Gambling Losses Tax Deductible Canada
The General Treasurer of Rhode Island is Seth Magaziner. When the state pays its bills, his signature (along with that of State Controller Peter Keenan) appears on the checks that are issued. Imagine the surprise when some business owners received tax refunds and instead of Mr. Magaziner’s signature, they looked down and saw “Mickey Mouse and Walt Disney.” Oops.
“As a result of a technical error in the Division of Taxation’s automated refund check printing system, approximately 176 checks with invalid signature lines were printed and mailed to taxpayers on Monday 7/27/2020. The invalid signature lines were incorrectly sourced from the Division’s test print files,” said Jade Borgeson, Chief of Staff for the [Rhode Island] Department of Revenue.
The checks were issued for business tax refunds, and impacted taxpayers are being contacted and presumably replacement checks are being issued.
- In general, it is not possible to deduct gambling losses in Canada. It may be that, if and when the Canada Revenue Agency decides to tax significant gambling winnings, it will interpret net winnings as income from a business. In the meantime, the Revenue Agency will continue to deny the deduction of significant, documented gambling losses.
- You may deduct gambling losses only if you itemize your deductions on Schedule A (Form 1040 or 1040-SR) PDF and kept a record of your winnings and losses. The amount of losses you deduct can't be more than the amount of gambling income you reported on your return.
- Claim your gambling losses as a miscellaneous deduction on Form 1040, Schedule A (PDF). However, the amount of losses you deduct may not be more than the amount of gambling income you have reported on your return. It is important to keep an accurate diary or similar record of your gambling winnings and losses.
On a more serious note, what should you do if you receive a tax refund you’re not due? I’ve had clients who receive such erroneous refunds. Do not cash the checks: If the money is not due to you, you’re not allowed to keep the funds. Contact the tax agency that sent you the refund, and follow their instructions to return the check.
Many taxpayers who report gambling winnings and losses don’t maintain satisfactory records of their gambling activity. Page 12 of this IRS publication states:
Gambling Losses Tax Deductible Canada 2020
You must keep an accurate diary or similar record of your losses and winnings. Your diary should contain at least the following information:
Gambling Losses Tax Deductible Canada Tax
- The date and type of your specific wager or wagering activity.
- The name and address or location of the gambling establishment.
- The names of other persons present with you at the gambling establishment.
- The amount(s) you won or lost.
The publication goes on to provide types of sufficient documentation specific to the type of wagering activity.
As I’ve said before, the amount of detail asked from the IRS in this regard is excessive. If you merely present that excuse to the IRS, however, you will likely lose every time. Alternatively, taxpayers conjure up various methods to prove the amount of gambling losses reported on their tax return is accurate.
In Canada gambling income is not generally taxable. If the gambling activity can be considered as a hobby, the income is not taxable. If the gambling is carried out in businesslike behaviour, then the income is taxable and losses deductible. This section provides information on capital losses, and on different treatments of capital gains that may reduce your taxable income. Consult our Summary of loss application rules chart for the rules and annual deduction limit for each type of capital loss.
The method employed by William Jones in his recent U.S. Tax Court case came up very short.
Mr. Jones regularly played slots in Chicagoland area casinos during 2006. Jones didn’t file a tax return that year. Instead, the IRS prepared a substitute return for him, and assessed a tax deficiency. Although not entirely clear from the court’s opinion, let’s presume this deficiency was based upon $7,000 in gambling winnings reported to the IRS on multiple Form W-2Gs.
Jones contended that he also had gambling losses from the tax year of approximately $7,000. A predictable response from the IRS: OK, prove to us your gambling losses.
Instead of showing any sort of contemporaneous diary of his gambling activity, Jones presented his bank account statements, which showed a balance of $7,531 on December 31, 2005, and a balance of $947 on December 31, 2006. Jones testified that most of his withdrawals from the account was spent on gambling. The taxpayer’s theory was “that his losses must have approximately equaled the difference between his beginning-of-year and end-of-year bank account balances.”
Nice try, but that ain’t gonna fly. Decision in favor of the IRS.
In some instances, however, the court may estimate the amount of a deduction that the taxpayer is entitled to. To make this estimation, the court requires a basis upon which to make it. This doctrine is known as the Cohan rule. One example exhibiting application of the Cohan rule to gambling losses was in the case Doffin v. Commissioner, T.C. Memo. 1991-114.
Mr. Doffin compulsively engaged in pulltab gambling. Unsurprisingly, Doffin mightily struggled with his finances, so his parents arranged for his paychecks to be deposited with a credit counseling service. Mr. Doffin pretty much gambled away whatever allowance he received. Because the court was presented with a very detailed description of the taxpayer’s lifestyle and financial position, the court was able to approximate the taxpayer’s gambling losses.
Had Mr. Jones read the Doffin decision, perhaps his Tax Court case would have turned out differently.