business of gambling; see the decision of MNR v. Morden, (1961) CTC 484, 61 DTC 1266 (Ex. Ct.). The issue of whether or not an individual’s activities are such that he or she can be considered to be carrying on a gambling business is a question of fact that can be determined only by an examination of all of the circumstances and the taxpayer’s entire course of conduct. Although no one factor may be conclusive, the following criteria should be considered in making the determination:
(a) the degree of organization that is present in the pursuit of this activity by the taxpayer,
(b) the existence of special knowledge or inside information that enables the taxpayer to reduce the element of chance,
(c) the taxpayer’s intention to gamble for pleasure as compared with any intention to gamble for profit as a means of gaining a livelihood, and
(d) the extent of the taxpayer’s gambling activities, including the number and frequency of bets.
Poker is only one form of gambling, however. Casinos offer many other games of chance, and they make money by ensuring that those games always favour the house. Some lucky winners will make money, but, in the long run, most people, most of the time, will lose money and thereby make money for the casinos. Most of the games offered by casinos are not games of skill; they are really games of luck where the odds favour the house.
Poker is a little different. Casinos don’t take the other side of bets in a poker game. Instead, the casinos that offer poker make money by charging players to sit at a table or by taking a percentage of each pot. The players, then, are playing against each other, and it seems to be the case (or so I’m told) that skillful players stand a better chance of winning money that the less skilled. Luck still plays a role, but some players, it seems, can make a good living by playing the game.
Those who make a living at poker in Canada could be subject to tax on their earnings, but my impression is that the CRA isn’t out looking for these people. Perhaps the CRA isn’t on the prowl because making a case for taxing winnings could be an uphill battle. Benjamin Alarie, a professor at the University of Toronto’s law school, has written an e-book on poker winnings, and, in an article he wrote for The Globe and Mail (March 29, 2010) he summarized his conclusions as follows:
The upshot for poker players is that it’s probably in only unusually active, skillful and financially successful circumstances that they will face Canadian income tax liability on their winnings.
The law is unclear, but the fisc faces another issue too. Most gamblers lose money. Perhaps even most poker players lose money. Professor Alarie, in his article, points out that
If the tax authorities are too aggressive in exacting income tax from winning players, they run the risk of too many losing players claiming they satisfy the conditions for being considered professional as well.
It might be better to let a few players “get away” with not paying tax on their winnings than to have to allow losses claimed by the much larger number who aren’t lucky or skillful.
Cohen illustrates the point well. Mr. Cohen was an associate at a large Toronto law firm, but he left his firm to take up a career in poker in 2006, or so he argued. Mr. Cohen claimed losses in that year of $121,991.43 (winnings of $81,283.30 less losses of $195,765 and business expenses of $7,509.73). Mr. Cohen’s business expenses included interest charges, financial fees, poker book purchases and fees paid for poker and gambling seminars. Mr. Cohen testified that, during 2006, he played poker for 6-8 hours per day, seven days a week either online or at “live” tournaments in Ontario and Atlantic City. He argued that his activities constituted a business and that he should be allowed to deduct his poker losses in 2006 from other income.
The Tax Court reviewed the Supreme Court’s decision in Stewart v. Canada, 2002 SCC 46, [2002] 2. S.C.R. 645, regarding when an activity ceases to be a hobby or personal pursuit of a taxpayer and rises to the level of a “business” for tax purposes so that losses from the activity can be deducted in computing income.
The Tax Court found that Mr. Cohen’s gambling activity in 2006 included a personal element. Until 2006, Mr. Cohen had gambled as an amateur. In light of the factors in Stewart, the Court also found as follows:
1. By 2006, Mr. Cohen did not have any profit and loss experience from his activities (he did not claim to be in the poker business before 2006).
2. Mr. Cohen’s evidence for his poker “training” did not show that he had learned skills to allow him to profit from poker. “The Appellant has not submitted any reliable evidence of any meaningful formal or other training or how it improved his level of play to a level of a professional poker player as he called himself.” (¶ 30)
3. The taxpayer’s business plan didn’t impress the Court either. “With respect to the Appellant, I cannot possibly find that the above, even taken as a whole would constitute a reasonable business plan in the ordinary sense of the word or constitute any serious systematic method of winning.” (¶ 38) The Court also found that Mr. Cohen didn’t follow whatever plan he did have. (¶ 40)
4. What about the capability of the venture to show a profit? “There is likewise no evidence to support that this so-called venture had the capacity to show a profit other than general statements that it could.” (¶ 41)
5. The taxpayer argued that the Court should consider other factors, including his strategies for managing risk and his skills. The Court responded as follows:
With all due respect to the Appellant, I cannot agree with his arguments based on the evidence before me. As mentioned, he abandoned his strategy to play small stakes games against new or inexperienced players just after 3 months in 2006 and lost significant money as a result. He totally failed to manage the risk by abandoning his strategy and continuing to increase his credit card limits when they were exceeded instead of re-evaluating the risks after significant losses in the spring and summer of 2006. (¶ 44)
…
As for the Appellant’s suggestion he was a skilled player, there is little evidence, as I stated earlier, that he had much training nor was any reliable evidence given to suggest he contained a superior skill set in the game. (¶ 45)
The Court dismissed the appeal; the taxpayer could not deduct his poker losses. The CRA, no doubt, breathed a sigh of relief and, perhaps, made a note to file not to chase after poker players who might be winning some money, net, year after year because, after all, who wants to create a set of precedents about what constitutes a poker business for those who lose money playing the game?
