Published: April 16, 2021
Last Updated: August 10, 2021
Introduction – Fantasy Sports and Tax Law
Fantasy sport is a type of competition where participants select and assemble their own virtual teams with real players of a professional sport such as the English Premier League of Soccer, NBA, MLB, NHL and NFL. These virtual teams compete with each other based on the performance of the real players selected on each team. With the growth of the internet as well as sports analytics, fantasy sports have grown from informal games played between friends offline to a global market worth around $20.4 billion USD in 2020.
With this growth comes various legal questions regarding fantasy sports. One of the most important legal questions for Canadian taxpayers is whether fantasy sports winnings are considered taxable income under the Income Tax Act and whether there are any other tax law implications for participating in fantasy sports leagues with real money at stake.
The Canadian parliament has not passed any legislation nor has the CRA issued policy statements specifically regarding the tax law implications of fantasy sports. Nevertheless, the tax implication of fantasy sports income can be analysed by an experienced Canadian tax lawyer through the general principles of Canadian income tax law as well as existing tax case law on sports gambling and gambling generally.
Taxation of Gambling under the Income Tax Act
While gambling and gambling winnings are legally defined terms under a number of Canadian laws, such as Ontario’s Gaming Control Act, the Income Tax Act does not define what gambling is, nor does it define gambling income. Instead, the Income Tax Act defines four taxable sources of income. These are:
- Office
- Employment
- Business
- Property
Any income falling outside the above four categories is considered income from “Other sources” and not taxable; these would typically include gifts, windfalls, and lottery winnings. Therefore, the determination of the taxation of gambling income will depend on whether the gambling income can be traced from one of the four taxable sources, which would make them taxable, or whether it can only be traced to “other sources” and thus not taxable.
Taxation of Gambling Income – Hobby or Business
Under the Income Tax Act, the question of gambling income has to be addressed on a case-by-case basis. The determination of whether activities constitute a business or not is almost entirely based on case law. Please see our article on Hobby vs. Business in the context of the taxation of gambling income for more details [https://taxpage.com/articles-and-tips/gambling-poker-winnings]
One of the important points to note from the case law on gambling income is the general development of the tax law on the definition of “business activities”. In both Luprypa v the Queen and Cohen v the Queen, the court made references to the existence of “reasonable expectation of profit” or the lack thereof as a factor in deciding whether there were business activities being carried out.
However, the reasonable expectation of profit as a test for the existence of business activities has been rejected by the Supreme Court of Canada in Stewart v Canada. The Supreme Court stated the reasonable expectation of profit test “is problematic owing to its vagueness and uncertainty of application; this results in the unfair and arbitrary treatment of taxpayers.” As a result, “reasonable expectation of profit” should not be accepted as the test to determine whether a taxpayer’s activities constitute a source of income.”
After Stewart, the test for whether a particular activity is a business under the Income Tax Act becomes whether the taxpayer’s activity was undertaken in pursuit of profit or was undertaken as a personal pursuit. When the activity could be classified as a personal pursuit, the court must then determine whether the activity is being carried out in a sufficiently commercial manner to constitute a source of income. The court should not scrutinize the taxpayer’s business decisions and judgments to construe the failure to earn a profit as the lack of a pursuit for profit.
As a result, we must take into consideration the rejection of reasonable expectation of profit test when reading the rulings from Luprypa and Cohen.
Fantasy Sports Winnings – Factors to Consider
While there is no case law on the tax consequences for fantasy sports winning, there are several factors which could be relevant to whether playing fantasy sports could constitute a business under the Income Tax Act.
In addition to these general factors below, there are a number of different fantasy sports platforms where participants have different means of profiting beyond winning their league.
For example, some fantasy sports platforms such as Yahoo Sports ask for a fixed amount of entry fee from each contestant and no further fee is required for the rest of the season. With the recent growth of daily fantasy sports (DFS) sites such as FanDuel and DraftKings, the amount of entry fee a participant could spend in a season on daily fantasy platforms can be much higher than traditional fantasy sports platforms and could potentially be relevant for that participant’s tax determination.
Other fantasy sports platforms such as PlayerSX or Trading Players allow players to bid on the rights to select the best players for their virtual teams.
Fantasy sports participants in these leagues can auction or trade their athletes to other participants for real money similar to the real life European soccer transfer market. The real cash value gains from these trades and auctions could give rise to additional tax issues such as the characterization of these auction gains as capital gains, income, or non-taxable other sources.
Furthermore, some emerging fantasy sports platforms are partnering with cryptocurrency exchanges to collect fees and issue winnings entirely through cryptocurrency. Participating in these platforms would raise additional issues related to cryptocurrency to be addressed in additional to fantasy sports winning. Please see our article on how the Canada Revenue Agency (CRA) taxes cryptocurrency here [https://taxpage.com/articles-and-tips/recent-cra-guideline-regarding-cryptocurrency/].
These differences in platforms can make a major difference on the tax consequences for income generated from fantasy sports. Keep in mind the tax determination will be made on a case-by-case basis when it comes to these business vs hobby questions, and Canadian taxpayers should consider contacting our experienced Toronto tax law firm to learn more about how their personal situation fits into the tax rules. Here is a preliminary list of factual factors, based on our reading of Stewart as well as Cohen, relating to a taxpayer’s behavior and strategies when playing fantasy sports that could be relevant to the tax determination of fantasy sports gains and losses:
- Whether the taxpayer’s main source of income is something other than fantasy sports – if the taxpayer is relying on his or her fantasy sports winnings and gains to pay for his or her living expenses, the court is more likely to consider the taxpayer to be carrying out business with his or her fantasy sports operation;
- Whether the taxpayer had a system of risk management strategies.-, having a strategy for risk management by entering into multiple fantasy sports leagues with different players selected could mitigate the risk from the inherent unpredictability of gambling on sports. Such system or strategy could indicate the taxpayer is carrying out business with a pursuit of profit;
- Whether the taxpayer has expertise in predicting individual and team outcomes in a particular sport compared to the typical fantasy sports league participant – if the taxpayer has particular expertise in sports analytics, this could give the taxpayer a definitive edge over other participants in predicting future performances from professional athletes. Having such defined advantage is another indicator the taxpayer is carrying out business with a pursuit of profit;; and
- Perhaps most importantly, whether the taxpayer’s behavior in managing his or her fantasy sports league is sufficiently similar to other cases where participants managed to turn fantasy sports league winnings into their primary source of income by carrying out their activity in a sufficiently businesslike manner – this is relatively self-explanatory, the strongest indicator of carrying out business in a sufficiently commercial manner is acting like other business people in the same line of business. Unlike professional sports gambling where the typical strategies of “sharks” are relatively well-known in the popular media, the behaviors and strategies of top fantasy sports winners are not yet well-publicized. Nevertheless, this could change very soon.
It is important to keep in mind the Stewart ruling that actually turning a profit or being able to reliably turn a profit through fantasy sports league winnings is not necessary for the court to decide that the taxpayer is carrying out the business activity with his or her fantasy sports league activities. Each case must be considered holistically by looking at all the relevant facts in light of the leading tax case law on the definition of a business under the Income Tax Act.
Pro Tax Tips – All Relevant Facts Must Be Considered when Reporting Fantasy Sports Winning and Losses
It is important to keep in mind that as a general rule of thumb, most Canadians who casually join a fantasy sports league with their friends to further their enjoyment of their favorite sport would be considered to be carrying out a hobby under the Income Tax Act. However, fantasy sports can involve complex strategies and analysis of real sports statistic that might give a single participant a systematic advantage over others, and thus pushing the activity towards business.
If you are concerned that profit or loss from your fantasy sports league that might meet the requirements for being carried out in a sufficiently commercial manner to constitute a source of income, do not hesitate to contact one of our experienced Canadian tax lawyers for tax guidance. If you are concerned that your past winnings could meet the requirement of business income and you did not report these winnings in your tax return, you should consider using the voluntary disclosure service to protect you against possible CRA audits and tax evasion charges. To know more about cryptocurrency and the VDP, consult with one of our top Canadian tax lawyers. All of your communications with us will be confidential.
Disclaimer:
"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."
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Frequently Asked Questions
The taxability of fantasy sports winnings depends on how the income is characterized under Canadian tax law. Specifically, the question is whether your participation in fantasy sports is considered a business or merely a windfall. The definition of business in the Income Tax Act is not comprehensive and includes “an undertaking of any kind whatever.” Cases have interpreted what qualities of an activity will elevate it to the status of a business and you should consult an experienced Canadian tax lawyer to determine if you have engaged in a taxable business activity through your fantasy sports activities.
From a Canadian perspective, if you are playing DraftKings as a business, the income is taxable in Canada. If the income is considered gambling winnings, it is not taxable in Canada unless you are a full-time gambler. From an American perspective, as a Canadian with US winnings, you will receive either a 1099-misc or a 1042-s from DraftKings and may be subject to s 30% withholding tax to satisfy your US tax liability.
From a Canadian perspective, if you are playing FanDuel as a business, the income is taxable in Canada. If the income is considered gambling winnings, it is not taxable in Canada unless you are a full-time gambler. From an American perspective, as a Canadian with US winnings, you will receive either a 1099-misc or a 1042-s from FanDuel and may be subject to s 30% withholding tax to satisfy your US tax liability.
The taxability of Fantasy Football winnings depends on how the income is characterized under Canadian tax law. Specifically, the question is whether your participation in Fantasy Football is considered a business or merely a windfall. The definition of business in the Income Tax Act is not comprehensive and includes “an undertaking of any kind whatever.” Cases have interpreted what qualities of an activity will elevate it to the status of a business and you should consult an experienced Canadian tax lawyer to determine if you have engaged in a taxable business activity through your Fantasy Football activities.
If you are a Canadian who gambles and wins in the US, American casinos will deduct a 30% tax from jackpots or other winnings greater than $1,200 before they are paid out to the winner. To ensure that your US tax liability on the earnings is correct, you will need to file a US tax return. Canadians are taxable on their worldwide income, meaning this income could also be subject to tax in Canada. However, gambling is not taxable in Canada unless you are a full-time gambler. Even if you are a full-time gambler, there may be relief from double taxation under the Canada-US tax treaty and you should consult a Canadian tax lawyer for advice.
Winnings from a Canadian lottery such as Lotto Max or 649 are considered to be windfalls, not income. Consequently, there is no tax to be paid on the prize money. Even winnings from a sweepstakes or lottery sponsored by a charitable organization are generally tax-free.
A moneyline bet is the simplest and most straightforward wager in all of sports betting. It is a bet that has potentially two or three outcomes depending on the sport. When there are two players or teams listed on a moneyline bet, bettors are choosing one player or team to win. Winnings from moneyline betting are not taxable in Canada unless you are a full-time bettor.
