Poker champion comes up a winner in excessive stakes showdown with CRA

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Jamie Golombek: Victory comes after nearly a decade battling over thousands and thousands in winnings

Jonathan Duhamel, first Canadian winner of the World Sequence of Poker, celebrates at a press convention in Toronto in 2010. Photograph by ERNEST DOROSZUK/Postmedia

When Quebec poker champion Jonathan Duhamel received the World Sequence of Poker Foremost Occasion in Las Vegas in 2010, a event that got here with a high prize of practically US$9 million, his assumption was that his playing winnings could be tax free. This week, the Tax Court docket of Canada agreed with him, however his victory got here after practically a decade battling the company over the winnings, which included an 11-day trial in Montreal and Ottawa final fall.

Duhamel was 23 when he received the no-limit Texas Maintain’em event, crowning him the world poker champion and propelling him into the higher echelons of the poker world. In October 2010, he entered into an settlement with the web poker web site PokerStars to behave as their spokesperson and take part in promotional occasions in addition to plenty of on-line and face-to-face tournaments. He was paid $1 million for the preliminary yr, and the settlement was renewed yearly till 2015, at decrease quantities.

After his large event win, Duhamel continued to play poker and understand web winnings from his playing actions which finally caught the attention of the tax man. The CRA concluded that Duhamel operated a enterprise by his poker actions, and thus reassessed him, saying he earned enterprise earnings for the 2010, 2011 and 2012 taxation years of $4,866,117, $383,916 and $106,775, respectively, representing his web winnings from the poker tournaments wherein he participated throughout the years in query.

The only real difficulty earlier than the court docket, subsequently, was whether or not the web winnings derived from Duhamel’s poker gaming actions needed to be included within the calculation of his earnings as earnings from a “supply that may be a enterprise” underneath the Earnings Tax Act for the three tax years in query.

In line with Duhamel, since poker is a recreation of likelihood, the winnings from poker playing actions are merely not taxable underneath the Tax Act. That is in keeping with the overall rule in Canada that playing, wagering and lottery winnings are tax free, except the CRA concludes that you’re “carrying on the enterprise of playing.”

Moreover, he argued, even when the court docket have been to conclude that the sport of poker can represent a enterprise regardless of the aspect of likelihood inherent within the recreation, poker was a passion and a leisure exercise for him, and subsequently his winnings shouldn’t be taxed as enterprise earnings. Certainly, prior case legislation reveals that poker playing actions have been solely thought of enterprise earnings if the taxpayer has the “predominant subjective intention” to revenue from the exercise and this exercise was carried out “in accordance with the target requirements of a severe businessman.”

Duhamel argued that his poker gaming actions weren’t a enterprise since he has no coaching within the recreation, no “system” to defy likelihood, nor did he make use of any explicit technique permitting him to win and thus beat the traditional poker odds. In his phrases, taking part in poker “doesn’t give rise to any expectation of revenue within the medium or long run.”

Clearly, the CRA disagreed and argued that Duhamel’s poker actions went “properly past mere leisure and represent a enterprise of a industrial nature … significantly following the conclusion of the PokerStars Settlement,” which required Duhamel to take part in future tournaments with the intention to earn the sponsorship charges.

The court docket went by a prolonged evaluation, starting with the Supreme Court docket of Canada’s seminal 2002 ruling, which established a take a look at to find out whether or not or not a taxpayer has a “supply of earnings.” The best court docket stated that the start line was to determine whether or not the taxpayer’s exercise was undertaken in “pursuit of revenue” or was private. The place there’s a private aspect, the exercise will need to have a ample diploma of “commerciality” to be thought of a supply of earnings.

However, the decide famous, given the character of playing (together with poker), the intention to make a revenue isn’t a figuring out issue within the research of the commerciality of one of these exercise since, ultimately, all poker gamers are motivated by the pursuit of revenue. Consequently, case legislation has developed further elements that have to be thought of when figuring out whether or not playing actions are carried on in a sufficiently industrial method to represent a supply of earnings for the needs of the Tax Act. These embody the taxpayer’s threat administration or mitigation methods and the information and expertise of the taxpayer.

Finally, the court docket was tasked to resolve whether or not Duhamel’s poker gaming actions have been exercised in a “sufficiently industrial method” to represent a supply of earnings for enterprise for the needs of the Act, or whether or not they’re extra akin to a passion or leisure.

The court docket then went by a prolonged evaluate of Duhamel’s coaching, together with his poker expertise, poker information and competencies, his future profession path, his income and losses from poker over time (together with these years after the years underneath evaluate), Duhamel’s capacity to finally make a revenue long-term by poker actions, and whether or not he employed any sort of threat administration or mitigation system.

The court docket additionally heard professional proof on whether or not the sport of No-Restrict Texas Maintain’em poker is a recreation of likelihood or talent. The taxpayer introduced as an professional witness a PhD in arithmetic, whereas the CRA introduced alongside its personal professional, a PhD in economics. Every professional got here to a special conclusion. Ultimately, nonetheless, neither professional was in a position to persuade the court docket that both likelihood or talent prevailed within the recreation of poker usually.

After reviewing all of the proof and professional testimony, the decide concluded, “on a stability of possibilities,” that Duhamel’s poker gaming actions have been “not carried on in a sufficiently industrial method to represent a supply of enterprise earnings for the needs of the Act.” Accordingly, the web earnings from poker for the years underneath evaluate shouldn’t be taxable.

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Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Property Planning with CIBC Non-public Wealth in Toronto.

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