Article

Canadians and the IRS

However, there is one other important distinction between the two countries - and that is how winnings are taxed. In Canada there is no tax on gambling gains, be they from a lottery, casino or charity draw. Such windfalls accrue directly and entirely to the individual lucky enough to have won the prize.

But in the United States, such winnings are taxed by the Internal Revenue Service prior to being distributed to the winner. Not only that, if he decides to share his good fortune with others, they too will be taxed on whatever largesse they have been granted.

The idea of paying tax on winnings obtained in the United States, when such a windfall would be free of tax at home, apparently bothers many who have been fortunate enough to be in such a situation in the first place.

A recent case in the Tax Court of Canada illustrates this point. In 1995, Jacques Dagenais won over $100,000 US in an American lottery but was disappointed to learn that the IRS withheld approximately one-third of his winnings for state and federal taxes.

Mr. Dagenais filed his 1995 personal income tax return and claimed the amount paid to the US authorities as a foreign tax credit. Revenue Canada disallowed the claim and the taxpayer appealed.

The court upheld Revenue Canada's position on the grounds that Mr. Dagenais did not declare the winnings as income for the year on the basis that such a windfall was not taxable in Canada. Consequently, he should be denied the foreign tax credit that is associated with such winnings. The taxpayer simply had to accept the money, net of any US taxes imposed by the local authorities.

However, under provisions of the Canada-US Tax Treaty, as amended a few years ago, losses incurred through “wagering transactions” that are taxable in one jurisdiction can be offset against similar taxable gains. Thus, if you go to Las Vegas or Atlantic City and win money at the blackjack tables, you need only be taxable on your net winnings if you can prove that you have previously lost money gambling in the United States.

It sounds good, but it may not be all that easy to do. The casino will deduct the statutory amount from your winnings before giving you your payout. You must then file a US income tax return to report the winnings and claim the loss. Calculating the amount of the loss that will be allowed, and the level of proof that will be necessary, is subject to US domestic law.

So the next time you win some money on a junket south of the border, accept your net winnings with a smile and be happy with your good fortune that your payout was a windfall that you never expected.

Article ©2001 The Quarterly Dividend
Reprinted with permission