Do you have to pay tax on gambling or sports betting? Educational notes from a Canadian CPA

A question I get asked quite often since sports betting became mainstream "Do I Have to Pay Tax on Sports Betting or Gambling in Canada?"

For most Canadians, the answer is no. Gambling, lottery tickets, and sports betting are generally tax-free.

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General Rule: Gambling Winnings Are Tax-Free in Canada

The CRA generally considers gambling winnings, including those from sports betting, as windfalls—unexpected one-time gains. As a result, they are not subject to tax.

So, if you bet on sports occasionally or win the lottery, you can breathe easy: you don’t owe the CRA a dime.

But the CRA is less forgiving if your gambling starts to look like a business activity. If you gamble frequently, systematically, and rely on winnings as income, the CRA might decide your gambling is taxable.

When Does Gambling Become Taxable?

The CRA uses several factors to assess whether your gambling income is taxable. It’s not about one factor—it’s a holistic view of your behavior. Key considerations include:

1. Frequency: How often do you gamble? A few bets during playoffs won’t raise eyebrows, but daily betting might.
2. Systematic Approach: Are you using a strategy or system, with an emphasis on reducing risk?
3. Skill vs. Luck: Are your wins purely based on chance, or is skill playing a significant role (e.g., betting on 1v1 basketball against amateurs when you're a pro)?
4. Dependence: Is gambling your primary source of income? If so, the CRA may consider it a business.

The "Pizza-and-Xbox Brothers": A Classic Court Case

One of the most famous Canadian tax cases on sports betting involved two brothers in who, according to the judge "[...]spent their days playing Xbox, eating pizza, and betting on sports."

During their prime, the brothers were betting $200,000 - $300,000 per week.

They even moved into a house between Gatineau and Ottawa so they could easily place bets in Quebec and Ontario (this was during the pro-line days). The CRA argued that their sports betting activity was so frequent and profitable that it constituted a business, making their winnings taxable.

But the court disagreed. Why?

The judge found that the brothers were just gambling addicts and didn’t operate like professional businessmen.

They didn’t have a system, a strategy, or even much discipline in their gambling. They just placed a ton of parlays using their own "strategies" , but their success was deemed to be pure luck, not a result of organized or intentional efforts to generate income.

Lesson: As long as your gambling remains recreational, even if it’s profitable, the CRA can’t tax your winnings.

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Other Famous Court Cases About Bets and Poker

Not all taxpayers are as lucky as the pizza-and-Xbox brothers. Here are two other notable Canadian gambling cases where the CRA treated the activity as a taxable business:

The Lawyer Turned Poker Player

A Canadian lawyer turned poker player, claimed to be in the business of gambling full-time. He reported gambling income of $81,283 but also tried to deduct over $203,000 in gambling-related expenses.

The court, however, didn’t agree with the lawyer's argument that he was a professional gambler. Here’s why he lost his case:

1. No Systematic Approach: Cohen didn’t have a concrete business plan. His expectation of making $150,000 in the first year was entirely unsupported, and his vague planning undermined his credibility.
2. Lack of Formal Training: Cohen’s "training" consisted of reading poker books and attending a three-day seminar in Las Vegas. This was deemed insufficient for him to claim professional status.
3. Credibility Issues: Cohen continued to collect severance pay from his former employer without disclosing his new "business venture," further weakening his case.

Ultimately, the court ruled that Cohen’s poker playing wasn’t a business but rather an unsuccessful personal venture, leaving him unable to deduct his losses or expenses.

The Pool Player

In another case, the CRA successfully argued that a professional pool player’s winnings were taxable because his activity met the criteria of a business.

Here’s the story:

• The taxpayer, a highly skilled pool player, would practice during the day and then visit bars in the evening to challenge drunk opponents while remaining sober himself.
• He earned between $200 and $300 daily, claiming that he made $16,000 in 1989, $20,000 in 1990, and $40,000 in 1991.
• He filed his tax returns showing no income, believing gambling winnings were not taxable. However, the CRA assessed him based on his net worth and argued that his pool-playing activities constituted a business.

The judge agreed with the CRA, finding that:

1. Systematic Approach: The taxpayer had a clear and intentional strategy to make money—playing sober against drunk opponents.
2. Principal Source of Income: Pool playing was his primary source of income during the years in question.
3. Professionalism: The taxpayer approached his pool-playing like a business, with a reasonable expectation of profit.

While the court reduced the CRA’s assessment for 1991 by $10,000 and removed penalties, it upheld that the taxpayer’s winnings were taxable as business income.

‍Takeaway: If your gambling is consistent, strategic, and the odds are in your favour because of your strategies, the CRA would likely consider it a business and tax your winnings as income.

Sports Betting: Where Does It Fall?

When it comes to sports betting, the same rules apply.

1. Casual Bettors: If you’re betting occasionally, or even addicted to betting for fun, and not relying on your winnings, they could be tax-free.
2. Professional Bettors: If you’re analyzing stats, tracking trends, with the odds in your favour, and betting systematically with the goal of consistent profits, your winnings could be taxable.
3. Grey Areas: If you place frequent bets but still have other income and don’t rely on gambling, the CRA may review your situation case by case.

Losses: Can You Deduct Them?

Here’s the flip side: if the CRA considers your gambling a business, you can deduct losses and related expenses from your taxable income.

For casual gamblers, losses are just part of the fun—you can’t deduct them.

How to Stay on the CRA’s Good Side

1. Keep It Recreational
   • If gambling is just a fun side activity for you, there’s nothing to worry about. Your winnings will remain tax-free.
2. Avoid a Systematic Approach
   • If you’re placing bets with strategy and consistency, the CRA might start asking questions.
3. Document Everything
   • If you gamble frequently, keep records of your bets, wins, and losses. This is especially important if your activity falls into the grey area.
4. Separate Accounts
   • If you gamble for fun but also engage in more structured activities like poker or professional pool, separate these activities into different accounts to avoid confusion.
5. Consult a Tax Professional
   • If you’re making significant gains or unsure about your status, speak to a CPA for personalized advice.

Final Thoughts

In Canada, most sports betting and gambling winnings are tax-free. But if your activity starts looking like a business—frequent, systematic, and profit-driven—the CRA could step in.

Take a lesson from the pizza-and-Xbox brothers: if your betting remains recreational and unorganized, you’re likely in the clear. But if you’re a professional bettor or gambling is your main source of income, it’s worth consulting a tax expert to ensure you’re filing correctly.

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For more information, consult Canada.ca and if you’re looking for a CPA in Ottawa, please don’t hesitate to reach out.

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This is not legally binding tax advice. This is educational analysis. Say hello if you need help.

hello@taxesmadesimple.ca

WhatsApp - 613.600.4194

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