As most of my regular readers know, my views on Guest Posts are quite simple, but on occasion I do allow for a guest writer, and this is another instance, and this one Tax Tips for Prize Winners, is a useful post. As I am not likely to win anything in the near future, best let someone else describe what to do.
Tax Tips for Prize Winners
By Jennifer Gorman, TurboTax
Earlier this year, it was announced a Mississauga woman had won Canada’s largest lottery jackpot ever – $64 Million. We’ve all dreamed about winning the lottery, retiring early, living a life of luxury and taking vacations at any time. With that said, let’s take a look at what winning the lottery means in terms of taxation for any lucky winners.
Casinos and Lotteries
Canadians are in luck when it comes to lottery and most casino winnings as they are considered windfalls and are tax-free! Even winnings from most sports pools, sweepstakes, or lotteries sponsored by a charitable organization are generally tax-free.
However, while the Canada Revenue Agency (CRA) doesn’t require you to pay tax on the winnings themselves, you are subject to tax on any money your windfall generates. Interest earned from bank accounts, GICs, and savings bonds is considered taxable income and must be reported on your tax return.
Does method of payment for the winning ticket make it taxable? No, method of payment for your ticket, even if it’s given to you as a gift, doesn’t change that the winnings are considered non-taxable windfalls.
Thinking of going pro as a card shark? The CRA has recently begun examining how “winnings” by professional gamblers are treated. Because of the expectation of profit, the theory is that monies won by professional gamblers should be classified as business income and subject to tax like any other type of business income. This means professional gamblers could also deduct related “business” expenses such as travel expenses, tournament fees, and equipment used in gambling. This theory is interesting as it opens to door to claiming a business loss if you didn’t win enough to cover your gambling expenses.
Prizes won through your workplace are generally counted as part of your income. Your employer will deduct income tax, Canada Pension Plan and in some cases, even Employment Insurance premiums on this type of award. Your T4 will have the amount of the taxable benefit listed in box 40.
The one potential exception to this if you win a prize in a draw by a social committee in your workplace. If the social committee, which is entirely funded by employee fundraising, paid for the prize, then any gifts or awards the social committee gives out are non-taxable. This isn’t the case if the committee is funded by the employer, as any gifts or awards the social committee gives out are taxable benefits.
Niagara Falls or Vegas?
While both can be lots of fun, if you hit the jackpot from an American source, your winnings will be taxed. The US Internal Revenue Service (IRS) considers all winnings, even from lotteries, to be taxable. If you hit the jackpot at a US casino, expect a good chunk of those winnings to be withheld by the casino to ensure your tax obligations are met before you even leave the country. Even if you win big from your own home on a US online poker site, for example, your big score will be considered to be American income and taxed accordingly. You may also be required to submit a US tax return the following April to ensure the proper amount of tax was remitted to the IRS.
About Jennifer Gorman:
Jennifer is a tax expert with more than 20 years experience helping Canadians. She enjoys holding seminars in her hometown in Newfoundland to teach seniors and students how to use TurboTax to prepare their own returns.
Site Note: Now just because this article talks about winning at the lottery, this does not mean I want you to go out and buy lottery tickets! That is not the message to take away from this, this is an informational piece about taxation.