In a bewildering instance of WTF, Canada is demonstrating that it has some pretty odd tax laws. Gamblers are given a break in the country and aren’t required to pay taxes on their winnings. However, casino employees are required to split the tips they earn on the job with the taxman. The National Post reports that a Canadian Federal Court of Appeals (FCA) judge decided this week that tips are not gifts, which would have allowed them to be exempt from the tax rules, but, rather, income that needs to be taxed like other earnings.
The tip tax tiff began when a slot attendant, Cheng Xia, working at the Grand Villa Casino in British Columbia took issue with the Canadian Revenue Agency’s decision that he had not properly recorded his income in 2011 and 2012. He reported his income just on his base salary, which was $29,327 in 2012, and didn’t include the $39,219 he had earned in tips, and this irked Canada’s taxman. He fought back, asserting that tips aren’t a form of income, but lost his case in 2018. Subsequently, he filed an appeal that led to the FCA’s ruling this week.
Adding to the perplexing situation surrounding the court’s decision, Canada has defined winnings from gambling as not being subject to tax collection because, as the government puts it, these winnings are not a consistent source of income in most cases. Given the definition of a tip, it would seem that the two – tips and gambling winnings – share a lot of similarities. The exception to the no-tax rule on gambling winnings is found when the activity is used as a profession, such as with a professional poker player.
Making it even more confusing, the tips received usually come from the gambling winnings when someone hits it big on a slot machine. In other words, non-taxable winnings by a gambler are taxable when given to an employee in the form of a gratuity. Since tips normally wouldn’t be given unless the gambler wins, they’re definitely not a “consistent source of income.”
Unfortunately, Xia’s case never really stood much of a chance in court, despite the complete lack of logic behind the tax code. According to Canada’s federal Income Tax Act, taxable income on salary includes the base compensation and “other remuneration, including gratuities,” including “benefits of any kind whatsoever received or enjoyed by the taxpayer… in respect of, in the course of, or by virtue of the taxpayer’s office or employment.”
The FCA decided that the previous court judge, Diane Campbell, was accurate when she wrote in 2018, “To the casino patron who wins a jackpot, his or her winnings will not be taxable. However, when part of those winnings are paid over to an employee of a casino as a thank-you or in appreciation of the services the patron receives, the nature of that amount changes from being non-taxable to a taxable amount in the hands of the employee.”
As a result, Xia is going to have to pay a fine of CA$8,411 (US$6,342) for what the court deems “gross negligence.”
