Income vs. winnings vs. prizes

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?

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4 thoughts on “Income vs. winnings vs. prizes

  1. Hi,

    What about this scenario: someone writes a paper for a conference, is accepted, and ends up winning the monetary prize that comes with the best paper award. The conference sponsors publish the proceedings and the names the participants and winners on their website. There is no employer/employee, nor supplier/retailer relationship between the conference sponsors and the participant. Is that prize considered to be an income from a prescribed prize? Also, does the $500 exemption for scholarships, fellowships, bursaries and prizes apply? I could not find jurisprudence specifically on this matter.

    Thanks.

    • Thanks for the question. By you submitting that paper, you are entering yourself into the competition, much like athletes, and therefore must pay tax on the income. It meets all definitions of taxable income, and does not meet the criteria for a prescribed prize. The prize is not “scholarship, bursary and fellowship income”, so I don’t see why the exemption would apply.

  2. I work part time for regular clients in design, and when I’m not busy, I enter design contests at 99designs.com. When I win, would the winnings be taxable?

    From their site: “99designs pioneered the design contest, where designers submit competing designs in response to a customer’s design brief—and the winner receives a cash payment for their work”

    Thank you.

  3. […] Of course my loyal readers know I have been writing about this for years now (well every two years that is) and here are several links to get you up to speed: here, here, and here. […]

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