PHOTO: Jonathan Duhamel, first Canadian winner of the World Series of Poker, celebrates at a press conference in Toronto in 2010. PHOTO BY ERNEST DOROSZUK/POSTMEDIA
Duhamel was 23 when he won the no-limit Texas Hold’em tournament, crowning him the world poker champion and propelling him into the upper echelons of the poker world. In October 2010, he entered into an agreement with the online poker site PokerStars to act as their spokesperson and participate in promotional events as well as a number of online and face-to-face tournaments. He was paid $1 million for the initial year, and the agreement was renewed annually until 2015, at lower amounts.
After his big tournament win, Duhamel continued to play poker and realize net winnings from his gambling activities which ultimately caught the eye of the tax man. The CRA concluded that Duhamel operated a business through his poker activities, and thus reassessed him, saying he earned business income for the 2010, 2011 and 2012 taxation years of $4,866,117, $383,916 and $106,775, respectively, representing his net winnings from the poker tournaments in which he participated during the years in question.
The sole issue before the court, therefore, was whether the net winnings derived from Duhamel’s poker gaming activities had to be included in the calculation of his income as income from a “source that is a business” under the Income Tax Act for the three tax years in question.
According to Duhamel, since poker is a game of chance, the winnings from poker gambling activities are simply not taxable under the Tax Act. This is consistent with the general rule in Canada that gambling, wagering and lottery winnings are tax free, unless the CRA concludes that you are “carrying on the business of gambling.”
Furthermore, he argued, even if the court were to conclude that the game of poker can constitute a business despite the element of chance inherent in the game, poker was a hobby and a leisure activity for him, and therefore his winnings should not be taxed as business income. Indeed, prior case law shows that poker gambling activities were only considered business income if the taxpayer has the “predominant subjective intention” to profit from the activity and this activity was carried out “in accordance with the objective standards of a serious businessman.”
Duhamel argued that his poker gaming activities were not a business since he has no training in the game, no “system” to defy chance, nor did he employ any particular strategy allowing him to win and thus beat the normal poker odds. In his words, playing poker “does not give rise to any expectation of profit in the medium or long term.”
Clearly, the CRA disagreed and argued that Duhamel’s poker activities went “well beyond mere entertainment and constitute a business of a commercial nature … particularly following the conclusion of the PokerStars Agreement,” which required Duhamel to participate in future tournaments in order to earn the sponsorship fees.
The court went through a lengthy analysis, beginning with the Supreme Court of Canada’s seminal 2002 ruling, which established a test to determine whether or not a taxpayer has a “source of income.” The highest court said that the starting point was to ascertain whether the taxpayer’s activity was undertaken in “pursuit of profit” or was personal. Where there is a personal element, the activity must have a sufficient degree of “commerciality” to be considered a source of income.
But, the judge noted, given the nature of gambling (including poker), the intention to make a profit is not a determining factor in the study of the commerciality of this type of activity since, in the end, all poker players are motivated by the pursuit of profit. As a result, case law has developed additional factors that need to be considered when determining whether gambling activities are carried on in a sufficiently commercial manner to constitute a source of income for the purposes of the Tax Act. These include the taxpayer’s risk management or mitigation strategies and the knowledge and skills of the taxpayer.
Ultimately, the court was tasked to decide whether Duhamel’s poker gaming activities were exercised in a “sufficiently commercial manner” to constitute a source of income for business for the purposes of the Act, or whether they are more akin to a hobby or entertainment.
The court then went through a lengthy review of Duhamel’s training, including his poker skills, poker knowledge and competencies, his future career path, his profits and losses from poker over the years (including those years after the years under review), Duhamel’s ability to ultimately make a profit long-term through poker activities, and whether he employed any type of risk management or mitigation system.
The court also heard expert evidence on whether the game of No-Limit Texas Hold’em poker is a game of chance or skill. The taxpayer brought as an expert witness a PhD in mathematics, while the CRA brought along its own expert, a PhD in economics. Each expert came to a different conclusion. In the end, however, neither expert was able to convince the court that either chance or skill prevailed in the game of poker generally.
After reviewing all the evidence and expert testimony, the judge concluded, “on a balance of probabilities,” that Duhamel’s poker gaming activities were “not carried on in a sufficiently commercial manner to constitute a source of business income for the purposes of the Act.” Accordingly, the net earnings from poker for the years under review should not be taxable.
Jamie.Golombek@cibc.com CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth in Toronto.