Published: September 11, 2023
Introduction: One-of-a-Kind Trading Card Sold by Canadian to Famous Rapper Post Malone
“Magic: The Gathering”,tm a collectible trading card game (or “TCG”) produced by the publishing company Wizards of the Coast, has become (since its release in 1993) one of the world’s most popular trading card games by both revenue (with over $1 billion USD in new card sales a year) and player count (with over 35 million players worldwide since 2018). Unlike hockey or baseball cards, Magic: The Gathering cards are designed for use in a tactics-based tabletop games between players, with its own proprietary rulesets. Tournament circuits sanctioned by Wizards of the Coast like Grand Prix, which have occasionally been hosted in Toronto, Montreal and Ottawa, can attract thousands of players and traders worldwide for major event play, lucrative side-events, or just for casual friendly play. A complex secondary market has also formed for buying and selling “singles”, or single Magic: The Gathering cards, so players can acquire specific rare cards for their collections or to assemble more powerful and interesting card decks. This combination of collecting, trading and playing with Magic: The Gathering cards means any player can hold a number of unique personal and profit-driven reasons for engaging in the hobby. As we will see, this can create complex issues for Canadian tax law purposes.
In July 2023, Wizards of the Coast released its newest set, “Lord of the Rings: Tales of Middle Earth”, tm a fully-fledged card set themed around the eponymous works of J.J.R. Tolkien. To promote the release of its new set, Wizards of the Coast released a series of special-edition collector’s boosters, containing unique cards with alternate art, and a number of unique, serialized cards representing some of Tolkien’s more celebrated characters and creations. A one-of-a-kind serialized copy of the “The One Ring”, depicting the eponymous Ring of Sauron from the book series, was included in the production sheets of the set’s collector’s boosters for one lucky player to find. In the flurry of media attention that followed the announcement of the collector’s boosters by Wizards of the Coast, major global card stores including Dave and Adams in the U.S.A. and Gremio de Dragones in Spain announced open offers worth millions of dollars to purchase The One Ring from the one lucky player who would open it. And as reported by CBC News, that lucky player happens to be a native to our fair city, Toronto, Ontario. The One Ring was eventually sold to Austin Richard Post, better known by his stage name “Post Malone”, for $2.64 million in a private sale.
This exciting event presents a unique opportunity to how TCGs and collectible card games (“CCG”) actually intersect with Canadian tax law. The purpose of this article is to explore many of the fundamental principles that underly taxation of income in Canada in the context of TCGs including Magic: The Gathering, including source theory income and windfall gains, and the importance of classifying profit as income or capital gains for Canadian tax purposes. And while this article may be framed around the now-famous discovery of The One Ring, we hope to explain how many of these principles might apply to a wide variety of TCG/CCG players, hobbyists and collectors. This article will conclude by providing some pro tax tips around maintaining records of your trades and transactions, and some frequently-asked questions concerning Canadian tax law.
Determining Whether Your Trading Card Ventures May Result in Taxable Income
The first and immediate complication with determining the Canadian tax treatment of acquiring and trading Magic: The Gathering cards originates with the nature of income for tax purposes. Under section 3 of the Canadian Income Tax Act, a taxpayer’s income explicitly includes all income from a productive “source” inside or outside of Canada. Section 3 provides a list of productive sources of income, including:
- business; and
While section 3 provides a list of enumerated productive sources, the definition of “income from all sources inside or outside of Canada” is not limited to the examples above. Income can still arise from other sources. Canadian tax courts have concluded that an income source should have one or more of the following characteristics:
- it recurs on a periodic basis;
- it involves an organized activity, effort or pursuit on the part of the taxpayer (like providing services, a business or from sale of property);
- it involves a marketplace exchange;
- it gives rise to an enforceable payment; and/or
- where it involves a business or property, there is a pursuit of profit.
Canadian tax courts have reinforced the view that if income does not fall within a recognized productive source, then it is not taxable for purposes of the Income Tax Act. Canadian tax courts have generally accepted that windfall gains, gifts, inheritance, strike pay for employees and lottery winning are not considered “sources” for income tax purposes. This is because, broadly speaking, none of the above-listed receipts flow from a “productive” source of income. That is to say, these are each irregular and non-recurring amounts that a taxpayer may receive, but not because of an organized effort to earn income, and rather because of probabilities, irrational decision-making or unforeseen circumstances.
For TCG players like Magic: The Gathering players, this rule is very relevant. Suppose for example a taxpayer participates in an organized tournament and places high enough in standings to earn a non-cash prize of packs or cards, or even a substantial cash prize. If that taxpayer is viewed as a hobbyist, then those prizes may not form taxable income on receipt (however, that taxpayer may have taxable income if he or she chooses to re-sell those non-cash prizes as a later date, which this article will address below). If that activity is viewed as business activity, then those cash earnings could be characterized as business income, and any non-cash prizes could be viewed as property income. Determining whether tournament winnings form a source of income often arises in the context of poker winnings, where it is widely considered that skilled players can significantly increase their chances of winning and profiting.
Determining how to characterize a taxpayer’s activities as a taxable source of income or if a particular activity was personal in nature and thus does not form a source of income was laid out by the Supreme Court of Canada in Stewart v Canada, 2002 SCC 46. There are two parts to the Stewart test, that need to be answered in sequence to determine whether a taxpayer’s activities constitute a source of business income or property income, and which this article will explore below:
- Was the taxpayer’s activity undertaken in pursuit of profit, or was it a personal endeavour?
- If it was not a personal endeavour, was the source of the income a business or property?
Test 1: Is the Taxpayer’s Activity Undertaken in Pursuit of Profit?
Under the first prong of the test, it must be asked if the taxpayer’s activity was undertaken with the predominant intention in pursuit of profit, or whether it was a personal endeavour. The answer to this question will ultimately turn on whether the activity was undertaken in a sufficiently “commercial” manner. Even if a taxpayer’s activities are personal endeavour, if there is evidence those activities were sufficiently commercial in nature, then the activities will likely be considered in pursuit of profit and forming a source of income.
Whether a venture is undertaken in a commercial manner depends on the subjective intentions of the taxpayer, evidenced by objective factors surrounding the taxpayer’s behaviour to support what the taxpayer’s intentions truly were. Thus, the taxpayer must have the predominant intention of profiting when engaging in a particular activity, and must carry out that activity in accordance with objective standards of businesslike behaviour. Canadian courts have recognized a number of objective factors that may play into this evaluation, including (i) the profits and losses of the taxpayer in recent years, (ii) the taxpayer’s level of training concerning the activity, (iii) the taxpayer’s intended course of action concerning the activity, and (iv) the capability of the taxpayer’s venture to show a profit.
The above-listed factors are not exhaustive, and the relevant factors pushing toward any determination will fall on the nature and extent of a taxpayer’s engagement with the hobby. In the case of a TCG like Magic: The Gathering, there is inherently a personal or hobby element to the activity, as opposed to other clearly commercial endeavours like running a law practice or a restaurant. For example, a player may study particular strategies and decklists and subscribe to podcasts and resources to learn more about a particular play format for an upcoming tournament. That same player may buy and sell cards on the secondary market, sometimes for profit when a card spikes in value and sometimes to simply acquire cards for a new deck to play with. Another player might travel worldwide to attend Grand Prix and Regional Championship Qualifiers, but for the experience of travelling and never with the hope of actually becoming a professional player. A taxpayer who actively monitors market trends for cards in demand, maintains and reviews records of purchases and sales of cards, tries to take advantage of arbitrage between vendors and traders, and who regularly attends sanctioned tournaments and places high while earning prizes may exhibit the degree of commercial intent required for those activities to be characterized as in pursuit of profit.
Test 2: If the Venture is Undertaken in Pursuit of Profit, is it Business or Property Income?
The second prong of the test explores, in cases where the taxpayer’s activities are not a personal endeavour and there is a predominant intention to earn a profit, how to characterize those gains or losses. As addressed above, where that hobby is elevated to a business activity, there may be immediate tax consequences for the taxpayer. And there may nevertheless be an income inclusion when a taxpayer receives and later disposes of cards for cash or in exchange for other cards, such as where a taxpayer opens a valuable card from a randomized booster pack or receives a non-cash prize for placing in a tournament (disposing of cards and prizes on the secondary market is a separate and clearly commercially-driven activity, that is treated as distinct from the circumstances of the taxpayer acquiring that property.) Any resulting gain or loss from that sale or commercial activity will ultimately be reportable on income or on capital account (i.e. as income from a business, or income from property).
The Income Tax Act recognizes two major categories of property for income tax purposes:
- capital property, the disposal of which results in a capital gain or loss (and which could be personal-use-property or listed personal property as well, and as will be explored below); and
- inventory, this disposal of which results in a business income or loss.
It is the type of income produced when a property is sold that determines whether that property is capital property or inventory, and the subsequent tax treatment of those gains or losses. Determining whether the profit or loss from a disposition of property should be on account of capital or income has been subject to extensive litigation in Canadian tax courts, and to answer this question, courts have considered a variety of factors, including:
- Transaction frequency – for instance, a higher frequency of purchases and sales of trading cards may point to a business;
- Duration of ownership – for instance, keeping trading cards for short periods of time indicates commercial activities rather than capital investments;
- Understanding of trading card marketplaces – more knowledge or expertise with trading card markets favours a business categorization;
- Relationship to the taxpayer’s other employment; for instance, if trading card trades (or similar activities) are a component of the taxpayer’s employment or other business, it indicates toward business;
- Time invested – for instance, there is a higher change that the taxpayer will be classified as operating a business if a significant portion of that taxpayer’s time is spent researching potential acquisitions, analyzing trading card markets, or actively managing a trading card collection;
- Financial support – for instance, leveraged trading card transactions would signify a business; and
- Advertising – for instance, there is a greater chance that the taxpayer’s trading card activities would be characterized as a business if the taxpayer had advertised those activities as a business.
In the end, the taxpayer’s purpose at the time of purchasing the property is the most crucial factor that courts consider when deciding whether a disposition of property resulted in a capital gain or business income. The Tax Court of Canada and the Canada Revenue Agency will pay attention to the objective circumstances surrounding both the acquisition and sale of the property in order to determine a taxpayer’s purpose for acquiring the property. This will be the case even if only a single property is acquired and sold (often referred to as “an adventure or concern in the nature of trade”).
Broadly speaking, characterizing proceeds from a transaction as capital gains is better for a taxpayer than receiving business income because only half of a taxpayer’s capital gains are treated as taxable income. The appropriate characterization of a Canadian taxpayer’s trading card activities as a business or as investing is a very fact-specific analysis, depending heavily on the taxpayer’s intentions at the time of purchasing those trading cards and whether those trading cards were purchased with the intention of trading.
The One Ring incident provides an appropriate backdrop to explore this rule further. In the case of The One Ring, the card was sold, very soon after being discovered, for a substantial profit. The taxpayer who sold the card had also acquired it from a range of randomized collector’s boosters, which were marketed and sold by Wizards of the Coast to serious collectors and re-sellers who understood the monetary value of the cards they could potentially open. These are both significant factors that would push toward characterizing the sale of The One Ring as an adventure or concern in the nature of trade. If the taxpayer’s knowledge of trading card markets is limited, or if there is other objective evidence to show the taxpayer intended to hold the cards he had acquired for significantly longer than the few months he held The One Ring, then these would be data points pushing toward a characterization of the sale as on capital account, with more favourable tax treatment. While a taxpayer’s business income is fully taxable income, only half of a taxpayer’s capital gains is treated as taxable income. So, broadly speaking, characterizing proceeds from a transaction as capital gains is better for a taxpayer than receiving business income. These are very complex and nuanced tax rules that depend on the unique circumstances of each taxpayer, and so a definitive determination would not be possible without more thorough analysis. This case also highlights the benefits of speaking with an expert Toronto tax lawyer to discuss the potential tax implications of buying and selling cards for your collection, to avoid potentially violating Canadian tax rules and underreporting income as required. If you are an active TCG/CCG trader or player with signification earnings and trades, you should consult with a Canadian tax lawyer to discuss your circumstances and ensure you are on the right side of the law.
Personal-Use Property Rules May Effectively Exempt Hobbyists from Reporting Obligations
It may come as a surprise to learn that many of your trades are taxable under Canadian law, even if you did not set out to run a trading business or truly earn a profit. The Canadian tax system is not entirely unforgiving, however. For property that would be treated as capital property, the personal-use-property rules under the Income Tax Act provide a window for hobbyists to avoid tax obligations related to their trades in specific circumstances.
The Canadian Income Tax Act defines “personal use property” (“PUP”) as including any property owned by a taxpayer used primarily for personal use or enjoyment of the taxpayer or somebody who is related to the taxpayer. This might include vehicles and furniture, or other personal effects, but can certainly include art and collectibles like trading cards. For personal-use-property, the Income Tax Act provides that the proceeds when disposing of personal-use-property will be the greater of $1,000 (the “floor”), and the actual proceeds the taxpayer received. In turn, the adjusted cost base of the personal-use-property will be deemed to be the greater of $1,000 and the actual adjusted cost base of the personal-use-property . As a result, where a taxpayer disposes of personal-use-property with an adjusted cost base of less than $1,000, and for proceeds of less than $1,000, then the proceeds of disposition will be nil for tax purposes and the proceeds of that disposition will not form taxable income.
It is important to recognize that losses for personal-use-property are not deductible for tax purposes like other capital losses, unless those losses result from the sale of “listed personal property” (“LPP”). The Income Tax Act defines listed personal property as a taxpayer’s personal-use-property that includes: (a) prints, etchings, drawings, painting, sculptures and works of art; (b) jewelry; (c) rare folio, manuscripts or books; (d) stamps; and (e) coins. To the extent that a taxpayer has losses related to the disposition of listed personal property, those losses may be deducted when calculating any net gains from the disposition of other listed personal property, and that may be carried back across the 7 taxation years immediately preceding the year in which those losses were incurred. It is important to note that this enumerated list under the Income Tax Act does not address trading cards, and as a result, it is unlikely that trading cards would qualify as listed personal property. As a result, any loses incurred as a result of disposing of trading cards which qualify as personal-use-property and not inventory of a business will likely not be deductible against any proceeds from the sale of other personal-use-property. Canadian trading card players and enthusiasts should become familiar with the PUP/LPP rules under the Income Tax Act to ensure that any sale of personal-use-property that exceeds the enumerated floors is reported correctly on that year’s tax return, and to ensure compliance with all applicable Canadian tax laws, and consult with a top Canadian tax lawyer in the event of any significant profits.
Pro Tax Tip: Be Careful About Classification of Personal-Use-Property as a Set for Tax Purposes
The $1,000 floor rule for personal-use-property is a generous exemption for most Canadian taxpayers. A taxpayer who disposes of personal-use-property to multiple arm’s-length parties can benefit from the rule for each of those transactions, so long as that property remains personal-use-property and does not become inventory of a business. However, the rules are less forgiving in situations where taxpayers might seek to take undue advantage of the $1,000 floor rule to deliberately shelter proceeds from taxation.
The Income Tax Act includes a number of provisions whereby multiple uses of the $1,000 floor rule are restricted in cases where properties originally belonging to a set or series are disposed of separately to the same purchaser or to several non-arm’s length purchasers. This might be the case where a single purchaser (or group of purchasers) agrees to purchase your TGC card collection or a set of rare TGC cards you possess, but across several transactions where the proceeds from each sale are not greater than $1,000. In that case, those transactions are deemed to be a single personal-use-property for the purposes of the $1,000 floor rule, potentially exposing those proceeds of disposition to extensive taxation.
The attributes that qualify personal-use-property as belonging to a “set” are not defined by the Income Tax Act. Whether a particular CCG collection or group of items qualifies as a “set” is a question of fact unique to every case, and there is no single decisive factor. While case law on this definition is limited, the CRA has published a number of documents discussing its own views on the matter. And while the CRA’s published views on Canadian tax law do not have force of law in Canada, they have been recognized by Canadian courts as fundamental tools for the interpretation and application of Canada’s tax laws to other taxpayers. A “set” does not exist simply because two properties are similar. However, if the value of two or more properties, if sold together, exceeds the aggregate of their values if sold individually, this may militate toward the existence of a set. If two or more properties would ordinarily be disposed of together, rather than individually, this may also be indicative of a set.
What this suggests is that a collection of CCG cards may not in of itself qualify as a “set” for the purpose of these rules. There nevertheless remains a risk that a group of collectible cards sold as a group could qualify as a set, given the right circumstances. Given the potential value of collectible cards, the potential tax risk can be significant. If you are arranging to sell or auction your TCG/CCG collections or any other collectibles or cards, we strongly recommend you consult with a top Canadian tax lawyer to avoid any unnecessary tax pitfalls and to explore any tax planning options that may exist for you.
When does an activity form a “source” of income for Canadian tax purposes?
Under section 3 of the Canadian Income Tax Act, a taxpayer’s income explicitly includes all income from a productive “source” inside or outside of Canada, including from an office, employment, business or property. Canadian tax courts have generally accepted that windfall gains, gifts, inheritance, strike pay for employees and lottery winning are not considered “sources” for income tax purposes, because none of the above-listed receipts flow from a “productive” source of income (i.e. they are each irregular and non-recurring amounts that a taxpayer receives and not because of an organized effort to earn income). Whether another receipt will form a source of income is a fact-specific analysis that depends on the commercial nature of the activity and whether it was undertaken in pursuit of profit.
When selling TGC/CCG trading cards in Canada, are those proceeds from a business or proceeds from property, and what are the tax implications of those sales?
Determining whether the profit or loss from a disposition of trading cards should be on account of capital (i.e. from the sale of property) or income (i.e. from a business) depends on a variety of factors, including: (1) transaction frequency involving trading cards; (2) duration of ownership; (3) the taxpayer’s understanding of trading card marketplaces; (4) the relationship between those trading activities and the taxpayer’s other employment; (5) the taxpayer’s time invested in trading cards; (6) whether the taxpayer finances those purchases and sales with leveraged debt; and (7) whether the taxpayer advertises those trading activities as those of a business. Ultimately, the taxpayer’s purpose at the time of purchasing the TCG/CCG trading cards is the most crucial factor that courts consider when deciding whether any disposition resulted in a capital gain or fully-taxable business income.
What is personal-use-property (“PUP”) and listed personal property (“LPP”)?
The Canadian Income Tax Act defines “personal use property” (“PUP”) as including any property owned by a taxpayer used primarily for personal use or enjoyment of the taxpayer or somebody who is related to the taxpayer. This might include vehicles and furniture, or other personal effects, but can certainly include art and collectibles like trading cards. The Income Tax Act defines listed personal property as a taxpayer’s personal-use-property that includes: (a) prints, etchings, drawings, painting, sculptures and works of art; (b) jewelry; (c) rare folio, manuscripts or books; (d) stamps; and (e) coins. The Income Tax Act provides a floor rule of $1,000 for the proceeds of disposition and adjusted cost base of any personal-use-property or listed personal property that a taxpayer disposes of, and as a result, where both are less than $1,000 the proceeds of disposition for tax purposes are treated as nil. However, only losses resulting from the disposition of listed personal property are deductible, and they are only deductible against net gains from the disposition of other listed personal property.
“This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer.”
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."