POKER PLAYER DENIED TAX BREAK

Thursday, June 16 2011 : If you're thinking of making poker a business, read on…
 
The Globe and Mail newspaper carried a cautionary tale about a would-be poker pro and his tax problems this week, illustrating the need for prospective pros to make sure they have put in place clear indications of their intention to play professionally.
 
The newspaper reports that Toronto lawyer Steven Cohen decided to quit his $200,000-a-year legal career to become a full-time poker player.
 
It didn’t go well. Although he prepared by reading books, attending seminars and playing in internet and live tournaments, he did not enjoy great success, and by the end of his first year as a ‘pro' in 2006 he had lost interest and $122 000, and decided to go back to lawyering.
 
Cohen claimed his losses in his next tax return on grounds that he had played as a business and was entitled to the losses as deductions, but the Canada Revenue Agency disagreed, ruling that Cohen's activities represented a hobby and not a business.
 
He appealed, and the findings of the Tax Court of Canada provide a cautionary tale for would-be professionals.
 
Judge Frank Pizzitelli sided with the taxman, saying that Cohen had failed to show he had been engaged in a commercial venture with a reasonable expectation of profit.
 
The judge dismissed Cohen’s attempt at bettering his game by buying books and attending a seminar, saying that was not business-like training. “I take judicial notice of the fact many hobby chess players I know have a small library on the game, chess moves and famous players, but are not professionals merely by such ownership of material,” the judge wrote. “The fact [Cohen] lost money every month, including the first three months he played smaller-stakes games, does not even suggest a superior skill set at that level.”
 
The judge also criticised Cohen’s business plan, ruling it was inadequate and did not include any proper budgeting, tax planning or financing. Cohen’s main source of financing, the judge noted, was increasing his credit card limit from $27,000 to $40,000.
 
“Having regard to all of the above, I cannot find that [Cohen] demonstrated that he conducted his venture in such a manner as to constitute a profession, calling, trade, undertaking, or adventure or concern in the nature of trade so as to fall within the definition of a business,” the judge ruled.
 
Benjamin Alarie, a law professor at the University of Toronto opined to the Globe and Mail that there will be a lot more cases like Cohen’s because so many Canadians are playing poker online.
 
Prof. Alarie said there is a big difference between playing poker recreationally and trying to become a professional. Recreational players are not taxed on winnings, but can’t write off losses. Professional players are taxed on winnings and can claim losses.
 
“There are a number of young Canadians who play online poker from their parents’ basement and they are earning significant amounts of money,” he said. “They’re in a tough spot because are they professional or are they not? They are not really relying on the winnings to support themselves, but they are making significant amounts of money. Should they be considered professional or not?”
 
He added that so far very few players have been able to convince the CRA and the courts that they have moved from recreational playing to becoming a professional. “It’s hard to say exactly where the line is because we don’t know where the line is,” he said. “It’s a fascinating case.”