My previous post on the taxation of Olympic winnings sparked some questions about the difference between income and winnings. See in Canada, unlike the US, under the Income Tax Act, windfalls are exempt from taxation. In order for money to qualify as windfall income, it must meet eight criteria set out in IT-334R2:
a) the taxpayer had no enforceable claim to the payment,
b) the taxpayer made no organized effort to receive the payment,
c) the taxpayer neither sought after nor solicited the payment,
d) the taxpayer had no customary or specific expectation to receive the payment,
e) the taxpayer had no reason to expect the payment would recur,
f) the payment was from a source that is not a customary source of income for the taxpayer,
g) the payment was not in consideration for or in recognition of property, services or anything else provided or to be provided by the taxpayer, and
h) the payment was not earned by the taxpayer as a result of any activity or pursuit of gain carried on by the taxpayer and was not earned in any other manner.
Most lottery winnings are, therefore, not taxable in Canada as is money won on beer night down at the bowling alley or dart night at the pub. In order for Olympic winnings to be categorized as windfall income, CRA would need to amend items b, c, d, f, and h. Poker winnings can be categorized as either windfall income or taxable income depending on whether or not item f applies (why the winnings from participating in your beer sports league are not taxable). They are taxable if the gambling activities constitute carrying on the business of gambling. When a poker (or any other) player goes from being an amateur to a professional player, however, is a central legal difficulty that has faced many a poker players.
In addition to windfall winnings, income from prescribed prizes is also exempt from taxation. The exemption for a prescribed prize dates back to 1987 after John Polanyi won a Nobel Prize. In a terrible fit of flag waiving pride, the Mulroney Government created the prescribed prize exemption so that Polanyi could collect his $1M prize tax free. A prescribed prize exemption is “any prize that is recognized by the general public and that is awarded for meritorious achievement in the arts, the sciences or service to the public.” Prescribed prizes contain two essential features. First, they are awarded to individuals who did not offer themselves up for competition but were nominated by an arm’s length body. Second, prescribed prizes are those where the underlying activities have a broad-based and tangible beneficial effect on the economy or the society. This must go beyond a “warm glow.” Examples of prescribed prizes include the Nobel Prize, the Governor General’s Literary Award, and the Donner Prize. Olympic winnings also do not meet either of these criteria. Olympic awards are similar to other athletic awards and do not qualify as a ‘prescribed prize.’
If Olympic winnings don’t qualify under these existing exemptions, why don’t we just create a new one? First, we don’t need to. As I previously wrote, if an Olympic athlete is paying tax on these winning, either they are a high earning athlete or needs much better tax advice. Second, adding more exemptions to our tax system further reduces the fairness and adds unnecessary complexity. Third, what makes Olympic athletes that much more special than any other individual competing on behalf of our country? What about the Canadian’s competing in the annual World Toe Wrestling Championship?