Last Wednesday night, the Boston Bruins defeated Roberto Luongo (or, as Don Cherry calls him, “LaLongo”) and the rest of the Vancouver Canucks to win the Stanley Cup. Of greater importance, I won my hockey pool by two narrow points. The first place prize is a certain sum of money (it would be unseemly to say how much). Are such winnings taxable? This question was examined by the Tax Court of Canada in an interesting case from 2006.
Brian and Terry Leblanc were brothers in their thirties who worked in their father’s window-washing business. They started gambling on sports lotteries, particularly on Pro-Line tickets, and did very well. Indeed, between 1996 and 1999, the Minister of National Revenue estimated that the Leblancs cleared about $5.5 million from their bets. The government took the position that the brothers’ wagering amounted to a business as it was managed and organized with the object of making a profit. Therefore, the net winnings were taxable. The brothers argued that, as per the Income Tax Act, gambling winnings were not taxable. The matter proceeded to litigation and eventually found its way in front of the Chief Justice of the Tax Court.
The evidence established that the Leblancs’ gambling “system” was not based on complex mathematical modeling or insider knowledge. They compared Pro-Line odds to Las Vegas odds, selected a few longshots (frequently combining or “parlaying” them), and bet heavily on them, often purchasing thousands of tickets. The brothers estimated that they lost 95% of their bets and that it was not unusual for them to bet $200,000 to $300,000 per week. To place their bets, they would call in ticket orders to retail outlets. Because they purchased so many tickets, they were able to negotiate a 2-3% discount with many retailers. After a while, they started paying up to fifteen of their friends to pick up the tickets with each helper being assigned a “territory” or “route” of stores. They rented a house near the Quebec / Ontario border so that they had easy access to tickets in both provinces. The judge was of the impression that the brothers were not terribly sophisticated: “They spent their time playing lottery games or watching sports on television. They also played ping pong and golf and sat around the house drinking beer and eating pizza.” The judge characterized this lifestyle as “unusual” and “bizarre”; I describe it as living the dream.
The brothers enlisted the help of an expert witness, Dr. Garry Smith, an academic who researched gambling issues. Dr. Smith’s evidence was summarized by the court as follows: (a) the odds against winning in Pro-Line type lotteries are astronomical; (b) there is no way one can beat the odds; (c) the payouts are not reflective of the true odds; and (d) skill plays no part in winning. Dr. Smith described the brothers’ system as “preposterously risky”.
The court summarized previous gambling taxation cases from Canada and England into three broad categories. First, those who gamble for pleasure, even if compulsively and with some sort of system. Second, those who gamble as an adjunct of a business. For example, one who trains race horses and who bets on the races. Third, professional gamblers in a game where skill is a significant component. For example, a professional riverboat gambler or a pool shark who only plays inebriated players. The case law established that the second and third categories were taxed but the first was not.
Luckily for the Leblanc brothers, the court ruled that they were in the first category. The judge felt that they were not sophisticated professional gamblers but just exceptionally lucky. As a result, the Leblancs did not have to pay tax on their winnings. And neither do I! Incidentally, my two-pronged system for hockey pool excellence is as follows: first, don’t watch the games; and second, avoid players with the words “Leafs” and “Maple” on their jerseys.
