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Gift Tax on Lottery Winnings

posted 2 years ago

Almost everyone, at some point, has dreamt of hitting the jackpot in the lottery or casino. With life’s endless difficulties, winning instant cash can solve anyone’s problems. Imagine getting thousands or millions of money and buying everything you have always wanted. 

Suppose you decide to take a chance, place a bet, and beginner’s luck backs you up. That’s a cause for celebration. So, congratulations!

However, once your festive mood wears off, you may spend hours wondering what to do with the money. You may opt to pay all your loans, buy new properties, open a business, donate to charities, and give some to your loved ones.

I’m almost a hundred percent sure you will do any of these. But are you going to take home the whole amount? How about the amount you shared with others? How about that one thing you may not have considered: tax?

Tax is a constant in everyone’s life, which can be a bummer to your celebration. It applies to almost everything we enjoy. How about your gifted winnings in the lottery? Tax systems in countries worldwide have different views of taxing lottery winnings. So below, we will look at some tax technicalities on the gifted lottery winnings in Canada. 

When are gifts taxable in Canada? 

In general, the government of Canada does not impose taxes on gifts. Regardless of the amount, you may not declare any gift or inheritance on your income tax returns. But the law does not apply to gifts, tips, or gratuities from an employer or any people related to the recipient’s job. 

Moreover, there is an attribution rule if the recipient is the spouse or a relative of minor age. Other limitations may apply if the gift or inheritance is from a deceased person. Meanwhile, other complications may arise if the gift becomes subject to taxes. 

Gifts from Employment

Many gifts, awards, and service awards can be subject to tax. Gifts as cash and near-cash are considered part of taxable employee benefits. Near-cash items include gift certificates, gold nuggets, stocks, securities, and the like. 

In short, performance-related awards or gifts are part of taxable employee benefits. Hence, you should fill out Box 40 of the T4 Slip or the Statement of Remuneration Paid. 

On the other hand, non-cash and near-cash gifts and awards can also be exempt from the policy. If the annual value of non-cash gifts is $500 or below, taxes will not apply. Check out this link for more information. 

Gifts to Spouses or Minor Children 

Taxation on gifts to family members depends on the attribution rules. Taxes may apply if a gift leads to cash or property income. This part is limited to money, near-cash, and non-cash gifts only. Check this link for more information about attribution rules on spouses or partners and related minor children. Below are the essential things to know:

Attribution Rules on Spouses and Common-Law Partners 

These rules can be imposed when the gift to the spouse or partner is purchased through cash or income-producing property. If the gift produces income directly or indirectly, taxes on capital gains will apply. But, it will be attributed to the giver, in general. It will also apply if the income-producing property is loaned or transferred to the spouse or partner through trust.

Attribution Rules on Related Minors 

The same rules for spouses and common-law partners apply for gifts given to a related minor child. These gifts should have been bought using cash or are income-producing properties. Related children, like nieces or nephews, are considered minor if they are under 18 years old. Essentially, they do not deal with or transact with the giver for business purposes. 

Gifting Capital Assets 

Most capital assets, such as land, buildings, and financial assets, are considered capital assets or property sold at fair market value (FMV). With that, taxes on income-generating gifts are levied on the giver, also known as capital gains. But if they are transferred or loaned to spouses, common-law partners, or related minors, attribution rules on gifts will apply again. 

To understand it better, capital gains or losses are the gains and losses from the sale of assets. These include real estate, investments, and promissory notes. In accounting, these correspond to the proceeds from the disposition of assets.

Valuation gains and losses before and after-sale are also part of these. They may also include gains and losses from bad debts and derivative assets. The amount must be included in the tax returns regardless of the assets’ location.

In short, capital gains happen when you generate income from a sale that’s more than what you paid for it. Personal-use property or listed personal property (LPP) are also included, but the calculation is separate. 

Gift from Deceased Persons 

This type of gift can also have tax consequences. When the deceased person owns capital assets, taxes apply on his estates. The fair market value applies on the date of receipt.

The cost of inheritance is equal to the deemed proceeds of disposal for the deceased. It is equal to the FMV of the asset on the person’s death. There is a different treatment when the property is inherited due to the passing of the giver. Inheritance is treated differently from actual gifts. For more details, click on this link

Gift from Persons with Financial Obligations to the Canada Revenue Agency 

This falls under the Income Tax Section 160, which pertains to receipt of property from tax debtors. The transfer of cash and other assets can be direct or indirect. The recipient may inherit tax liability. Hence, the Canada Revenue Agency (CRA) can hold you liable. They can exercise their powers by collecting taxes from you. 

Can you gift lottery winnings in Canada? 

Winning the lottery or in a casino is a massive step towards your luxurious dreams. It can change your financial status in an instant.

But how much of your winnings are actually tax-free? Fortunately, lottery winnings in Canada are considered windfalls. In other words, your newfound wealth is free of tax. You can take it home or place it in banks untouched. 

Can a person give or share their lottery winnings with others? The Canada Revenue Agency says that you can gift any amount from lottery winnings to anyone. Whether it’s a family member, a friend, or a charitable institution, you are free to do so.

There is no limit to gifting winnings in Canada, unlike in other countries. Even so, there are considerations to follow. For example, if the cash gift is from someone under obligation to the CRA, chances are, you will have to shoulder paying the taxes. 

Is gift lottery subject to tax? 

Again, lottery winnings are windfalls. And since windfalls are not subject to taxes in Canada, your lottery winnings can remain untaxed. Even your winnings from a lottery sponsored by charitable institutions are safe from taxes. Likewise, casino winnings are treated as windfalls and can be tax-exempt.

But over the years, the Canada Revenue Agency has started to view it as business income. That is why they have been looking for professional gamblers to add logic to their current view. In the same way, professional gamblers can treat their casino losses as business expenses. Different rules will apply if you play casinos in other places, like Las Vegas. 

Lottery winnings continue to be part of windfalls in Canada. So, people may not anticipate the recommendation or implementation of lottery winnings taxation anytime soon.

You can gift any amount of winnings to other people free of tax without them facing tax implications. Typically, individuals share their winnings with their families, friends, and charitable organizations. So, they can take it without any deductions. 

But even if the tax agency does not impose taxes on lottery winnings themselves, some circumstances can still lead to recipients paying taxes. If they invest it or use it in any means that increases its value, they will have to face tax consequences.

For example, they invest their lottery winnings in the stock market. Once they sell their stocks after earning, they will be subject to dividend taxes. Likewise, the interest earned will be subject to taxes if they put it in the bank. 

If the amount is used to buy properties that generate income, taxes are also applicable. Again, gifted lottery winnings themselves are not taxable. But if you use the amount to generate income, some forms of taxes will apply.

Capital gains from it are the typical scenario that leads to taxation. As such, the recipients may consider placing the winnings in their respective Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP), if possible. 

Need to Learn More? Contact Taxpage Today.

Tax systems in all countries can be complex since they cover a broad range of income and gains. Even your winnings in lotteries and casinos can be subject to taxes depending on the situation. Canada implements a clear and detailed set of rules on taxes related to lottery winnings. A point to note is tax is often applied to things that may generate income. 

Do you find this article helpful? If you want to know more about taxes and how to apply them to your income and assets, reach out and seek assistance from Taxpage. We have experts who offer quality services regarding tax problems and representation. We also provide tax succession and tax and estate planning to clients. 

Need to know more about this topic? Our Certified Specialist Canadian tax lawyer can provide expert tax advice that will help ensure the CRA will not fault you for misrepresenting your tax returns.


FAQs on Gift Tax on Lottery Winnings 

How much money can you give as a gift if you win the lottery in Canada? 

You can gift any amount generated from lottery winnings in Canada to others. 


Is it tax-deductible to give someone a million dollars as a gift? 

If you use the gifted amount to derive earnings, taxes will apply. 


How can I avoid paying taxes on lottery winnings? 

Do not use it for capital gains or put it in a tax-free savings account.



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