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How Canadians can get back the taxes on their U.S. gambling wins

Steve Mertl
National Affairs Contributor
People gamble at a casino on January 3, 2016 in Biloxi, Mississippi. (Reuters)

If you were one of the Canadians who flocked across the border last week to buy a ticket for the US$1.5-billion Powerball lottery you probably weren’t thinking about the 30 per cent the U.S. government was going to keep before you took your winnings home.

Or it might have seemed like a fair exchange in return for pocketing – if that’s the right word when it’s this much money – more than $2 billion in flaccid Canadian dollars.

Gambling winnings are not taxed in Canada, whether it’s from a lottery, horse race or casino jackpot. It comes as a surprise to many Canadians on their first trip to Las Vegas or other U.S. gambling destination that Uncle Sam withholds almost a third of their winnings, on top of whatever cut state and local governments may take.

A cottage industry has grown up around helping Canadian gamblers recover at least some of that money for a fee, with ads online and welcoming visitors at the Vegas airport and other gambling locales.

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You can actually do this yourself (or get any accountant to do it) but many gamblers don’t feel like tackling the paperwork the U.S. Internal Revenue Service (IRS) needs to get a refund.

“We file thousands of returns every year, actually, and we’re talking millions of dollars that’s actually been recovered,” said Brooke Sacks, marketing vice-president of Refund Management Services (RMS), which says it is the largest such service in Canada.

Gamblers are also liable to pay tax on non-cash prizes, such as cars, based on the fair market value or through withholding if they convert the prize to cash, as happens with some game shows, said Sacks.

“We’ve had ‘Jeopardy’ winners, we’ve had ‘The Price Is Right,’” she told Yahoo Canada.

It’s not known how many Canadians don’t bother applying for a refund, simply swallowing the tax bite as the price of a gambling windfall.

Gary, who didn’t want his last name used, and his wife have been going from their Ontario home across the border to Niagara Falls, N.Y., to play the slots at the Seneca Resort & Casino half a dozen times a year.

“The very first time we went down there, four or five years ago I guess, we found out that they took 30 per cent,” said Gary, semi-retired from the financial sector.  “The guy that paid me, the slot attendant, said but you are able if you’re Canadian I think you can get it back because you’re not an American citizen.”

U.S. and Canadian gamblers treated equally by IRS

In fact, American gamblers are eligible for tax refunds on their winnings, too. Canadians get the same treatment because of a bilateral tax treaty between Canada and the United States. So U.S. gamblers, like their Canadian counterparts, pay no tax on winnings here. Whether the IRS may want a piece is another matter.

Gary’s web search turned up RMS, which processed his refund application for a 25 per cent fee. Because the paperwork can’t be filed until the end of the tax year, getting the refund would take months. Gary opted to pay an additional 20 per cent fee to get his refund right away directly from RMS.

“They gave me a cheque in U.S. funds right there and off I went,” he said.

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Sacks said a small percentage of RMS’s clients have opted for the upfront payment but the firm has stopped offering that option because IRS rule changes have further lengthened the waiting time for a refund.

U.S. federal tax withholding automatically kicks in whenever a casual gambler wins $1,200 or more in a jackpot payout. Under IRS rules, though, gamblers are allowed to offset the tax with any losses incurred on the way to that win.

Several games, including blackjack, roulette, baccarat and craps, are exempt from withholding because it’s too hard for casinos to track the win/loss balance of individual gamblers. That’s not the case with electronic slot machines, which keep track of players’ activities, or formal poker tournaments that include player buy-ins, said Sacks.

To be eligible for potential refunds, gamblers have to keep a record of their play to match wins against losses. The easiest way to do that is through a casino’s player’s card, a kind of loyalty card that tells the establishment how much you’re playing to gauge what complimentary services you should get – free drinks, meals, hotel rooms, show tickets – as you move from game to game.

The player’s card also makes it possible for the casino to print out a win/loss statement at the end of the year to make tax filing easier. Without the card, it’s up to you to record your own activity. It’s relatively easy with slots because a jackpot above $1,200 triggers a payout slip by the slot attendant.

The rules apply to so-called “casual” gamblers. Professional gamblers are treated differently and can deduct other expenses such as travel and accommodation, like any business.

Winnipeg firm no longer doing gambling tax refunds

Grants International, a Winnipeg firm that specializes in getting clients various government refunds, used to handle U.S. gambling withholding. But owner Darren Earn said it’s hard to compete with companies specializing in gambling tax refunds. He now simply gives some guidance to allow people to file for themselves.

“I’m a big fan of companies that take care of things like that for you because I do other things like that all across Canada,” Earn said. “But you’ve got to do it correctly and you’ve got to make sure you protect your customer. That’s my biggest concern with that particular product.”

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Earn said he’s concerned some outfits may be obtaining refunds – for lottery winnings, say – that people aren’t entitled to receive.

“I’ve seen some people who ask for a refund and they get it,” he said. “I’m looking at that and thinking gee, the IRS is worse than the CRA [Canada Revenue Agency].”

Filers are not required to include documentation but, like any taxpayer, have to retain their records in case of a future audit. Earn said he’s not aware of the IRS auditing any Canadian gambler to date but the potential remains, along with the liability if it demands the money back.

Meanwhile, gambler Gary won’t be headed down to Niagara Falls for a while. The decline of the dollar has seen to that he said. He and his wife won’t be headed to a Canadian casino either, Gary said. The payouts are smaller and, besides, you can’t drink or smoke while you’re playing.