If you won the lottery tomorrow, what’s the first thing you’d do? Would you track down a mint 66 Shelby? Or travel the globe to exotic destinations? No matter what your dreams are, if your winnings are from a Canadian lottery, you’ll be able to enjoy the entire amount tax-free.
Canadians are in luck when it comes to lottery winnings! Winnings from a Canadian lottery such Lotto Max or 649 are considered to be windfalls. Even winnings from a sweepstakes or lottery sponsored by a charitable organization are generally tax-free. Everything from your local hockey team’s 50/50 draw to the Big Brothers/Big Sisters travel lotto vouchers is included in the windfall category and therefore exempt from tax.
The Canada Revenue Agency (CRA) does not require you to pay tax on the winnings themselves. However, as with most other types of income, you will be subject to tax on any money your windfall generates. If you simply put your millions in the bank, only the interest your money makes will be taxable.
If you score big from a Canadian casino, your winnings will be treated the same as other lotteries and usually remain tax-free.
However, over the past few years, CRA has begun to examine its policies for professional gamblers, classifying “winnings” as business income and therefore taxable like any other business income. At the same time, this also means professional gamblers can claim business expenses. For example, if you’re considered to be a self-employed professional poker player under this theory, you could deduct all of your travel expenses, tournament fees, etc. from any winnings. If you didn’t win enough to cover the expenses, you’d be able to claim a business loss.
Prizes won from your place of employment aren’t always tax-free. Cash awards or near-cash awards such as gift cards, are almost always considered to be taxable employment benefits. This means the award will be considered 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.
What Happens in Vegas Stays in Vegas…
And that includes a portion of your windfall from all US casinos and lotteries.
Heading south of the border to strike it rich in a casino, or pick up a US Powerball ticket may be tempting, but the US Internal Revenue Service (IRS) has a different approach to your lottery winnings than the CRA, and considers all winnings to be taxable. What does that mean for you? As a Canadian winning a US lottery you would still be responsible for American tax obligations. With a lottery winning you would have to file a US tax return. And if you hit the jackpot at a casino, 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.
Hitting the jackpot is a dream for most people, and as Canadians we’re lucky that most of our winnings won’t be taxed.