US-Canada Gambling Tax Treaty
It’s hardly a secret that gambling is a popular pastime for Canadians. From Vancouver to Montreal, the country is full of top-end casinos and other gambling establishments, not to mention the many online operators serving the populace.
Canadians also have the option of crossing the border to visit one of the many famed US gambling cities – aside from the legendary Las Vegas, places like Atlantic City, Chicago and Philadelphia are all popular destinations for a spot of gaming.
US gambling culture differs significantly from Canada, and visitors from the north may not be prepared for one of the major differences between the neighbouring countries: the US tax on gambling winnings. For Canadians, who are used to keeping every cent of their wins when playing at home, this levy can come as a surprise. But thanks to a 25-year-old tax treaty, they may avoid having to give a substantial cut to the IRS.
What are the best paying casinos for Canadians?
In Canada, any money generated through gambling, be it from a game of poker or a lottery jackpot, is considered a windfall and not a source of taxable income. When Canadians play at domestic or online casinos with high payouts such as these, there is no chance that any of their winnings will go to the taxman.
Under Canadian law, gambling of any kind by a private citizen does not fall under the category of a business or employment and is therefore tax exempt. Very few people, with the possible exception of some poker professionals, can make a steady living from games of chance. The same reasoning does not hold true in the US, so should Canadians forgo Vegas and just play at the best payout casinos in Canada instead?
What is US gambling tax?
For American citizens, tax is levied on most types of gambling winnings over a certain threshold. It can then be re-taxed at federal and state level when declared as income, meaning that gamblers could end up paying as much as 45% to the IRS.
For tourists, there is a flat rate of 30% and it is payable on the spot. The casino or sports betting establishment is required by law to withhold the tax from the winnings, so there is no getting round it. Luckily there are some exceptions, and many table games such as roulette, craps and baccarat are not included. The tax also applies only to so-called substantial wins, meaning $1200 or more for slots and $600 for sports bets – any gains smaller than that are still yours to keep.
If you do win big, then the hefty duty can take a bit of the shine off. Imagine making the jackpot on the slots and expecting to walk away with a cool $3,000, only to receive just $2,100 from the cashier. It’s not an inconsiderable amount of money, and it gets worse the more you win. Not to mention that a Canadian citizen may not feel too happy handing over $900 to the coffers of a foreign government.
Can Canadians claim back US gambling tax?
So, what is the tax treaty all about? Back in 1996, an amendment was made to the existing Canada-US Tax Treaty which allows Canadians to recoup some or all of their US gambling taxes. The provision gives Canadians the same rights as Americans to deduct gambling losses up to the value of their wins.
Naturally, this only applies if you have had losses and wins while gambling in the US. In the case of a winning lottery ticket, there may be no way to avoid paying the 30%. For most tourists playing at a casino, some losses are practically guaranteed. If for any reason a US casino withholds tax on an exempt game – e.g. roulette – then this can be claimed back in full.
What should Canadians do if they win big in the US?
Forewarned is forearmed, and every Canadian should keep detailed records of all their gambling expenditure while on US soil. This includes the amount wagered, won and lost – and of course where and when the gambling took place. Any credit records or statements from casinos, plus wager tickets from sports betting, need to be kept as evidence.
The process of reclaiming US taxes can be somewhat daunting. A US non-resident alien income tax return (1040NR) must be filed, and an individual taxpayer identification number (ITIN) obtained. Unless you are very adept at paperwork and bureaucracy, then it is recommended to use one of the many reputable tax recovery services available in Canada that deal with cross-border taxation.
As a final note, some patience is required when reclaiming US gambling taxes. The 1040NR is filed on an annual basis, covering wins and losses from gambling over a twelve-month period. So, whether it is a one-time lottery win or several gambling trips a year, the tax refund will be applied only once a year.