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Income Tax Interpretation Bulletin
Prizes from lottery schemes, pool system betting and giveaway contests
NO: IT-213R
DATE: October 19, 1984
SUBJECT: INCOME TAX ACT
Prizes from lottery schemes, pool system betting and giveaway contests
REFERENCE: Paragraph 40(2)(f) (also subsections 52(4), 5(1) and 9(1), and paragraph 69(1)(c))
This bulletin cancels and replaces IT-213 dated May 12, 1975. Current revisions are designated by vertical lines.
Lottery Schemes
1. The amount or value of a prize received by a taxpayer from a lottery scheme is not taxable as either a capital gain or income unless, due to the circumstances applying to the lottery scheme, the prize can be considered to be income from employment, business or property or a prize for achievement referred to in paragraph 56(1)(n).
2. While paragraph 40(2)(f) specifies that no taxable capital gain or allowable capital loss results from the disposition of a chance to win or a right to receive an amount as a prize in connection with a lottery scheme, subsection 52(4) states that for the purposes of computing any tax consequences after receiving a prize a winner in a lottery scheme is deemed to have acquired the prize at a cost equal to its fair market value at the time of acquisition.
3. A lottery has been defined as a scheme for distributing prizes by lot or chance among persons who have purchased a ticket or a right to the chance. If real skill or merit plays a part in determining the distribution of the prize the scheme is not a lottery (unless it is based essentially on chance and the degree of skill is minimal). Again, when the chances of a prize are obtained wholly gratuitously, as for instance, a prize awarded to the winner of a game, the scheme is not a lottery.
Pool System Betting
4. Paragraph 40(2)(f) also provides that no taxable capital gains or allowable capital losses arise from the disposition of a chance to win a bet or a right to receive an amount as winnings on a bet in connection with a pool system of betting referred to in section 188.1 of the Criminal Code. The nature of pool system betting is such that the only winnings are in the form of cash from the respective pool. Consequently, no additional capital gain or loss tax consequences could arise on subsequent disposition of the winnings and thus it is not necessary (as described in 2 above, in the case of a lottery) to deem the winnings to have been acquired at fair market value.
5. A "pool system" of betting is defined in the Athletic Contests and Events Pools Act as a pool system of betting on any combination of two or more professional athletic contests or events. The fact that a degree of skill is involved in the selection of the outcome of the contest or event in the pool betting distinguishes it from a lottery scheme as described in 3 above.
Other Schemes
6. Where a prize has been won otherwise than through a lottery scheme or a pool system of betting, neither paragraph 40(2)(f) nor subsection 52(4) will apply. The tax implications of receiving these other prizes will vary, depending on the following factors:
(a) When the prize has been received as a gift, it is not included in computing income at the time of receipt. However, the recipient will be deemed to have acquired the prize at its fair market value pursuant to paragraph 69(1)(c), so that a subsequent disposition of the prize will result in a capital gain on any increase in value since the time of its acquisition. A prize can be reasonably considered to be a gift from the viewpoint of the recipient, even though chance and/or skill may have been involved in the win. Ordinarily a gift is not considered to have been made until the donee has received delivery of the gift and accepted it in a completed and irreversible transaction.
(b) The prize will be received as income where it is received by virtue of the recipient's employment pursuant to subsection 5(1) and paragraph 6(1)(a), received by virtue of the recipient's business pursuant to subsection 9(1) or received in respect of an achievement in a field of endeavor ordinarily carried on by the recipient pursuant to paragraph 56(1)(n) (see IT-75R2).
(c) Where the prize is not received as income as described in (b) and is not a gift as described in (a), no amount will be included in income upon receipt of the prize and the provisions of paragraph 69(1)(c) will not apply. Such a situation would arise where the contestant has incurred a cost towards winning the prize such as purchasing a ticket or paying an entrance fee entitling the contestant to participation in the contest. In such a case, while there are no tax consequences resulting from receipt of the prize, any subsequent disposition of that prize may result in a capital gain or loss. In computing any such gain or loss the taxpayer's cost of the prize will be the original cost of the ticket or entrance fee rather than the fair market value of the prize as used in (a) above.
It should be noted that where "personal use property" is involved, the $1,000 exemption contained in subsection 46(1) may eliminate any capital gains on disposition of a prize as described in (a) and (c) above.
7. In some instances, a ticket (or entrance fee) of the type described in 6(c) above entitles the holder to something in addition to a prize, for example, some entertainment value. Where, in such a case, the portion of the ticket that relates to the prize is considered insignificant in relation to the total cost of the ticket, the fact that a portion of the cost has been incurred towards the prize may be ignored and the prize will be treated as a gift to the taxpayer as described in 6(a) above.
8. Where the winner referred to in any of the paragraphs above is a syndicate, the income tax consequences to the individual members of the syndicate are the same.
9. Some examples of the manner in which the rules in 6 to 8 above apply are given in the paragraphs which follow.
Employer-promoted Contests
10. Where an employer who was accustomed to awarding employees with a bonus has provided a scheme or giveaway contest in which the bonus or some amount in lieu of a bonus is divided among the employees as prizes following a draw, the scheme would not be a lottery and the prizes are considered to be employment income under subsection 5(1). However, if the employees and their families account for only a small percentage of the participants in a scheme, are not given a favoured position in relation to the other participants and they are subject to the same contribution requirements (if any) towards the scheme as other participants, the value of any prize won by chance is not employment income but is considered a win from a lottery scheme. Therefore, paragraph 40(2)(f) and subsection 52(4) will apply. IT-470, "Employees' Fringe Benefits - After 1980" and Special Releases to IT-470 discuss holiday trips and other prizes.
Television and Radio Programs
11. The value of a prize or other award received by a person for being at or participating in a radio or television program is generally not included in income when the person is not party to an employment or business contract, and
(a) it is awarded through a draw because, for example, the person is in a "lucky" seat or has a certain brand of merchandise at home, even though the person may have to demonstrate some minor degree of skill or knowledge before being eligible to receive the prize, or
(b) the prizes that go to winning contestants, the consolation prizes that go to losing contestants or the merchandise gifts given to all participants are all that the person receives for appearing in the program. On the other hand, if a contract exists, such as may be the case where a professional actor, an entertainer or some other person appears on a television show as a celebrity and receives a giveaway prize or wins a prize by skill or chance for appearing or participating in a contest on the show, the prize will be subject to tax as business or employment income.
In all cases cited in this paragraph, the capital gains implications will be established on the basis of the particular circumstances in each case through application of the rules given in 6 or 7 above.
Free Tickets in Lieu of Volume Rebates or Bonuses
12. Volume bonuses or rebates from suppliers are included in computing a purchaser's business income. However, where a supplier provides customers with free tickets for a draw for a prize with the winning ticket to be drawn strictly by chance, the prize is ordinarily considered a gift. Its value is not included in the recipient's business income and the application of paragraph 69(1)(c) to the deemed cost of acquisition of the prize is as set out in 6 above. On the other hand, if real skill or merit is involved in the win, it will be a question of fact to be determined in accordance with the circumstances in each case whether the prize is a gift or whether its value is business income to the recipient.
Annuities as Prizes
13. Where the prize in a lottery scheme is an annuity, for the purposes of determining the amounts to be brought into income, the initial adjusted cost basis of the annuity is considered to be the fair market value of the annuity when it was acquired in accordance with subsection 52(4). Should the annuity be a prescribed annuity contract, as defined in Regulation 304, the adjusted purchase price of the annuity will be its fair market value at the time it was acquired. For prescribed annuity contracts and those other annuity contracts not subject to the accrual rules, annuity payments are brought into income under paragraph 56(1)(d) and a deduction from income is allowed under paragraph 60(a) for a portion of the adjusted purchase price as determined under Regulation 300. For other annuity contracts, which are subject to the accrual rules, the income from the annuity is determined according to the provisions of paragraph 56(1)(d.1) and section 12.2 in which the adjusted cost basis is a determining factor. In the case of the application of paragraph 56(1)(d.1) and section 12.2, the income calculation should be furnished by the issuer.
