Lotteries are tax-free, sort of...

There is a great article in the December 11 issue of Canadian Business about two brothers in Toronto who have made millions of tax-free dollars playing sports lotteries.  It seems that the Canada Customs and Revenue Agency (CCRA), formerly Revenue Canada, now wants them to pay tax on their winnings.  Huh?

CCRA takes the position that the brothers' gambling hobby is really a "business".  They say that where a great amount of skill and knowledge is involved, the hobby may no longer qualify as such.  Never mind that the Income Tax Act specifically makes lottery winnings non-taxable.  Never mind that the provincial lottery corporation promotes the lottery by claiming that the winnings are non-taxable.

Let's give CCRA an A+ for creativity and an F- for foresight.  One has to assume that a decision like this was not made by one individual bureaucrat that processed the returns for the brothers. More likely is that this went up the ladder and someone with a fair degree of responsibility made the call to tax the winnings. 

It seems that all of the people involved looked only at the potential tax dollars of the case and not the wider ramifications of the policy decision.

If lottery playing can be considered a business, then, like any business, money spent to earn income becomes a deduction.  That trip to Vegas - business expense!  All the drinks you bought at the casino - yup, business expense.  All the trips to the corner store to buy tickets - start deducting automobile expenses.  The room on your home where you read the paper and decide what teams to bet on - that must be your office!

CCRA often denies people deductions for business losses where they can show that there is no reasonable expectation of profit. People don't buy tickets with the expectation that they are not eligible for major profits.  If the two brothers can be said to have a reasonable expectation of profit, so can everyone that plays a lottery. 

Does the CCRA really want the millions of people that play lotteries to start making billions of dollars in deductions for their "business expenses" incurred in their "on the side" gambling business?  Given that more money is lost playing lotteries than is won, plus the great scope for deductions of business expenses, CCRA is set to lose a lot of tax revenue with their position on this case.

I don't recommend that you start claiming deductions for this.  In my opinion, CCRA has as much chance of winning as the proverbial snowball has in that hot place in the afterlife.

File this one in the folder marked "What were they thinking?