Tax on Lottery and Gambling Winnings in Canada

A lottery prize or a casual win at a casino is generally not taxed in Canada, but the CRA draws lines around that rule: prizes tied to a job or a business, gambling carried on as a business, and the income the winnings earn once invested. This page sets out where those lines are, using the CRA’s Income Tax Folio S3-F9-C1, Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime (effective July 3, 2020), and covers US tax on gambling winnings won by Canadians. It is part of the investment tax hub; for planning around a large win, see finances after winning money, and for money received from an estate, tax implications of receiving an inheritance.

Lottery winnings

The CRA’s list of amounts you don’t report or pay tax on includes “lottery winnings of any amount, unless the prize can be considered income from employment, a business or property, or a prize for achievement”. The folio puts it the same way: “The amount or value of a prize received by a taxpayer from a lottery scheme is not taxable as either a capital gain or income.”

Three details from the folio:

• Non-cash prizes. A lottery winner “is deemed to have acquired the prize at a cost equal to its fair market value at the time of acquisition”, so if you later sell a prize such as a car or a house, any gain or loss is measured from that value.
• Prizes paid over time. Where a lottery prize is an annuity, “the initial adjusted cost basis of the annuity is considered to be the fair market value of the annuity when it was acquired”, and the payments are taxed under the annuity rules: part of each payment can be taxable even though the prize itself is not.
• Ticket sellers. “Lottery ticket retailers who sell winning tickets must include in their income the amount or value of any prize commissions they received from a provincial lottery corporation.”

Other gambling winnings and prizes

When gambling is a business

The folio says “An individual’s gambling activities may result in taxable business income or a business loss” if they amount to carrying on a business of gambling. It also quotes the Tax Court in Leblanc: “Gambling - even regular, frequent and systematic gambling - is something that by its nature is not generally regarded as a commercial activity except under very exceptional circumstances.” The exceptions the courts have found involved “taxpayers who applied inside information, knowledge and skill to their activities.”

The question is decided on the taxpayer’s whole course of conduct, considering:

• the degree of organization that is present in the pursuit of this activity by the taxpayer
• the existence of special knowledge or inside information that enables the taxpayer to reduce the element of chance
• the taxpayer’s intention to gamble for pleasure as compared with any intention to gamble for profit as a means of gaining a livelihood
• the extent of the taxpayer’s gambling activities, including the number and frequency of bets

If gambling is a business, the net winnings are taxable business income and a net loss is a business loss; business income is reported on Form T2125. If it isn’t, the winnings aren’t income, and losses aren’t deductible either: the folio’s general rule for activities that aren’t a source of income is that “In the case of hobbies, neither amounts received nor expenses incurred are included in the income computation for tax purposes”.

Tax on what your winnings earn

The prize is not taxed, but the CRA says “Income earned on any of the above amounts is taxable . For example, any interest that you earn when you invest lottery winnings must be reported on your return.” Dividends and capital gains the money earns in a non-registered account are taxed the same way as any other investment income; see dividend tax vs capital gains tax.

A TFSA is the exception. Interest, dividends and capital gains earned in a TFSA are generally tax-free, even when you withdraw them. Winnings moved into unused TFSA room can therefore earn income without tax; how much room you may have is on the TFSA contribution limit page.

Sharing winnings with family

Giving part of the winnings away doesn’t create income for the person who receives it. The CRA lists most gifts and inheritances among amounts you don't report or pay tax on, so receiving one isn't income to you, but income earned on it afterwards, such as interest, is taxable. What the gift earns afterwards can still be taxed to you rather than to them: If you give or lend money or other property to your spouse or common-law partner, the income it earns is taxed to you, and so are capital gains when they sell it, while you are resident in Canada and still together; if you give or lend it to a child, grandchild, niece or nephew under 18, the income (but not capital gains) is taxed to you until the year they turn 18. The main exceptions are a loan at the CRA's prescribed rate with each year's interest paid within 30 days after the year ends, a transfer for fair market value, and living apart after the relationship breaks down. The attribution rules page has the detail. Giving away property bought with the winnings, rather than cash, can be a taxable disposition for you; see gifting money to family. At death, investments bought with winnings are treated like any other capital property; see inheritance tax in Canada.

US gambling winnings

Winning in the United States is a separate matter, because the US taxes it:

• The tax. IRS Publication 519 says nonresidents “are subject to the 30% tax on the gross proceeds from gambling won in the United States if that income is not effectively connected with a U.S. trade or business and is not exempted by treaty”. It also says “Tax may also be withheld from certain other income”, naming gambling winnings among the examples.
• Games with no US tax. “However, no tax is imposed on nonbusiness gambling income a nonresident alien wins playing blackjack, baccarat, craps, roulette, or big-6 wheel in the United States.” Pub 519 also lets you exclude winnings from legal wagers initiated outside the United States in a pari-mutuel pool with respect to a live horse or dog race in the United States.
• Losses under the treaty. The Canada-US tax treaty, Article XXII (Other Income), paragraph 3, says losses a Canadian resident incurs on wagering transactions whose gains the US may tax are deductible for US tax “to the same extent that such losses would be deductible if they were incurred by a resident of that other State”. The US rules for residents set how much of a loss counts and what records support it.
• Getting a refund. Pub 519 says nonresidents who file use Form 1040-NR, and that you must file to “Claim a refund of overwithheld or overpaid tax”. Whether any of the 30% tax comes back depends on your documented US wagering losses for the year.

Quebec

Quebec residents file a Quebec return with Revenu Québec as well as the federal return. This page describes the federal (CRA) rules; Revenu Québec publishes its own guidance on taxable and non-taxable income.

Related pages

• Investment tax hub
• Finances after winning money in Canada
• Tax implications of receiving an inheritance
• Gifting money to family in Canada
• Attribution rules in Canada
• TFSA contribution limit