Principal Issues: [TaxInterpretations translation] Does a taxpayer who has a daily activity of gambling on the Internet, through virtual casinos, carry on a business within the meaning of the Income Tax Act?
Position: Question of fact. Generally such activities will not be a source of income.
Reasons: The Income Tax Act.
XXXXXXXXXX 2010-037732
March 2, 2011
Dear Sir,
Subject: Definition of business - Internet gambling
This is in response to your letter of April 8, 2010, in which you asked whether your client (the "taxpayer"), who has a daily activity of gambling at an Internet casino, is carrying on a business for the purposes of the Income Tax Act (the "Act"). I apologize for the delay in answering your question.
Unless otherwise indicated, all legislative references in this document are to the provisions of the Act.
More specifically, you indicated that the taxpayer plays games of chance on the Internet, through virtual casinos, for a maximum of 45 hours per week and that he takes coaching courses to improve his skills in this area. You indicated that the taxpayer has no other sources of income for the purposes of the Act.
You therefore wish to know whether the taxpayer should include income from his Internet activities and, as a corollary, whether he can deduct the resulting losses.
Our Comments
The situation you described in your letter appears to be related to a factual situation that concerns a specific taxpayer. As stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, it is our practice not to express a written opinion on proposed transactions otherwise than by way of advance rulings. In addition, when determining whether a completed transaction has received the appropriate tax treatment, the determination is made first by our Tax Services Offices after reviewing all facts and documents, which is usually performed as part of an audit engagement. However, we can offer you the following general comments that we hope will be useful to you.
Interpretation Bulletin IT-334R2, Miscellaneous Receipts (the "Bulletin"), discusses the taxation of various amounts received by taxpayers. Section 3 indicates that a taxpayer's income for tax purposes includes income from all sources and the taxable portion of capital gains after deduction of allowable capital losses. Thus, in order to determine how an amount will be treated for tax purposes, it is necessary to identify the source, whether it is an employment, an office, a property, a business or any other unlisted source. You can consult that Interpretation Bulletin by accessing the Canada Revenue Agency's website at http://www.cra-arc.gc.ca/E/pub/tp/it334r2/READ-ME.html.
Where a taxpayer derives income from the sports bets the taxpayer has placed, it is necessary to determine whether the taxpayer's activities are such that it is possible to conclude that there is a business.
In Stewart v. Canada (footnote 1), the Supreme Court of Canada developed a two-pronged approach to determining whether a taxpayer's activities are a source of income from a business or property:
- Is the taxpayer’s activity undertaken in pursuit of profit, or is it a personal endeavour?
- If it is not a personal endeavour, is the source of the income a business or property?
In Leblanc v. The Queen (footnote 2), Bowman CJ recognized the distinctiveness of gambling activities and indicated that the approach developed in the Stewart case should be applied somewhat differently to those activities in concluding as to the existence of a business. According to Chief Justice Bowman, barring exceptional circumstances, although the activities surrounding gambling are invariably undertaken to make a profit, the fact remains that those activities have a personal element.
Thus, in such cases, gambling activities can only be considered as a business if they are carried on in a sufficiently commercial manner. For an activity to be characterized as commercial by nature, the taxpayer must have the subjective intent to make a profit and there must be evidence of the conduct of a serious business person supporting that intention. A reasonable expectation of profit is only one factor among others that must be taken into consideration at that stage. In the Leblanc case, Bowman JA also pointed out that the existence - or lack thereof - of a loss minimization system was a relevant factor to consider.
The Bulletin also provides other elements to consider in this analysis:
(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.
According to Bowman CJ, gambling cases can be classified into three broad categories:
a) There are cases involving the gamblers for whom gambling is a pleasurable pursuit. They are not taxable even though they do it regularly, even compulsively and with some sort of organization or system… .
b) Gambling gains have been held to be taxable where the gambling was an adjunct or incident of a business carried on, for example by a casino owner who gambles in his own casino or an owner of horses who trains and races horses and who bets on the races… .
c) Gambling gains have also been held to be taxable where a person uses his own expertise and skill to earn a livelihood in a gambling game in which skill is a significant component … .
Although we do not have enough information in this case to conclude whether or not there is a business arising from the taxpayer's gambling activities, we believe that the comments provided above will allow you to draw the appropriate conclusions. Of course, that final determination – which is one of fact – rests with the Tax Services Office for the region in which the taxpayer resides.
In closing, where a given activity does not constitute a source of income, neither the amounts received nor the expenses incurred in connection with that activity should be included in computing the taxpayer's income and any excess of expenses over revenues is personal expenses or living expenses that are not deductible under paragraph 18(1)(h).
Best regards,
François Bordeleau, LL.B.
Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate.
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 2002 2 S.C.R. 645
2 2006 TCC 680