Canadian Online Poker Tax Thread

[Tuco]

TCFE,

Thank you for all your (free) advice in this thread. I have a couple questions if you dont mind indulging me.

1. If a player uses a non-canadian bank to withdraw his/her earnings to, does RevCan have any proceedures to find that information or arbitrarily estimate someone's (in the event of an audit) income?

2. If a poker player has a job that pays 50K a year and that player makes 100K on the side playing poker, is it still a hobby if it takes less time than their real job but makes more money?

3. Would a person who makes a large amount each year be better off withdrawing it all at once yearly (as opposed to monthly) so its treated like a windfall?

Thanks for any further advice you can offer.

Tuco.

[TorontoCFE]

Well, to answer your questions (normally I attach the standard disclaimer that this advice is general and may not apply to individual situations so check with proper advisors but I don't like sounding like a lawyer, I prefer direct answers):

1. Canada Revenue Agency can find out about offshore / foreign accounts. However, they need to have a reason to look for one and ask for it from the other government. Relations with the US are much closer and there is some question as to whether there is routine data sharing there (for anti-crime purposes).
That said, they would have to have a reason to suspect something was going on. That would either come from a tip or an audit. In the case of an audit, the auditor is free to estimate your income (if there is reasonable proof it exists) and then the onus shifts to you to prove the estimate is unreasonable - auditors have quite broad power (in the past, an auditor estimated my client's tax due at $700,000 and we had it reduced to $25,000, but we still had to pay up and try to get the money back later).
I could go on and on about how what would make them suspicious or how one can defend oneself, but that is really best left to individual cases. Besides, I am in no way advocating tax evasion. The truth is that it is pretty unlikely the CRA would find out, but if they did then you could face not only tax liabilities but tax evasion charges.

2. One issue that people used to look at was how much time you spent on your hobby. In my opinion, it wouldn't be considered much of a factor any more. It really boils down to expectations. If you meet the factors I mentioned above, then it will be considered a business. Did you know that if you buy stocks, assuming they will quickly go up and intending to hold them for a little while and quickly making a few bucks, is actually considered a business and not a capital gain? - it all comes down to intentions.

If you approach poker as a source of income, I think it's taxable. By definition, a hobby is something you do without expectations of profit. Even if you spend one hour a day playing 200-400 poker, if you know you can beat the game and you pay your mortgage with your winnings, then I believe CRA will come looking for its share some day. The relative share of your income, whether it's 80k job, 10k poker or 10k job, 80k poker, doesn't matter.

3. I thought about this last night. If you make a large withdrawal / deposit, you may get your bank reporting you to FINTRAC, just like a CTR in the US, under the Anti Money Laundering / Terrorist Financing Act. Large deposits will stand out, especially if the bank doesn't know your income source.

On the other hand, if you make your money in large multitable tournaments, then you have a better arguement that it is a windfall and not a business. The problem is that it would be up to you to prove that. Tax-wise, you'd have a better position winning the WSOP and that's it for the year then winning $5 million playing 4 hours a day every day.
If I am making $50-200k/yr at poker, then I may look at setting up a CCPC (small private corporation) with its own bank account, depositing funds there and then paying yourself a salary. Then the poker earnings are taxed but at the lowest possible rate, you can control how much money gets to you and in what form, it is all legal and above board and prevents tax evasion charges - but thats just me.

If you really don't want to declare the income, that's up to you but it carries a risk - not much of one now, but the risk will grow in the next 2-5 years.

[TorontoCFE]

When you are talking about a six-figure poker income, you are definitely safer than sorry. If you have substantial other income, then putting that at risk is not worth it.

I have seen no evidence that earnings the 1st year are treated differently than later years. CRA doesn't care that it's your 1st time making big bucks. It may take them more than a year to catch on, but legally the liability is the same. The facts may be stronger the longer you've been at it, but they will still want their cut of every year.

As for being a professional gambler, I've always said "good, call me that". Then you can deduct a lot potential expenses EVEN WHEN YOU HAVE A LOSING YEAR. If you have a bad year, well then poker losses can be offset against your day job earnings. You can't do that if it's considered just a hobby. If I decide to turn pro and give up my day job, I'd love for CRA to think of me as a pro gambler.

I am in the Toronto area (west end).
While I normally do not do public tax work, I don't mind helping you out.
My day job is as a CFO for a smaller, high-tech company and I do investigative & forensic accounting projects on my own.
Poker is really my 3rd income, but at least I have the poker player's perspective in these matters.

[Equal]

First of all, thank you for all the detailed replies TCFE. Actually that goes for everyone here - I think this is the first tax thread I have read that has really got some great information in it.

[ QUOTE ]
then I may look at setting up a CCPC (small private corporation) with its own bank account, depositing funds there and then paying yourself a salary. Then the poker earnings are taxed but at the lowest possible rate, you can control how much money gets to you and in what form, it is all legal and above board and prevents tax evasion charges - but thats just me.

[/ QUOTE ]

This option interests me. Can you shed some more light on some of the advantages to this?

[TorontoCFE]

Thanks for the nice words.
I think the CCPC route is the best (from my perspective as an accountant and a poker player). I would consider it once you have a regular gaming income in the six-figure range or close to it.

I can outline the mechanics of how it works if someone really wants to go that direction, but essentially the benefits are:

- the bank account is in the corp name, creating a separation between you and the gaming activities. This can be useful if for some reason you don't want people to know you are involved in it (reputation, bitter divorce, business reasons) - it also allows better tracking of gaming income / losses

-you pay yourself a small salary (I'd say $1/yr to minimize payroll taxes and get max benefits), unless you have no day job, then it may make sense to pay yourself up to 80k salary to generate RRSP room. This RRSP room lets you invest earnings for the future and defers current taxes.

-You can deduct all kinds of reasonable, poker related expenses - if an online player, your internet fees, a portion of your home costs (if a place is used only for playing poker online), travel costs to play - a long list almost the same as if its you personally but it looks much cleaner to CRA if done in a corp name.
-The rest of the poker income is taxed when earned at the CCPC rate, about 20%, better than your personal tax rate.

-If you want to get the poker winnings from the corp to you for personal use, you can then choose to remove them as salary, dividends or a capital gain (even as a loan but then it gets complicated). Salary would cost you the most in tax and dividends likely the least and you have freedom to leave profits in the corp forever, pay only the 20% tax when earned, until you need the money and then take the money out later, at a tax-advantageous time.

- If you have a spouse or kids with little/no income, you can give them some shares in the corp and pays them dividends (assuming they know about the poker money). If it's their only income, there would be no taxes payable on it beyond the 20% the corp already paid, thereby lowering your tax total tax liability.

-You have legal protection, if you are acting in the corp's capacity; it has legal responsiblity and not necessarily you. This might be useful in extreme or risky situations.
I'm not sure it would ever be useful for me if I went that route, but if you want to lease a car in the company name or travel to exotic locales, then I can see it being useful.

-the corp would also be available to use in other business opportunities that come up in the future. Working through a corporate structure is the most flexible arrangement possible.

I see the ability to split income and decide on the timing and nature of the income as extremely attractive. It means you can play by the rules and pay the minimal amount of tax legally possible.

I haven't seen anyone using this structure yet (though there may be a lot out there) but I've toyed with it for a couple of years. It may throw CRA for a loop, but once they catch onto the potential of cracking down on gaming income, I bet it will be a popular and accepted tax planning method.

of course, there is a downside:
- cost to incorporate: about $1,000 once

- cost to prepare a corp tax return every year: depends on accountant, about $500/yr.

-occasional legal expenses to maintain the corp books - less than $1,000/yr.

-you have to keep books and records, but of course you should have these as well for yourself in case of an audit.

These costs really aren't too bad when you look at the flexibility you gain. Again, you need a decent regular gaming income to make it worthwhile but if you are in the six-figure range or close, then I'd recommend it (it's what I would do personally).

For the record, this advice can vary or be inappropriate in a given person's situation.
There are many other tax issues to take into consideration and you should spend an hour or two talking with a good advisor to see what you should do. I would need to look at a person's total financial picture to firm up any recommendations.

While I didn't really intend to solict any business, I am ready to help out with general questions and I am willing to discuss individual situations if desired.

[4thstreetpete]

WOW!

This is bar none the best Canadian tax thread ever. I've learned so much from reading this thread than I ever had in the last few years. Thank you to all the posters and a very special thanks to TorontoCFE for all the great advice.

TorontoCFE I see that you are new to this forum. Very glad to have you here. The CCPC info is 'very' interesting. I can see myself and many other canadian readers in this forum
acquiring your services at tax time every year.

I don't know how involved in poker you are since you're so busy but I hope you become a pernament member here on 2+2. I like many others am so glad I found this forum because of threads like this. Your advice is like a goldmine. Thanks again.

I suspect that I may PM you in the future to help me out filling a corp tax return and all the other legal stuff maybe ?..hehe. The costs are very reasonable and you've definately given me a lot to think about that I've never had before. I'll see how my progress goes.

Welcome to the forum.

[Tuco]

I echo all the posters in thanking you for all your help. Of all the threads Ive read here in the last couple years, this one is the most beneficial (to me at least). Its really hard to find someone like yourself who understands poker from the accountant point of view.

I too will PM you if you dont mind to aquire your services. Thanks for the offer.

Tuco.

[TorontoCFE]

Thanks for the kind words.
I have actually been reading the forums for about 5 years, and occasionally posted under a different screen name, mostly on tax issues.
Because I've been so busy, I haven't had a chance to play as much poker lately as I'd like (though that is changing - 57% ITM, 45% ROI online & 2BB/hr live) or as others do so I tend to refrain from commenting on poker, leaving that to others who are better qualified.
But I am usually here if needed.

[Equal]

I really appreciate you taking the time to exhaustively type out these details TCFE - Im sure this is VERY useful information for many of us - I know it is for me.

I am definitely interested in the corp you describe, maybe us Canadians can get a group rate for your services lol?

Playing live tonight I came across an article about taxes in the October 2004 issue of Canadian Poker Player (the one with a close up of a white guy with dark glasses on).

Tomorrow I will try and find it online and perhaps cut and paste it here. If not, I will try and write up a summary.

[messenger309]

Oops. Ok, so I am the source of the 'tax advantageous' quote. As my lawyer said "way to go Einstein" [img]/images/graemlins/smirk.gif[/img] I'll probably be responsible for every 35 year old Rob Baillie getting audited this year.

That being said, as far as I know, ATM transactions are not tracked. Your Neteller would show withdrawals but not where they occured (if you used your debit card).

Also, since the 'gaming events' occur outside Canada are you even earning the money in Canada? Does this make a difference?

If you invest offshore and spend the profit offshore you don't owe tax on it. So if you spent all your Neteller cash outside Canada I don't think you have a tax obligation.

Rob Baillie