Anyone who has played the lottery even once has thought about winning the jackpot. What few people consider are the taxes associated with winning this significant prize. Lottery winnings are taxed differently depending on where you live.
In Canada, lottery winnings are not taxable. You will receive the entire amount if you win a prize or jackpot through a lottery, such as Lotto 6/49, Lotto Max, or others. The Income Tax Act considers lottery winnings a financial windfall or an unexpected cash surplus. It is not earned as income or considered as such, meaning it is not in an applicable tax category.
Additionally, lottery winnings are not reported. Since these windfalls are tax-free in Canada, informing the CRA or including them on your tax return is unnecessary. However, you should monitor and maintain a log of your winnings. Be diligent in managing records with ticket numbers, purchase dates, and the dollar amounts won.
Let’s learn more about lottery winnings taxation under different scenarios.
Canadians can win US and foreign lotteries.
You don’t need to be a US resident or another nation to participate in their regional lotteries. As a Canadian, you can conveniently purchase a Powerball ticket online, join any international lottery, and even win it! Remember that all winnings must be claimed within the United States or the corresponding host country of the lottery.
Some Canadians might be intrigued by the possibility of joining the US lottery scene, such as the popular Powerball lottery. Be advised that any prizes won in this pursuit are taxable income in the United States. As non-residents, Canadians must inform the US IRS about their lottery windfall and complete an income tax return accordingly.
Lottery winnings can be withheld if you refuse taxes.
Lottery winnings are taxed at 30%, meaning you will only take home a portion of the win. This includes any US lottery winnings you won online. It’s considered American income and taxed accordingly.
Lottery organizations are allowed to withhold winnings until tax obligations are met. If you refuse to fulfill your tax obligations on foreign lottery winnings, it is unlikely that you can leave the United States with your prize. This includes winning a foreign lottery prize online. You may also be subject to penalties and interest for failing to pay taxes on time.
You can share or gift lottery winnings to others.
Like many, you may give some of your lottery winnings to family or friends. Rest assured, you can transfer the funds or provide them with cash. This act won’t be considered taxable income for recipients. Ensure it’s not labelled business income or deemed income to some extent.
Income generated from lottery winnings is taxable.
The initial win is not taxable. If you put the money in a savings account to earn interest, it is taxed as income. Another similar scenario is by investing your money in the stock market. You may earn various returns, dividends, and capital gains. In that case, all the money is taxable. It works like any returns, dividends, and capital gains would be.
Invest your lottery winnings smartly.
Lottery winners often consult financial experts to discover methods of reducing their future tax obligations. In Canada, several enticing options exist, such as Registered Retirement Savings Plans (RRSPs) or Tax-Free Savings Accounts (TFSAs). By allocating some of their lottery winnings to these accounts, winners can maximize their available contribution room. In addition, they can reduce taxes on interest accrued within specified limits.
Casino and gambling winnings are also not taxable.
Let’s say you enjoyed a successful night at the casino. Winning money through gambling will not be taxed. It shares similarities to lottery windfalls. It’s considered a financial stroke of luck from an activity where profit isn’t anticipated. You can keep everything!
However, be careful if you regard yourself as a professional gambler and rely on it for your livelihood. That’s when your winnings may be seen as business income. It gets taxed accordingly in Canada.
Lottery losses are not tax write-offs.
As a seasoned gambler, you can claim gambling losses as tax-deductible in Canada. This guideline is only applicable if you’re gambling professionally. Keep in mind this does not pertain to lottery participation. The concept of a professional lottery player doesn’t exist since it’s entirely dependent on chance rather than skill. Consequently, unsuccessful lottery tickets or losses aren’t eligible for tax deductions.