Archive for the ‘Canada’ Category

When Bad Recordkeeping Helps You (And Bad News for Some Canadian Professional Poker Players)

Monday, July 18th, 2022

As we previously reported, the Canada Revenue Agency (CRA) thought that Jonathan Duhamel, the winner of the Main Event of the World Series of Poker (WSOP) in 2010 was a professional gambler, and that he conducted himself as a professional gambler.  Thus, his gambling winnings should be subject to Canadian income tax.  Mr. Duhamel argued that poker is a game of chance and not subject to tax in Canada, and that even if it were a game of skill Mr. Duhamel did not conduct himself as a professional poker player.  The case was tried in front of the Tax Court of Canada last November, and a decision was released late last month.  (I am indebted to a friend of mine who speaks French for translating the key points of the decision — his translation runs 40 pages.)

The evidence as presented to the court showed that Mr. Duhamel was bad at recordkeeping.  He apparently only kept track of his tournament results, and never tracked cash games (even though he played lots of cash games).  For a Canadian who doesn’t want to be considered a professional gambler, bad recordkeeping appears to be a plus as this was a factor that influenced the court.

(Of course, if you are an American—and this blog caters to Americans—a warning is needed.  Bad recordkeeping is not what you want to do as either an amateur or a professional gambler in the United States.  All gamblers in the United States must pay tax on their winnings, and a gambling log is a must.  But I digress….)

The Court noted (as translated) [1]:

Because the evidence shows that chance is a very important element in poker game results, that Mr. Duhamel’s poker game activities do not demonstrate an ability to generate profits, that the probability Mr. Duhamel’s ruin in his poker gambling business is well over 50% (but less than 87%), that Mr. Duhamel does not act like a serious businessman in his poker gaming activities, that Mr. Duhamel has not developed any system for managing or mitigating risks in connection with his poker gaming activities and that the financial results of his tournaments do not show any consistency or progress in the results, the Court concludes, on a balance of probabilities, that Mr. Duhamel’s poker gaming activities are not carried on in a sufficiently commercial manner to constitute a source of business income for the purposes of the Act. Accordingly, the net earnings from Mr. Duhamel’s poker gaming activities should not be included in the calculation of his income under sections 3 and 9 for the 2010, 2011 and 2012 taxation years.

The court looked at the activities of Mr. Duhamel, and found that he acted as an amateur; for Mr. Duhamel, this decision is excellent news.  Mr. Duhamel won in part because he didn’t act like he was in business.

However, there is bad news implicit in this decision for some Canadian professional poker players:  It’s clear that there are Canadian poker players who consistently make their living from poker, and who would likely be considered professional gamblers if the CRA were to look at their activities.  I don’t practice in Canada, but I would advise any Canadian professional poker player to seek advice from a Canadian tax professional who understands gambling activities and this decision.


[1] This paragraph in French reads, “Puisqu’il ressort de la preuve que le hasard est un élément très important dans les résultats au jeu de poker, que les activités de jeu de poker de M. Duhamel ne démontrent pas une capacité de générer des profits, que la probabilité de ruine de M. Duhamel dans le cadre de ses activités de jeu de poker est bien supérieure à 50 % (mais inférieure à 87 %), que M. Duhamel n’agit pas comme un homme d’affaires sérieux dans le cadre de ses activités de jeu de poker, que M. Duhamel n’a mis au point aucun système de gestion ou d’atténuation des risques dans le cadre de ses activités de jeu de poker et que les résultats financiers de ses tournois ne démontrent aucune constance ni progression dans les résultats, la Cour conclut, selon la prépondérance des probabilités, que les activités de jeu de poker de M. Duhamel ne sont pas exercées de manière suffisamment commerciale pour constituer une source de revenu d’entreprise aux fins de la Loi. Conséquemment, les gains nets tirés des activités de jeu de poker de M. Duhamel ne doivent pas être inclus dans le calcul de son revenu aux termes des articles 3 et 9 pour les années d’imposition 2010, 2011 et 2012.”

Do Canadian Professional Poker Players Owe Income Tax?

Thursday, November 5th, 2020

In the United States, the tax law can be boiled down to two sentences: Everything is taxable unless Congress exempts it. Nothing is deductible unless Congress allows it. Gambling winnings are taxed–they are an accession to income. An American professional gambler clearly owes income tax.

However, in many countries like Australia only professional gamblers (those conducting a business) are taxed on their gambling winnings. This came up when Australian Joseph Hachem won the World Series of Poker. He successfully argued that at the time he won he was an amateur gambler and did not have to pay income tax on his winnings.

The law in Canada is not settled in this area. There is a court case from British Columbia that says that professional poker players do not have to pay tax on their winnings. But clarity is likely coming, as the Tax Court of Canada will hear the case of Jonathan Duhamel in March.

Mr. Duhamel won the 2010 World Series of Poker main event earning $8,944,310. Canada’s tax agency, Canada Revenue Agency (CRA), argues that Mr. Duhamel was operating a business; thus, he owes income tax on his net income. CRA argues that Mr. Duhamel hasn’t paid $1,219,114 (Canadian Dollars) in tax from 2010-2012. That’s $934,695 (USD), well worth fighting over.

The case will probably come down to whether or not the business aspect of Mr. Duhamel’s career outweighs the luck that caused him to win specific events. Per an article in The Canadian, CRA believes that because he considers himself a professional poker player, he behaves like a “serious businessman” while playing poker, he has no other primary source of income, and he performs his occupation for 40 to 50 hours per week, he is in business and owes income tax. Mr. Duhamel argues it’s just luck that causes him to win.

The good news for Canadian poker players is that clarity on income taxes is coming (probably next summer). The bad news is that to this observer it appears that CRA is starting with pocket Queens versus Mr. Duhamel’s eight-seven suited.

Zappers OK in B.C. but Using Them Isn’t

Friday, July 19th, 2013

A Richmond, British Columbia firm marketed an interesting computer program. As I noted when I first wrote about this (in 2008):

Bradley Alvarez of the Canada Revenue Agency told The Province that, “Businesses are suspected of having hidden thousands of transactions and millions of dollars in sales across Canada.” The software, from InfoSpec Systems in Richmond, BC, will save an owner taxes. The RCMP noted in its application for a search warrant that an InfoSpec spokesman allegedly said that the software can be used for “deleting cash sales.” Additionally, the software vendor claimed that you can take the cash and “pay kitchen staff.” There’s no reason to stop at one felony when you can commit two, eh?

Well, the software vendor won a victory at the B.C. Court of Appeal. As the Vancouver Sun reported:

Four years after a Richmond computer company was charged and a year after it was convicted of tax fraud, the province’s highest bench has ordered the company acquitted…

“It is noteworthy that the law does not prohibit the making, possession, or sale of a zapper,” Justice Frankel said, even though a number of criminal code provisions target and restrict other instruments of crime used, for instance, in counterfeiting or falsifying credit cards.

“I do not accept the Crown’s submission that InfoSpec ‘engaged in a course of dealings that was by its very nature dishonest.’ InfoSpec participated in commercial transactions involving the sale of a computer program that is not prohibited by law; the restaurants got what they paid for. Whatever reasonable people might think about the propriety of such a sale, I am unable to say they would consider the vendor to have acted dishonestly.”

However, using the software to evade taxes was and still is a crime in Canada. It is likely that the Canada Revenue Agency will appeal this decision to the Canadian Supreme Court.

California Leads the Way (as Worst State for Business)

Tuesday, May 7th, 2013

If anyone wonders why I left the Bronze Golden State, yet another survey has come out regarding places to do business. Chief Executive Magazine rated all 50 states from top to bottom. Before focusing on the dismal state of California’s business climate, let’s highlight the top ten states:

1. Texas
2. Florida
3. North Carolina
4. Tennessee
5. Indiana
6. Arizona
7. Virginia
8. South Carolina
9. Nevada
10. Georgia

At the bottom was California:

41. Maryland
42. Pennsylvania
43. Hawaii
44. Michigan
45. Connecticut
46. New Jersey
47. Massachusetts
48. Illinois
49. New York
50. California

Looking at why California ranks where it does, one can see the problems are taxation and regulations. The comments note that the regulations and taxation is unreasonably and “…getting worse, if that is even possible.” Compare these to the comments regarding Texas: “Texas is the clear leader because of taxes and pro-business attitudes.”

Do I expect anything to change in California? No — I think the state will have to hit bottom (be broke) in order for real change to happen.

When an Agent’s Fees Are Not Deductible

Thursday, July 5th, 2012

Suppose you are a professional athlete and you hire a sports agent to negotiate with you. Those fees are, in the United States, generally deductible as an “ordinary and necessary” business expense. However, the same is not true in Canada.

The Canada Revenue Agency ruled several years ago that agent’s commissions are not deductible. Given that most athletes hire agents (who typically receive 3% to 5% of a player’s salary), this can be a significant issue. This impacts all four major sports leagues (there are several hockey teams in Canada, along with the Toronto Blue Jays of Major League Baseball and the Toronto Raptors of the NBA; additionally, the NFL’s Buffalo Bills play three home games a year in Toronto), and sooner or later some “lucky” athlete was going to be audited by the CRA.

That happened when Michael Caruso, a defenseman with the Florida Panthers, was audited. He lost, so he appealed his decision to the Tax Court of Canada. In Caruso v. Queen, Canada’s Tax Court ruled against Mr. Caruso.

Canadian tax law is similar to, but not identical to, American tax law. In the US, any business expense that is both “ordinary and necessary” is generally allowed. However, Canada’s Income Tax Act states, “Except as permitted by this section, no deductions shall be made in computing a taxpayer’s income for a taxation year from an office or employment.” It would seem that an agent’s fee would be deductible, given that Paragraph (8)(1)(b) states a deduction can be taken for, “(b) amounts paid by the taxpayer in the year as or on account of legal expenses incurred by the taxpayer to collect or establish a right to salary or wages owed to the taxpayer by the employer or former employer of the taxpayer;”

So are an agent’s fees legal expenses? Not in Canada:

In this case the services rendered by the agent were the services in negotiating the contract that was entered into between the Appellant and the Florida Panthers. When the Appellant was asked about the services provided by the agent, he referred to the additional $60,000 in signing bonuses that the agent was able to obtain for him…

To the extent that any of the services provided by AKT Sports Management Consultants Inc. (or MFIVE SPORTS) could be regarded as legal services, the services were not to collect salary or wages owed to the Appellant (the services were rendered before any contract was signed) nor were such services rendered to establish a right to salary or wages. The services were rendered to negotiate the contract. There was no right to any salary or wages until after the agreement was signed, which was after the services in question were rendered by the Appellant’s agent.

While there is a proposed amendment to this part of Canada’s Income Tax Act that would change the law, the judge in the case stated it would still not apply to agent’s fees:

As well, not all legal services will qualify. Only amounts paid for those legal services provided to collect amounts owed to the taxpayer or to establish a right to such amount will qualify for the deduction under this paragraph. Therefore even if such amendments were now effective the proposed changes would not result in the amount that was paid to the Appellant’s agent being deductible.

Now, decisions of this court can be appealed; however, based on this news story it appears that won’t be happening in this case. That said, this decision impacts every hockey player and many other athletes. Mr. Caruso did not earn a huge salary; I suspect some highly salaried player, such as Roberto Luongo of the Vancouver Canucks, will end up fighting this issue if he gets audited. (As an aside, Mr. Luongo will be competing in the main event of the World Series of Poker which begins on Saturday. Mr. Luongo’s $10,000 buy-in is being paid for by the British Columbia Lottery Corporation.)

Hat Tip: Robert Raiola

IRS Announces New Procedure on RRSPs; Jaywalkers Apparently No Longer Subject to Firing Squad

Wednesday, June 27th, 2012

The IRS announced yesterday a new procedure to deal with “low compliance risk” taxpayers who have innocently not filed FBARs or tax returns noting their RRSPs (a Canadian retirement account similar to a 401(k) or IRA). While the full details have not been released (the plan will go into effect on September 1st), it appears that the IRS has heard the complaints from tax professionals and others regarding the “one size fits all” voluntary disclosure plan.

Of course, the devil is in the details but they look reasonable at this point:
– Taxpayers will need to submit delinquent tax return for the last three years;
– Taxpayers will need to submit delinquent FBARs for the last six years; and
– Pay any tax and interest due with the submission.

Note that to qualify for the plan your unpaid taxes will need to be less than $1,500 per year.

Once the full details are announced (probably in late August) I’ll report on them.

More: Roth Tax Updates, Janet Novack

Corruption Alleged at Canada Revenue Agency

Tuesday, June 19th, 2012

There may be some shenanigans happening north of the border. Canada’s Globe and Mail reports that the Royal Canadian Mounted Police are investigating officials at Canada Revenue Agency over a a $1 Million alleged kickback scheme. The allegations revolve around an accountant whose firms received a $10 million tax bill. CRA officials told the accountant that for just $1 million (and later, for $300,000) they could make the problem vanish.

The problems appear to be centered in Quebec, and involve the accounting, construction, and restaurant industries.

“The accused allegedly attempted to extort money from restaurant owners in exchange for lower income tax assessments,” the RCMP said in a news release…

“The RCMP investigation into these allegations of corruption within the Canada Revenue Agency was initiated in 2008 and is still ongoing,” the RCMP said. “More charges could be laid in this matter.”

This isn’t the first case of corruption within the CRA. Back in 2009 two CRA auditors were found to share a $1.7 Million bank account in the Bahamas with the owner of a Quebec construction firm.

HatTip: @GamingCounsel

Bozo Tax Tip #1: Get Out of Town, Fast

Sunday, April 15th, 2012

There’s an old saying: When the going gets tough, the tough get going. Well, with Bozos things work differently. “Oh my,” a Bozo thinks. “Tax Day is just a couple of days away. I’m completely unprepared. I know: I’ll go visit Aunt Bertha and Uncle Abner in Ottawa. I’ll catch the hockey, and forget about tax.”

Believe it or not, this strategy actually works (for a while). If you are outside of the United States on the day taxes are due (April 17th this year), you get an extra two months (until June 15th) to file your federal taxes. There are no penalties, just interest.

So suppose you haven’t a prayer of paying your federal taxes and you go to Ottawa to see the Rangers face the Senators on both Monday and Wednesday (and stay all three days). Yes, you have until June 15th to file your taxes.

Now, this strategy doesn’t work for every state, though. Some states do follow the two-month extension (New York and North Carolina, for example); others do not. I’ve had clients stuck in Europe do a volcanic eruption (remember that volcano in Iceland that erupted a couple of years ago), panic, and I told them to relax.

Of course, if you can’t travel abroad, going from the city to the suburbs won’t change the tax deadline. And I must emphasize that this is just a temporary fix. Yet this is the one example of a Bozo maneuver that can really work.

That’s it for our Bozo Tax Tips for the 2011 Tax Filing Season. I hope you’ve enjoyed them. We’ll be back with actual tax posts at the end of the week.

Happy Tax Day!

Gambling Addiction Costs Ice Winery Head

Sunday, February 26th, 2012

Something I didn’t know until recently is that wine grapes are grown in all 50 states. They’re also grown in Ontario, Canada. One winery head dipped into the till because he liked to gamble.

From St. Catharines, Ontario, comes the story of Charles Pillitteri, head of the the Pillitteri Estates Winery. Mr. Pillitteri apparently liked to gamble, and back in 2004 and 2005 Mr. Pillitteri reached into the company’s cash and took $439,102 and $951,508 (Canadian Dollars). The Canada Revenue Agency found out, and the company was fined the amount of the back taxes: $122,031 and $202,510 for 2004 and 2005. The company has paid the fines assessed when Mr. Pillitteri pleaded guilty to tax evasion.

Mr. Pilliteri no longer gambles according to this news report. Connie Slingerland, the CFO and the sister of Mr. Pillitteri, told the National Post, “We’re very proud of what we do…. This happened a long time ago, and all the measures have been put in place for it not to happen again.”

The specialty of Pillitteri Estates Winery is ice wines; the grapes for the wines are frozen on the vine, picked, and then crushed while still frozen. It sounds like the perfect thing to try during a Las Vegas summer.

Revenue Canada Says “Just Say No” to the IRS

Wednesday, August 24th, 2011

Last Sunday I linked to two well-written articles by Don Cayo of the Vancouver Sun. One question that has interested individuals residing in Canada who are impacted by FBAR (Form TD F 90-22.1) is whether the Canadian tax authorities would collect penalties on behalf of the IRS.

Mr. Cayo corresponded with Revenue Canada (the Canadian equivalent of the IRS) and got the answer: No. You can read his correspondence here, but it boils down to CRA noting that the FBAR provision is not included in the US-Canada Tax Treaty. Additionally, CRA says they will not collect taxes for the IRS for an individual who is a Canadian citizen at the time the liability arose.

This will have even more meaning in the years to come as Congress is forcing foreign banks to collect information on Americans (beginning in 2013). I expect to see significant pushback, and it will be interesting to see how that plays out.

Hat Tip: Phil Hodgen