Lotteries and taxes: the truth

Hey there, time traveller!
This article was published 11/09/2009 (6177 days ago), so information in it may no longer be current.

Judging by the massive wave of newspaper, radio, television and Internet ads for local hospital foundation lotteries lately, you could be forgiven for forgetting about back-to-school week and thinking it’s lottery season instead.

This explosion of opportunities to win houses, cars, trips and the like — instead of just the usual cash — prompted a number of readers to ask about the tax consequences, specifically if a prize is sold after winning.

It appears there’s a lot of confusion on this point, even among financial advisers. Since I intend to be one of those lucky people and wanted to be sure, I dusted off Canada Revenue Agency Interpretation Bulletin IT-213R — prizes from lottery schemes, pool system betting and giveaway contests.

The first point is that lottery winnings do not need to be included in taxable income and can be considered tax-free. As well, most “prizes” or “gifts” won in contests are also tax-free. This includes those millions you might win through sports betting pools.

Did you know there is a federal Athletic Contests and Events Pools Act? The amount of skill involved in sports pools distinguishes them from lotteries and events like radio station prize draws, even though these require winners to answer a “skill-testing question.” (CRA does not consider adding 43 and 27 to be an actual “skill.”)

Prizes or gifts are taxable if they come from your employer and are only available to employees. As well, if you are in an occupation that competes for such prizes, your prize is generally taxable. Think of a professional athlete or spelling bee contestant. They would generally be expected to declare prize money (though wouldn’t it be a shame to correctly spell “antidisestablishmentarianism” and then find your $50,000 prize is taxable?)

Now, to the tough questions: When I win my million-dollar house and then sell it, will I have a taxable capital gain, or any other type of income? Do I need to hold it for a year, or some other arbitrary time period? Do I have to live in it before I sell it?

The answer to all of those myths is “no.” The value of the house (or car, cottage or piano or whatever) is tax-free, and you are deemed to have received the prize at its then-current fair market value.

Fair market value is the price that an arm’s-length (unrelated and independent) buyer would pay for the article on the open market at that time. If you sold the house to a stranger shortly after you received it, then that sale price is a pretty good definition of fair market value.

You will recall from past articles on the taxation of capital gains and losses that you must include in income one-half of the gain on the disposition (or deemed disposition) of a capital asset. The gain is calculated as the difference between the net proceeds of the sale and your adjusted cost base (ACB). In the case of a lottery win of a house, cottage or other capital asset, your ACB is the fair market value at the time of receipt.

So, I win a house worth $1 million at the time of the prize. If I sell it for $1 million, I have no gain or loss. If I wait and sell it for $1.1 million, then I have a $100,000 gross gain and must include half of that ($50,000) in income. (That is, unless I declared the house to be my principal residence for that period of time, but that’s another set of rules for another time.)

The main point is that if you want to support those health-care and other charitable lotteries, you don’t have to worry about tax issues. You’ll only have to worry about my ticket being the lucky one.

David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc., advising clients with $2 million to $10 million of investment assets. You can e-mail him at

dchristianson@wellwest.ca

Feeling lucky?

Here are some choices for Manitoba charitable lotteries:

Health Sciences Centre Foundation Lottery

Phone: 204-787-4391

www.HSCHomeLottery.com

St. Boniface Hospital MegaMillion Lotto

Phone: 204-237-2067

Toll Free: 1-866-4SAINTB

www.stbonifacemegamillion.ca

The Easter Seals Great Escape Lottery

Phone: 204-975-3274

www.GreatEscapeLottery.com

The Harvest of Dreams Lottery

Society for Manitobans with Disabilities

Phone: 204-975-3274

http://smd.mb.ca/harvestofdreams/contact.aspx

CNIB Lottery Calendar

Phone: 204-774-5421

http://www.cnib.ca/en/mb-sk/events/lottery-calendar2009/Default.aspx