DON’T BET ON IT

Two items crossed my desk at about the same time last week and I found the juxtaposition of them provocative. The first is the report of the Tax Court’s decision in Zsebok, 2012 TCC 99; the other is CRA technical interpretation 2012-0432251E5. Together they reminded me of something I’ve always found weird about our income tax system.

The Zsebok case is straightforward enough. The taxpayer was very active in on-line stock trading. He wasn’t very successful and ran up losses for several years. He deducted them as business losses; the CRA assessed them on capital account. In allowing the appeal, the court pointed out that losses incurred in the course of securities trading are business losses in two situations. One is where the taxpayer is a “trader or dealer” in securities; the other is when the securities trading is part of an adventure in the nature of trade. The court decided this case on the adventure in the nature of trade basis. In the course of doing so the judge observed: “If the tables were turned and he had managed to make the profits he dreamed of, I cannot for one moment imagine the Minister characterizing his activities as being consistent with an intention to acquire the shares as a long-term capital investment.” Apart from its interest as an example of a non-trader winning the right to deduct business losses, there’s not too much of interest here.

In the technical interpretation, the CRA was asked whether the income from playing online poker is taxable. It confirmed its general position (outlined in IT-334R2) that the income is only taxable if the gambling activity is organized as a business. If it is not, the winnings (and any losses) are not counted for income tax purposes. (A recent article by Benjamin Alarie, “The Taxation of Winnings from Poker and Other Gambling Activities in Canada,” (2011),59 Canadian Tax Journal, no.4, p.731, was not cited by the court, but is a very useful summary of the law on this point.)

I’ve often wondered why we don’t tax lottery and incidental gambling winnings in Canada. Work hard at your business or employment and we’ll reward you with a tax liability. Be frivolous and win at gambling or the lottery, and you’re home tax free. With lottery prizes now in the mega millions, it seems strange that governments haven’t moved to tax these winnings. (They’ve made sure that just about everything else that moves is taxed.) Come to think of it, I haven’t heard anything from the currently noisy 99% that these amounts should be subject to tax, either, in addition to the increased taxes they want on the 1%. Anybody want to bet we’re likely to see a change in these tax rules anytime soon?