http://decisions.fct-cf.gc.ca/site/fc-cf/decisions/en/item/62785/index.do 
Radonjic v. Canada Revenue Agency[1] (August 29, 2013) is a judicial review application in the Federal Court. The subject matter, generally speaking, was the taxation of the applicant’s winnings from “Texas Hold ‘Em” poker.[2]
[2] The Applicant is a 37-year-old man living in Coquitlam, British Columbia. He is a lifelong game and sport player, and in mid-2003 took up playing poker.
[3] The Applicant began playing online poker, and in early 2004 began making significant winnings. In the spring of 2004, when filing his 2003 tax return, the Applicant asked his accountant whether or not his online poker winnings were taxable or not.
[4] The accountant did some research, and provided the Applicant with CRA’s Interpretation Bulletin IT-334R2 titled “Miscellaneous Receipts”. The relevant portion provides as follows:
Gambling Profits
10. Profits derived from bookmaking or from the operation of any gambling establishment (carried on legally or otherwise) constitute income from a business. In addition, an individual may be subject to tax on income derived from gambling itself, if the gambling activities constitute carrying on the business of gambling; see the decision of MNR v. Morden, (1961) CTC 484, 61 DTC 1266 (Ex. Ct.). The issue of whether or not an individual’s activities are such that he or she can be considered to be carrying on a gambling business is a question of fact that can be determined only by an examination of all of the circumstances and the taxpayer’s entire course of conduct. Although no one factor may be conclusive, the following criteria should be considered in making the determination:
(a) the degree of organization that is present in the pursuit of this activity by the taxpayer,
(b) the existence of special knowledge or inside information that enables the taxpayer to reduce the element of chance,
(c) the taxpayer’s intention to gamble for pleasure as compared with any intention to gamble for profit as a means of gaining a livelihood, and
(d) the extent of the taxpayer’s gambling activities, including the number and frequency of bets.
It is clear from various decisions of the courts that earnings from illegal operations or illicit businesses, such as illegal gambling and fraudulent business schemes, are not exempt from tax. (See for example, the decisions in The Queen v. Poynton, (1972) CTC 411, 72 DTC 6329 (Ont. C.A.) and MNR v. Eldridge, (1964) CTC 545, 64 DTC 5338 (Ex. Ct.).)
[5] The Applicant understood IT-334R2 to mean that as long as he was working at a conventional job his gambling winnings and losses were not taxable. At this time, the Applicant was doing research on a contract basis for the federal government.
[6] In May, 2004, the Applicant stopping accepting contract work as he thought he could make money playing online poker. When filing his tax return for 2004, he decided that to be “safe” he would include his gambling winnings as income on his tax return. The Applicant thought that it would be better to pay taxes on the money right away rather than risk facing a large tax bill in the future should the CRA decide his winnings were taxable. Should it become clear in the future that his winnings were not taxable he would be able to file to get his money back. The Applicant also wanted to have declared income so that he could apply for a mortgage.
[7] The Applicant continued to declare his poker winnings for the years 2004, 2005, 2006 and 2007. After discussion with other poker players, the Applicant became aware that CRA Interpretation Bulletins are not legally binding and that court judgments are the binding legal authorities on the taxability of gambling winnings. In the Applicant’s view, the jurisprudence states that poker winnings are not taxable, and so he filed Adjustments to the CRA for the years 2004 to 2007, requesting that the income tax he had paid be returned to him.
The Minister ultimately refused the adjustments requested by the applicant and he filed this judicial review application in respect of the Minister’s decision.
The court cited the applicable standard of review:
[19] When reviewing a decision on the standard of reasonableness, the analysis will be concerned with “the existence of justification, transparency and intelligibility within the decision-making process [and also with] whether the decision falls within a range of possible, acceptable outcomes which are defensible in respect of the facts and law.” See Dunsmuir, above, at paragraph 47, and Canada (Minister of Citizenship and Immigration) v Khosa, 2009 SCC 12 at paragraph 59. Put another way, the Court should intervene only if the Decision was unreasonable in the sense that it falls outside the “range of possible, acceptable outcomes which are defensible in respect of the facts and law.”
[Emphasis added]
After a careful review of the facts and the arguments raised by both the applicant and the respondent, the court quashed and set aside the Minister’s decision and returned the matter for reconsideration in accordance with the reasons for judgment:
[51] Notwithstanding these caveats, upon reviewing the record as a whole, I have to conclude that the Applicant has made his case. The Minister’s exercise of her discretion under subsection 152(4.2) of the Act in this case lacks intelligibility and justification and, in my view, falls outside the range of possible, acceptable outcomes which are defensible in respect of the facts and law.
[52] I say this for the following reasons:
(a) The Minister in this case relied upon the fact of winning and, in effect, conducted the kind of retrospective assessment warned against by Justice Bowman in Leblanc, above, as part of the assessment of reasonable expectation of profit;
(b) The Minister concludes that the Applicant had a “system” but does not provide any meaningful explanation of what this system might be. It looks as though the Applicant’s simply playing online poker on his computer on an intense and regular basis over an extended period of time is equated with a system. This is bolstered by the Leblanc fallacy that, because he happened to win more than he lost during the three years in question, he must have had a system. I see no evidence of the Applicant applying a system in a way that would make this conclusion by the Minister intelligible or reasonable.
(c) The Minister’s reliance upon Luprypa, above, is misplaced and unreasonable. I see no analogy between a skilful pool player who systematically applied his skills to make money from inebriated opponents and anything the Applicant did in this case where, essentially, his winnings were dependent upon chance, even though he had studied, practised and improved his skills in a way that most amateur poker players do. Everyone who competes in online poker wants to win and will attempt to narrow the odds in their favour in any way they can. But this does not mean they have devised a system if they do win; chance remains the predominant factor in whether they win or lose, as it did on the facts of this case;
(d) The method of payment used was no indicator of a “system” or a reasonable expectation of profits. Everyone who wants to pay has to set up some kind of payment system, so this cannot be an indication of running a business. Paypal accounts are used in a variety of contexts where payment is required online;
(e) The Applicant’s cutting back on other work and income while he won at poker is also no indicator of a system or running a business with a reasonable expectation of profit. A large gambling win could result in the winner quitting work entirely, but that would not mean he or she had been running a business. The luxury of being able to work less is one of the fruits of successful gambling, just as having to work more may be one of the results of unsuccessful gambling. Chance dictates the outcome in either case;
(f) The use of winnings to finance a mortgage is no indication of running a business. Winnings can be used in a constructive way. The gambler is not obliged to play until he or she loses, and the use of winnings in this case was no indicator of a system or a business that was being run with a reasonable expectation of profit;
(g) There is no indication that the monitors or other equipment which the Applicant used to gamble in this case were anything special or that the Applicant had made capital investments for the purpose of running a business or earning a profit;
(h) The Applicant’s record keeping was minimal and entirely consistent with the need to prove the source of funds for tax purposes. They were not business records in any meaningful way, and did not even correlate to CRA’s own criteria.
If the principles adopted in this case are followed in the Tax Court it would seem that receipts from gambling, however intensive and organized, will rarely if ever be subject to income tax.
Comment: Radonjic is, on its face, a careful and well-reasoned decision. The difficulty is that it is quite counter-intuitive. The surge of interest in poker in recent years, particularly “Texas Hold ‘Em”, is at least some evidence that the general public perception is that a considerable degree of skill is involved in this activity. This is evidenced by television shows, tournaments, rankings, etc. While the case law on receipts from gaming is somewhat opaque most people will likely agree that there is a spectrum of activities involving various degrees of skill. On one end of the spectrum would be an activity such as chess where few would dispute that the winnings of a chess grandmaster are taxable. On the other end of the spectrum would be winnings from slot machines where no skill is involved and it seems almost impossible to imagine a scenario where the winnings would be taxable (absent fraud or collusion). There was no expert evidence in front of the court as to the degree of skill involved in this form of poker.[3] It would be interesting to see how this case would be handled in the Tax Court as an appeal from an assessment where both sides were free to call evidence as to the nature of the gambling activity.
While this decision was clear victory for the applicant (unless it is reversed on appeal which is probably unlikely) it may not be one that the organized poker community can place much stock in if a similar situation is litigated in the Tax Court.
[1] 2013 FC 916.
[2] This was the applicant’s “primary” form of gambling; there is no information in the reasons for judgment about the nature or frequency of other forms of gambling.
[3] Unlike the sports lottery case of Leblanc v. The Queen, 2006 TCC 680, where the court accepted expert evidence that skill played no part in such activities: para. 26 (d).