Why can Canadians recover some taxes paid on their gambling winnings?
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One method utilized by countries the world over to better their business relations is signing protocol and fiscal agreements with other countries aiming at improving and expediting investment, transportation, commercial exchanges, etc. Canada has signed many of these with most occidental countries and with many emerging countries. These treaties are constantly being negotiated and renegotiated and it's possible to follow their evolution with this link:
Of course, due to the volume of their trades and their geographical proximity, there is such a treaty between Canada and the United States called Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital
The convention covers a multitude of subjects, as diversified as dividend taxing, old age pensions and annuities, help in perception and information sharing, double taxation elimination, etc.
Article XXII of this convention deals with other revenues; the third paragraph covers transactions linked to gaming winnings:
-3. Losses incurred by a resident of a Contracting State with respect to wagering transactions the gains on which may be taxed in the other Contracting State shall, for the purpose of taxation in that other State, be deductible to the same extent that such losses would be deductible if they were incurred by a resident of that other State.
The first innuendo in this statement is that in the United States, winnings from gambling are taxable:
Topic 29 Gambling Income and Losses:
- The following rules apply to casual gamblers. Gambling winnings are fully taxable and must be reported on your tax return. You must file Form 1040 (PDF) and include all of your winnings. Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse races, and casinos.
On the other hand, it is also possible to deduct losses from these winnings:
- - You may deduct gambling losses only if you itemize deductions. However, the amount of losses you deduct may not be more than the amount of gambling income reported on your return. Claim your gambling losses on Form 1040, Schedule A, as a miscellaneous itemized deduction that is not subject to the 2% limit.
Thus, only the net gain is taxable for Americans. But since income taxes are deducted directly on the winning for Canadians, it's impossible for them to pay only on the net gain. That's why the convention between Canada and the United States specifically claims that the Canadian player must be treated the same as his American counterpart, and that his losses are deductible in the same fashion as they are for Americans.
You now understand the legal and fiscal reasons why Canadian players can have part or all of their losses in the United States.