written on behalf of Feigenbaum Law
The World Series of Poker’s Main Event is currently underway in Las Vegas, Nevada. One lucky participant will soon be heading home with $8 million, which is the first-place share of the $82.5 million prize pool. Exactly how much of that $8 million will be kept by the winner, and how much it will be taxed, will depend on where the winner is from, however.
In the United States, poker winnings are considered taxable income, much like lottery winnings. But not all countries tax gambling income. Canadian poker players recently received good news in this regard from the Tax Court of Canada. The court ruled that Jonathan Duhamel, winner of the 2010 World Series of Poker Main Event, does not have to pay taxes on his poker tournament winnings from that year and those that followed it. Duhamel’s legal team argued that poker was a game of luck. This position is contrary to the long-standing sentiment of the poker community that poker is a game of skill that should be regulated.
Poker winner ordered to pay taxes on winnings
Duhamel’s tax issues began after the Minister of National Revenue (the “Minister”) concluded that Duhamel was doing business when engaging in his gambling activities. The Minister issued notices of tax reassessment to include taxes owing for both his poker winnings as well as his sponsorship payments. Duhamel’s net winnings in 2010 were $4.8 million, with net winnings of $383,916 and $106,775 in 2011 and 2012 respectively. There was no dispute about these amounts. Rather, the dispute concerned whether or not the winnings can be considered business income for the purposes of the Income Tax Act. If the winnings are classified as business income, Duhamel would owe tax. If not, he could keep it all.
Is poker a game of chance?
Duhamel’s core argument was that poker is a game of chance. Even if the game includes an element of skill, and if Duhamel had strategies in place to minimize his risks, the chance involved in the game should prevent him from having to pay tax on his winnings. Duhamel also submitted that, even if poker constitutes a business activity, he pursued it recreationally rather than as a business.
The Minister’s position relied on a 2002 Supreme Court of Canada decision which stated that if someone enters into a business that includes risk, income from that business is taxable if:
- the taxpayer employs strategies to minimize risk, and
- if there is an intention to profit from the activity.
In short, the Minister said that Duhamel’s poker playing went well beyond recreation and entertainment. Duhamel’s sponsorship agreement provided him with additional income, which further proved his gambling to be a business of a commercial nature.
The court differentiates gambling for profit from gambling for income-related purposes
The court differentiated poker from other sources of income. While everybody who enters a poker game does so with the intent to profit from their playing, not everyone who plays poker does so for income-related purposes. Most people who play poker do it as a hobby or form of entertainment. Because of this, the court had to expand its analysis to include Duhamel’s risk management strategies as well as his knowledge and skill of the game.
The court did not agree with the Minister that Duhamel’s studying of the game gave him an advantage over his opponents. In fact, the court found that he had never taken any courses on poker and started playing when he was a teenager. The court agreed that his reading on the subject of poker could be considered recreational. He also did not use software that is available for online players to track the betting patterns of opponents and recommend strategy.
The court also spent some time looking at whether Duhamel pursued poker as a means of income. While it was true that his only source of income for a few years was poker-related, the court found that he had completed university prior to experiencing good fortune in poker and his ability to save money while in university allowed him to take time off after obtaining his degree.
Poker was not his main source of income in 2010
The court then turned to the question of whether poker was Duhamel’s main source of income during the years in question. As a participant in the Main Event, he entered into a similar sponsorship agreement as many other players. He then entered into a substantially larger one with PokerStars once he made the final table at the event. This is what provided him with income, as did dividends from investments he had made. So, the court concluded that poker was not his main occupation during these years.
Both parties called expert witnesses to speak to the roles of chance and skill in poker. Duhamel’s expert focused on the large role that chance plays, while the Minister’s expert focused on how professional players use skill to mitigate risk and tilt the odds in their favour. However, the court did not have to decide which side it agreed with, ultimately finding that it was Duhamel’s big win in 2010 that allowed him to focus on his recreational pursuit of poker without having to worry about making any income. The ability for him to be able to play poker and not hold down a traditional day job did not mean that his playing constituted business activity.
Feigenbaum Consulting helps clients avoid tax trouble
Do you need help with personal tax planning and compliance or are looking for legal advice related to corporate taxes? Feigenbaum Consulting has the experience to help ensure you or your business limit your tax obligations while also staying within the confines of the law. We help clients in both the United States and Canada. Our firm has a great deal of experience with people who live or do business on both sides of the border. Please don’t hesitate to call us at 1-877-275-1268 or reach us by email to see how we can help you today.