Canadian Court of Appeals Says Tips to Casino Workers Are Taxable Income

A Federal Court of Appeals in Canada has upheld a previous court ruling that money granted to casino staff as a “thank you” compensations or tips are still subject to Canadian tax law.

Casino Workers Tips Subject to Taxation, Lawmakers Say

A Canadian Federal Court of Appeals (FCA) judge has ruled earlier this week that tips couldn’t be construed as gifts and therefore they couldn’t be exempted from tax. Effectively, with the present decision, Canadian casino workers are now facing a tax on any and all tips that they receive, the National Post reports.

The case came to light when Cheng Xia, an employee at the Grand Villa Casino in British Columbia was petitioned by the Canada Revenue Agency to explain a discrepancy in his income. At the time, back in 2012, Mr. Cheng was earning $29,327 as base salary, but his salary didn’t include the $39,219 he also received as tips, prompting the tax services to take a closer interest with the issue.

He then filed a lawsuit to challenge the tax man’s interpretation of tips as taxable income, but eventually lost in 2018. However, Mr. Cheng also took the issue up with the FCA, which finally came up with a ruling this week, arguing that the Canada Revenue Agency had justly took issue with Mr. Cheng’s income, which more than doubled owing to the tips.

Gambling Tips Taxable, But Not What You Win from Gambling

Surprisingly, though, Canada doesn’t see gambling winnings as taxable income due to the volatile nature of the games and the unpredictability of the outcomes. In other words, because these winnings are not a sustainable source of income, they cannot be levied with tax, Canada’s lawmakers argue.

“Even if gambling winnings are generally not taxable in the hands of a casino patron, a tip or gratuity given by that same casino patron to a casino employee is not a gift and is taxable income": https://t.co/zsU5LZclKM #taxlawyer #taxlaw

— Mark Feigenbaum (@feigenbaumlaw) February 12, 2020

There are some small exceptions made for ‘professional poker players,’ but even then, determining the status of the player is often a bit of a challenge, especially if the individual does not identify as such.

Even though tipping and gambling income bear a lot of similarities, they are as it is, the opposite sides of the same coin. What is peculiar in this case is the nature of the tip. Unlike a server’s tip in a restaurant, for example, tips are only awarded as a token of gratitude and appreciation by a gambler who, in most cases, has just won from gambling.

Yet, the court is disinclined to interpret these tips as an extension of gambling wins. However, the law is also very specific about gratuities, and Canada expects individuals to state their full income regardless of the form it was earned in.

In the 2018 statement, Diane Campbell, the previous judge to oversee the case prior to the FCA appeal, was correct in her surmise that:

“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 […] the nature of that amount changes from being non-taxable to a taxable amount in the hands of the employee.”

The judge also noted that Mr. Cheng clearly stands out as both a well-educated and intelligent individual, which makes him capable of interpreting the law and that he should have been able to state his full income at the time. As a result, he will now have to pay a $8,411 fine for gross negligence.

The court also elaborated that as soon as a player’s winnings are donated or given away to casino staff, they change their nature to taxable income.