Gambling is receiving increased attention in Canada due to a number of factors, including concerns born during the COVID-19 pandemic and a new legislative framework under the Safe and Regulated Sports Betting Act, which allows licensed entities to conduct and manage betting on a single sporting event or athletic contest.
Increased access to advanced online betting tools and smartphone apps, as well as the success of iGaming Ontario revenues, made it clear that gambling is a growth industry in Canada.
We review taxes and gambling in Canada, specifically the tax treatment of gains and losses from poker, in light of Canada Revenue Agency (CRA) guidance, applicable legal tests, and a recent quadrilogy of decisions: Duhamel c. La Reine (2022 CCI 66), Fournier Giguère c. Le Roi (2022 CCI 132), D'Auteuil c. Le Roi (2023 CCI 3) and Bérubé c. Le Roi (2023 CCI 12).
These cases have collectively blurred once-apparent lines determining whether a taxpayer is operating a business for income tax purposes. They worsen the odds for poker players who consistently make profits from their activities and will potentially be a source of frustration and confusion for Canadian gamblers, moving forward.
♠ In contrast to Duhamel, the cases of Giguère, D’Auteuil and Bérubé suggest the development of a results-based approach to the taxation of gambling activities, meaning individuals with profits are more likely to be taxed than those with losses.
♣ The primary factor for determining “commerciality” in cases decided against the taxpayer appears to be the ability of a player to make a profit.
♥ The cases are inconsistent in their treatment of profit-sharing agreements and how their presence is weighted as a risk-mitigating factor.
♦ Use of third-party software for online play has received a significant amount of judicial attention, though there has been little in-depth discussion of how, exactly, such applications are used to increase a player’s profit.
1. Shuffle: Tax treatment of gambling activities
A taxpayer must consider the applicability of Sections 3 and 9 of the Tax Act when determining whether gambling activities are taxable.
Section 3 of the Tax Act requires that taxable income be determined by calculating the total of all amounts of income from a source inside or outside Canada, including the taxpayer’s income for each office, employment, business and property.
Section 9 requires that income derived from a business “is the taxpayer’s profit from that business or property for the year.”
In gambling activities, the question becomes whether the taxpayer is operating a business. As a general rule, winnings from gambling are not taxable, as they do not come from a source of income (for example, a business). However, if gambling winnings are received as part of business income or in the context of a business activity, then those winnings are taxable.
The results of this characterization can be tax-efficient for two reasons:
- Gambling winnings are not taxable if they do not constitute a business source of income;
- Gambling losses are deductible if the gambling activities constitute a business.
All levels of the Canadian judiciary have addressed the characterization of gambling activities, but recently there have been a significant number of decisions related to Texas hold ’em poker (generally referred to here as poker). These cases will form the foundation for virtually all poker-related tax disputes moving forward and will have important implications for the taxation of gambling-related activities generally.
2. Big and small blinds: Relevant legal test
Defining business income under the Tax Act is historically a moving target and jurisprudence has grappled with this definition in a variety of gambling-related activities. In Stewart v. Canada, the Supreme Court of Canada used the following test to distinguish personal from commercial activities:
“Does the taxpayer intend to carry on an activity for the purpose of making a profit and is there evidence to support this intention?”1
This legal test is both subjective and objective and aims to distinguish between personal and commercial activities, with the latter being subject to the Tax Act. Subjectively, the Court asks whether there is an intention to make a profit. Objectively, the Court asks whether there is evidence and features of commerciality. Given the nature of gambling activities and the fact that participants are usually motivated to make a profit, Courts have stated that “the intention to make a profit is not decisive in the study of the commerciality of this type of activity since all players are motivated by the pursuit of profit.”2
Paraphrasing Duhamel, to conclude that there is a business source of income, it must be apparent from the evidence that the activity in question was carried out in accordance with objective standards of conduct expected of a serious businessperson.
3. The deal: Factors in determining commerciality
Moldowan v. The Queen (a non-gambling case) provides a non-exhaustive list of objective factors that assist the Court in determining whether gambling activities support the taxpayer’s intention to make a profit. These include:
- Statements of profit and loss for prior years
- Taxpayer training
- The path the taxpayer intends to take
- The ability of the person to make a profit3
Risk management or risk mitigation also serves as an important factor. In particular, “the courts consider that risk-taking is an inherent characteristic of any income-generating activity and that it is rather risk minimization or risk management that is likely to make this activity a source of income.4
Typically, to find commerciality, there must be a clear system that involves a business plan, training, capacity to make a profit and some mechanism to mitigate risks. Giguère, in particular, states that “the criterion of risk minimization in the analysis of the taxpayer’s operation of a business” is an important factor “likely to make this activity a source of income.5
Perhaps the most contentious factor raised by the four recent gambling cases we examine in this article is the frequency of gambling activities. The oft-cited Leblanc v. The Queen, an earlier case, found that “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.”6
There must be more than just luck, hope or a desire to win; there must be a planned and reasonable expectation of making a profit that follows business-like conduct.7 While the frequency of gambling activities is of little relevance, the taxpayer’s skill, knowledge and discipline should be considered in determining commerciality.8 It is the various weights assigned to these factors that influence the objective findings of “business-like” behaviour under the Stewart test. As the cases demonstrate, this determination is not always clear.
4. The raise: Historical cases
There has been a general reluctance shown by both the Courts and the Minister of Finance to claim that gambling activities constitute a source of income, which has led to an increasingly high bar for gambling activities to qualify. This is likely explained by the observation by Benjamin Alarie that the vast majority of gamblers lose money overall, combined with the fact that such losses could be deducted against all other sources of income.9
Prior to the quadrilogy of recent cases, Cohen v. The Queen served as the seminal poker decision in Canada, where the Court found against the taxpayer, who had claimed a loss of $121,991.43 for the year. Unlike the recent cases, in Cohen, the taxpayer sought to deduct poker losses and business expenses, and the CRA reassessed the taxpayer as a hobbyist who was not in the business of gambling. The Court found that there was no reasonable or planned expectation of winning more than losing, and that there was limited training and no capability of the venture to show a profit. The taxpayer did not prepare a budget and lacked reliable evidence to show there was a well thought-out and executed plan.
The high-water mark for testing a Court’s tolerance in finding business income was Leblanc v. The Queen, which involved the gambling winnings of two brothers who played different sports lotteries in both Ontario and Québec. The brothers hired numerous agents to purchase tickets on their behalf to surpass lottery ticket purchase limits and negotiated discounted rates on their tickets. The brothers consistently won during the taxation years in question (1996 to 1999).
Despite an aggressive betting approach and using a computer program to hedge their betting to come up with a unique method of long-shot wagering, the Court found in Leblanc that: “[t]he appellants are not professional gamblers who assess their risks, minimize them and rely on inside information and knowledge and skill.”10 No “system” was found to exist despite a number of factors to suggest they had a reliable structure for making a profit. Accordingly, the Court concluded the gambling activities were of a personal nature and not business income subject to taxation.
Physical, rather than technical, skills appear to be an obvious tipping point for the Courts in finding for gambling activities being business income. For example, both a seasoned pool player challenging inexperienced and inebriated bar patrons (Luprypa v. The Queen, 97 DTC 1416 (TCC)) or a professional golfer gambling on their own private matches against other players (Dowling v. The Queen, 96 DTC 1250 (TCC)) have been situations where the Court decided against the taxpayer, by including such amounts in income and thus recognizing the presence of a business.
As stated in Leblanc and referred to later within D’Auteuil and Giguère, gambling cases fall into three general categories:
- Cases which involve gambling as a pleasurable pursuit for the player, which are not taxable, including activities that are compulsive and with some sort of organization or system;
- Gambling as an adjunct or incident of business; and
- Taxable gambling gains where the taxpayer uses skill or expertise to earn a livelihood where skill is a significant component.11
When read together, Duhamel, Giguère, D'Auteuil and Bérubé blur the factors of the first category, where gambling is a pleasurable pursuit and engaged in compulsively with some sort of organization or system, while mixing the taxable attributes of the third category, where skill is recognized as a significant contributing factor. Presumably, it is against this analysis and categorization of gambling activities that Chief Justice Bowman (as he then was) saw all four of the cases engage in a detailed but largely irrelevant discussion of whether poker is a game of skill.
Hundreds of paragraphs of these four cases were dedicated to determining the level of skill present in poker and whether skill determined success. The cases all concluded that some element of skill was involved in poker but made no direct conclusion as to whether each individual relied solely on skill to consistently earn income.12
5. The Flop: The Duhamel and Giguère cases
The analysis and decisions from the Duhamel and Giguère cases are difficult to compare, as they seem to reach contrary conclusions given similar contextual background and facts. Both Mr. Duhamel and Mr. Giguère were successful professional poker players living similar lifestyles and appeared to run in the same social circles.
In particular, Duhamel suggests a fairly high bar that is in line with current jurisprudence, while Giguère appears to set a much lower bar for gambling activities to constitute business income.
Gutshot straight – Duhamel
Duhamel includes extensive facts, detailed use of expert testimony and evidence across a variety of topics, such as winnings, business structures, sponsorship agreements and analysis under the Tax Act. Justice Lafleur’s 255-paragraph decision focuses on a singular narrow issue: whether the net winnings from Mr. Duhamel’s poker gaming activities should be included in computing his income as business income under section 3 and 9 of the Tax Act. The taxpayer was successful and the Court concluded that “net winnings from Mr. Duhamel’s poker gaming activities are not to be included in computing his [business income] under sections 3 and 9.”
At first glance, Mr. Duhamel’s poker success and associated winnings appeared to fall comfortably under the category of business income, given several factors presented by the respondents. The evidence was that Mr. Duhamel used mitigation strategies, published a book, analyzed opponents, received sponsorship income, played in charitable poker tournaments and hired an agent to manage profit-sharing agreements. By all accounts, it appeared that this venture was more than just mere hobby or entertainment, especially considering Mr. Duhamel’s victory at the 2010 World Series of Poker Main Event.
Testimony revealed a significantly more carefree approach that disclosed little training and little theory of advanced poker strategies or other advantages used that would lean in favour of a finding of commerciality. While Mr. Duhamel occasionally watched YouTube videos and browsed poker news sites, this was not sufficient to constitute training. Furthermore, he did not seek a profit by providing any courses to the public. The Court noted that table placements at tournaments are determined at random, making it obvious that players cannot study games in advance. In addition, the mathematical knowledge necessary to play poker does not require advanced training. The agents hired to manage interviews and media were not involved in the management of poker activities, as Mr. Duhamel registered and organized his trips personally.
Mr. Duhamel had other sources of income, including dividend payments from his subcompany, income from investment portfolios, sponsorship income and speaking engagements. Even though most this income can be said to have originated from his success as a poker player, the Court was not convinced that his sole or main occupation was related to gambling activities. The Court refused to find this factor relevant, noting that the activities of the subcompany and the activities of Mr. Duhamel were distinct. The subcompany was a clear separate legal entity that paid corporate tax and included sponsorship income, poker winnings and appearance fees.
Other evidence in favour of finding no commerciality included the fact that no separate banking account or credit card was opened for a gambling business, there was no business plan, no records of winnings and losses and no serious preparation for tournaments with high entry fees.
The Duhamel decision, on its own, fits neatly with the jurisprudence and it is surprising that the matter reached the trial stage. In Duhamel, the Minister simply had bad facts, particularly when looking at the arguments that conflate separate activities of the individual taxpayer and his related corporate entities. The result is that Mr. Duhamel did not need to pay taxes on a windfall “lucky break” in his poker playing, and this result is reconcilable with the jurisprudence.
2-7 Offsuit – Giguère
Like Duhamel, there was a singular narrow issue for the Court to decide in Giguère; namely, whether the net winnings from Mr. Giguère's poker gaming activities should be included in computing his income as income from a source that is a business.
Whereas Duhamel focused on the details of how specific income was made (sponsorship, poker winnings, appearance fees, etc.) and the specific business structure of the taxpayer’s corporate entities, Giguère paints “poker activities” with a broad brush without going into the same level of detail on the different activities or income sources. This was likely due, in part, to the fact that Mr. Giguère was not receiving sponsorship or appearance fees, and there was no discussion of separate legal identities as in Duhamel.
Justice Favreau found at paragraph 129:
…I conclude that, on a balance of probabilities, the appellant had a subjective intention to make a profit by engaging in his poker activities and that he was using his expertise and skills to make a living at poker, a game of chance where skill is a strong factor.
The Court focused its analysis and conclusion on the taxpayer’s ability to profit and make a living due to Mr. Giguère's gambling activities. This contrasts with Duhamel, which focused on the “commerciality” of the poker activity itself.
The factors that appear to weigh most heavily in favour of the finding that the taxpayer operated a business in Giguère include playing a high number of hands against lower-skilled players, use of third-party applications and use of profit-sharing agreements.
Giguère creates uncertainty when addressing the practical realities of online poker play for a number of reasons:
- Any skilled poker player who regularly plays online against random opponents will be playing against lower-skilled players. It is unclear how the Court found that Mr. Giguère was able to consistently play against lower-skilled opponents online to systematically make a profit.
- There was no discussion of how third-party applications increased the probability of winning or how the use of these applications led to increased profits as part of a systematic approach to gambling (for example, success before and after the use of third-party applications).
- Furthermore, profit-sharing agreements are unilaterally characterized in Giguère as a risk mitigation strategy and indicative of commercialization of the gambling activities, rather than as part of the social nuances of entering in-person tournaments with friends, as seen in Duhamel.
The single largest factor in deciding the case appears to have been the ability for Mr. Giguère to make a profit and earn a living from his gambling activities. If a person can reliably and regularly earn an income by playing poker, Giguère suggests such winnings will be taxed as income from such a source. This approach strongly favours a results-based analysis, rather than income being a by-product of either training, or the presence of a business plan, or careful considerations of profit and loss.
6. The turn – D'Auteuil and Bérubé
The D'Auteuil and Bérubé decisions are nearly carbon copies of each other and generally follow the Giguère analysis. All three cases were written by Justice Favreau and contain similar themes and trends in how various pieces of evidence are weighted. Both the D'Auteuil and Bérubé cases rely heavily, indeed almost exclusively, on the Moldowan factor that a business is found where there is an “ability of the person to make a profit.” This results-based approach places primary importance on the fact that the taxpayers made money. Analysis of other commercial factors or detailing the presence of a system received only passing analysis.
In answering the legal test posed in Stewart v. Canada – “Does the taxpayer intend to carry on an activity for the purpose of making a profit and is there evidence to support this intention?” – Justice Favreau focuses his discussion primarily on the evidence that the taxpayer made a profit overall. In contrast, Duhamel sees Justice Lafleur primarily tie her analysis to Stewart and specifically focus on the commerciality of the evidence throughout the decision.13
The judgment in each of the D'Auteuil and Bérubé decisions are as follows in paragraphs 120 and 115, respectively:
Despite his extraordinary lifestyle and his propensity to always want to play at the very high stakes tables, the Appellant behaved like a serious businessman. He played poker to win. He avoided playing against certain opponents and he adapted his game according to his "bankroll" to avoid situations that were too perilous. The Appellant adopted objective standards for risk management and minimization. When he participated in face-to-face tournaments, he shared and sold shares to other players based on tournament entry costs. He also occasionally took participation in tournaments in which Martin Fournier Giguère participated for amounts between $100,000 and $150,000.
And from the Bérubé decision:
Despite his extraordinary lifestyle and his propensity to always want to ridicule his opponents, the Appellant behaved like serious businessmen. He didn't need accounting records or business plans. He played to win and he knew how to achieve his goal. He avoided playing against certain players or he played with more caution. He adapted his game according to his "bankroll" to avoid situations that were too perilous. The Appellant adopted objective standards for risk management and minimization. He played on several tables at once in order to maximize his chances of winning in the shortest amount of playing time.
These decisions leave important questions unanswered, including the extent to which third-party software applications can positively affect player profit margins and whether a distinction exists between high-volume online play and in-person high-stakes tournaments (each involving separate considerations for risk management and software usage when looking at commerciality).
7. The river: Bottom line
A taxpayer would be forgiven if reading these recent cases left more questions than answers regarding the tax treatment of poker activities. Collectively, the cases do not provide any bright-line rules and it is hard to anticipate whether a taxpayer would be taxed in different hypothetical situations. Contextual analysis provides little guidance on definitions of terms like commerciality.
The cases do not outright conflict with each other or read as having unreconcilable results. These decisions ultimately reached reasonable common-sense conclusions, considering that all of the individuals were professional poker players who made significant gains over the course of impressive careers playing poker. The real ambiguity arises from the fact that the cases have missed an opportunity to establish a complete and predictable framework for taxpayers to understand the tax implications of their gambling activities. In fact, these cases appear to take a step back in terms of critically looking at factors that speak to distinguishing business income.
One factor that is clear on a plain reading of the decisions is that the more successful the poker player, the more likely gambling activities will constitute a pursuit of profit and subsequently be included as business income (and taxable).
A strange irony is revealed in that Mr. Duhamel was found not to intend to make a living by regularly playing poker (and by extension, not operate a business by gambling), largely because the winnings and sponsorship agreement from the World Series of Poker Main Event provided sufficient one-off income on their own, enough for Mr. Duhamel to treat poker as a hobby or entertainment from that point on, rather than a way to earn a living year after year. Mr. Duhamel’s success as a world series winner enabled him to diversify his income sources through dividends, sponsorship and appearances, and ultimately resulted in the Court finding that he had no subjective intent to make a living playing poker.
In Giguère, D'Auteuil and Bérubé, the Court focused primarily on evidence of personal financial success, such as yearly revenue, coaching income, the cost of properties purchased from winnings, the sale of online account balances, net worth and profit, rather than more traditional commercial factors. It is questionable whether a Court would come to the same conclusion if, instead of “making a living,” Mr. Giguère’s activities resulted in claiming large capital losses year after year. Duhamel avoids this problematic and contradictory hypothetical situation by looking at the way the activities were carried out rather than focusing on the amounts earned.
The decisions raise additional questions about how pay-sharing agreements should be treated by the Courts as a risk reduction strategy. In Duhamel, the Court viewed entry-sharing and winnings-sharing agreements to be an insignificant risk mitigation strategy when compared to the number of in-person and online tournaments played by Mr. Duhamel. This nuance is not present in Giguère, which begins and ends its analysis at the mere presence of such agreements.
The opposing views of Justice Lafleur and Justice Favreau is most clear considering paragraph 248 of the Duhamel decision, where Mr. Giguère’s testimony is referenced.
In addition, although one of the purposes of gain-sharing agreements with other participants is risk management, the Court also takes into account Mr. Duhamel's testimony that such agreements are entered into to create a team spirit and not to minimize the potential for losses. The testimony of Mr. Fournier-Giguère, who signed such an agreement with Mr. Duhamel, tends to confirm the purpose of these agreements, since Mr. Fournier-Giguère returned to Las Vegas in November 2010 to attend the final table, although he had lost in the first days of this tournament that began in July 2010.
Giguère appears particularly problematic for taxpayers, as the wording of its conclusion follows an approach previously dismissed by Chief Justice Bowman (as he then was) at paragraph 42 of Leblanc in 2006:
[…] If I understand it correctly it is this: since you won it proves you must have had a system and therefore a business. If you had lost it would have proved you had no system and therefore no business and you could not have deducted your losses. This contention is about as classic an exposition as I have ever seen of the logical fallacy post hoc ergo propter hoc.
Like the Minister in Radonjic, the Court in Giguère concluded that Mr. Giguère had a “strategy” but does not provide any meaningful explanation of how this strategy was put into place.14 Playing high-volume hands on low-limit tables does not guarantee success and no evidence for how the appellants were able to choose weaker opponents over time was provided.
It is difficult to give insight into how the Giguère,D'Auteuil and Bérubé decisions will shape jurisprudence or taxpayer behaviour moving forward. These cases loosely describe the use of software, statistics and win tracking but do not actually detail the types of strategies, commercialization, or business-like behaviour these tools facilitated in earning a profit. There is no distinction as to whether there is a business-like use of these software applications for gain in profit or if the mere presence of such tools implies an adverse inference.
Taxpayers hoping to avoid inadvertently operating a business as part of their regular gambling activities should take care to limit the number of tables being played simultaneously. Furthermore, the use of third-party software should be completely avoided or at least disabled when such applications track the win rate or relative success of opponents.
At face value, Mr. Giguère, Mr. D'Auteuil and Mr. Bérubé simply played online poker on their computers on an intense and regular basis over an extended period of time. The conclusions in these latter cases appear to be largely supported by the Leblanc fallacy that, because someone happens to win more than they lost during the years in question, they must have had a system and therefore their winnings should be treated as business income.
Perhaps the issue these decisions present is best characterized by looking at the inverse situation. Would CRA be comfortable with Canadian taxpayers claiming millions of dollars in losses while demonstrating little regard for common business practices, such as having a business plan or bookkeeping, and demonstrating behaviours more akin to addiction rather than commercialization?
8. Split pot: Conclusion
Whereas Duhamel provided a sense of finality for taxpayers and CRA alike, Giguère, D’Auteuil and Bérubé have immediately reshuffled the deck and introduced a new level of uncertainty. In particular, there is uncertainty over the judicial treatment of profit-sharing agreements and to what extent commercial factors are influenced by the availability of tools for online poker players.
Gambling activities and access to gambling activities continue to increase at an astronomic rate in Canada. For example, sports betting is more common than casino table games and is almost as popular as the use of electronic gambling machines.15 Widespread engagement and profit in sports betting exists today and invites the use of third-party tracking and performance applications similar to those available in poker. These cases will be relevant for sports betting matters, as it is not difficult to draw comparisons to the poker market and tools available.
The CRA acknowledges that “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.”16 The Giguère, D’Auteuil and Bérubé decisions have fallen under this exception, which effectively opens the door to the taxation of players who play regularly and use third-party apps to seek a profit from gambling activities.
Perhaps the best tax advice was delivered by Kenny Rogers: “You never count your money when you're sittin' at the table / There'll be time enough for countin' when the dealin's done.”
Prior to going all-in and addressing matters of gambling winnings or losses with CRA personally, reach out to the authors of this article or any member of BLG’s Tax Group, particularly if you become subject to a tax audit.