Canadian Crossing Concerns

     If you are a Canadian who wins big (over $10,000) in the USA, you might be the subject of two currency transaction reports. One filled out by the US casino where you won the money for the IRS and one filled out at the border for the Canadian Border Service Agency (CBSA).

     Why, you ask?

     The first report is the Form 8300 filing required by Title 31 of the US code to circumvent money laundering and the funding of terrorist activities. It applies to aliens as well as to US citizens. How do I know that? From the instructions at 4.26.10.7.1(5) of the IRS document HERE. It indicates that identify verification for aliens or non-residents must be done by using the person’s passport, alien Identification card, or other document evidencing nationality or residence. The document used is recorded on the form, and the form is sent to the US Government to aid in its money laundering investigations.

     The second report is required by the CBSA. You can read their guide for yourself at CBSA. Here’s what it says:

     It is not illegal to transport money across the US/Canada Border. It doesn’t matter how much money you bring into Canada or how much money you take out of it. But there is now a requirement to report to a border services officer transactions totaling CAN$10,000 or more. It makes no difference whether the money is coin or currency, domestic or foreign, or whether it includes travelers cheques, bank notes or securities. If it’s more than $10,000 and it’s cash, you must declare it and complete Form E677.

     If the funds are not your own, you complete Form E667 instead. You cannot avoid the requirements by mailing the funds into Canada. The form must be completed and included with the item being mailed. Another copy is sent to the nearest CBSA office at the same time. Other postal requirements may exist. Nor can you avoid these requirements by sending the money by courier. If you fail to report monetary instruments greater than $10,000, your funds are subject to seizure and the assessment of penalties or forfeiture. Penalties can range form $250 - $5,000. 

     Canadians with questions can call throughout Canada at 1-800-461-9999. Outside of Canada call 204-983-3500 or 506-636-5064. 

     There are a lot of sites with threads discussing CBSA reporting requirements on the internet. Unfortunately many of these bloggers are making suggestions about how to circumvent the rules. Are they devious people? Or do they not understand the rules and the reasons for them? Why should you need to hide something legally won? Especially if it is recreational gambling winnings. Canada doesn’t tax recreational gambling winnings of its citizens - only a Canadian professional gambler’s business income is taxed by Canada.

     Not all of the ideas put forth on the web are bad. One writer had some very good suggestions. He suggested you document where the money came from - a letter from the casino, a picture of the winnings, a copy of your plane ticket, etc. He advised that you ask the casino to write you a check for your winnings rather than try to carry large amounts of cash across the border. He felt that the Canada Revenue Agency might contact you about the money, and if you couldn’t prove that is was recreational gambling winnings, they’d want it declared as taxable income. 

       Incidentally, don’t forget 30% is withheld by the US casinos from foreigners on large wins. If you are a Canadian citizen with winnings in the States, you may need to file a US 1040NR return to have overwithholding refunded at tax time. Take a look at my earlier post HERE that addressed Canadian gambling rules if you’ve forgotten.

Canadians Gambling in the USA

       The USA taxes all gambling winnings won in this country, both the winnings of its citizens and the winnings of the foreigners who gamble here, like our friendly Canadian neighbors who cross the border to play in our casinos.  US casinos withhold tax from all foreigners gambling in this country when paying out hand pays, the winnings they have to report on form W2G. And they withhold a lot! They withhold 30% of any reportable jackpot wins - the ones over $1,200 - regardless of the foreign gamblers’ home country’s rules or rates for taxing gambling winnings. Why do they do this and why do they withhold so much? 

       Well, for one thing, casinos are required by law to withhold tax in certain instances. They must withhold 28% when a US jackpot winner doesn’t provide and certify his Social Security number on a W9 form. This is called backup withholding. Threatening to backup withhold 28% of a winner’s jackpot is a good way for the casino to encourage the player to provide his SSN for the W2G form. The withholding is shown in box 4 of the W2G the casino gives the US resident, who will claim it on line 64 of his 1040 when he files. Over-withholding from US citizens by the casino is refunded when they file Form 1040 just like overwithholding from an employer is. 

      Casinos are also required to withhold 30% of reportable winnings from foreigners — slot winnings over $1,200 currently. The foreign gambler can file a non-resident tax return (Form 1040 NR) for a refund from the United States if too much tax was withheld here from his winnings. If he doesn’t bother filing that claim within 3 years, our government still got its share of his jackpot.

       There are a lot of companies who will file form 1040 NR for Canadians who had tax withheld in the USA. Their ads pop up on my computer all the time. You can see the 1040 NR form and read its instructions on the internet yourself at IRS.gov. The form seems fairly complicated. The income of the Canadian citizen earned in the United States falls into one of two categories - effectively connected income (such as income from a business located in the US) or non-effectively connected income (which includes gambling winnings.) The instructions direct residents of Canada to use lines 10a — 10c of the Schedule NEC to report their gambling wins and losses. Residents of other countries use line 11. Here’s what the instructions from last year’s 1040 NR Schedule NEC say. 

       “If you are a resident of Canada who is not engaged in the trade or business of gambling, enter all gambling winnings on line 10a. Include proceeds from lotteries and raffles. Do not include winnings from blackjack, baccarat, craps, roulette, or big-6 wheel. You can deduct your US source gambling losses to the extent of your US source gambling winnings. Enter your gambling losses on line 10b. Enter your net gambling income on line 10c, column (c). If line 10b is more than line 10a, enter 0 on line 10c.  A net loss from gambling activities is not deductible.”

       That part doesn’t seem too bad. Canadians report their US wins, they subtract their US losses for which they have records. (Remember to keep a diary!) The difference (if any) is the reportable taxable income. Unfortunately Schedule NEC is not all you have to complete. You also have to file it with Form 1040 NR, and that tax return seems to be a rather  complicated one.  People will want to charge you money to file it for you, probably a lot of money.

       Bottom line is, if the Canadian gambler files Form 1040 NR, he will probably have a refund of at least part (and maybe all) of what was withheld by the casino — unless he has other income connected with the USA to report on his US non-resident tax return. But because Form 1040 NR is a very specialized tax return to file, his tax preparer will take a fairly large part of his refund to file it for him. If you are a Canadian paying someone to do this form for you, make sure you use a preparer  who has had experience with the 1040 NR. Keep any paperwork the casino gave you showing the amount the casino withheld to give him.

       Or, if you prefer, you can use one of the companies on the web that make a living recovering such withholding instead.

       Or, if you are really ambitious and really into taxes and accounting, you can order the forms and instructions for Form 1040 NR from irs.gov or print them off the internet and fill them out yourself. You will probably also need Form W-7 to apply for an ITIN - Individual Taxpayer Identification Number - if you don’t already have one. An ITIN is an individual taxpayer identification number used for filing tax returns in the US by people who are not eligible for social security numbers.

       Or you can avoid max bets and hope your wins are small enough that you don’t get any hand pays requiring tax to be withheld. 

      But maybe your best option is to just gamble in Canada where they don’t tax their residents’ gambling winnings!  That’s what I would do.

Gambling in Canadian Casinos

       Nobody likes to pay taxes, but we all understand why we have to do it. How would our federal and state and local governments all pay their bills if we didn’t all chip in our fair share? Who’s going to finance these roads and schools and armies and services deemed necessary for our well-being if we don’t all pay our part?

       OK, we’re all willing to pay our fair share of taxes if everyone else does too. But we wish our share didn’t have to be quite so much. And we slot and table players wish our taxable income didn’t have to include our gambling winnings at all. It doesn’t seem fair that we have to pay tax on money we won today if we give it all back when we play tomorrow. 

       Well, guess what - if we were residents of Canada, we wouldn’t have to pay tax on our gambling wins. Not on money won in Canada anyway. For recreational gamblers - which is what we all are - gambling winnings are tax free. Yes, you read that correctly. Recreational gambling winnings in Canada are tax free! 

       …for Canadian citizens.

       Under Canada’s Income Tax Act, “windfalls” such as lotteries and sweepstakes are not taxable. Prescribed prizes awarded for meritorious achievement in the arts, sciences, or public service are also exempt from taxation. Canadian taxable income encompasses total income from just four sources: office, employment, business, and property. So, unless the gambling activity is in fact a business, our sensible neighbors to the north do not tax their resident’s gambling winnings. They recognize that almost nobody wins if they gamble long enough, and so they don’t require reporting either gambling wins or gambling losses at tax time. How lucky can our Canadian neighbors be!

       You might wonder what happens when US residents cross the border and gamble in Canada. What if a US citizen gets lucky and wins at Windsor - will his gambling winnings be exempt from tax  too? We just said Canada does not tax recreational gambling winnings.

       Sorry. The answer is no. (You thought it would be, didn’t you?) The USA taxes all income you have no matter what the source, unless specifically excluded by law. The IRS doesn’t care whether you won your windfall in the United States or in Canada or on a boat in the middle of the Pacific Ocean. They don’t care if you won the money playing slots in a Native American casino or shooting craps in some back alley. They don’t care if the game was legal or was totally against the law. The IRS doesn’t care where or how you won the money. They just want you to include it on your 1040 Form and pay tax on it. Log it in your gambling diary. Include it on line 21 of your 1040 with your other gambling winnings. It’s all taxable income in the USA. Period.

       It’s a little like winning a jackpot in Nevada, which does not have a state income tax, when you are a resident of California which does have a state tax. A very large one. You pay tax to California for your Nevada win. You pay tax to the USA for your Canadian one.

       Fair? Unfair? Who’s to judge. Well, one thing’s for sure — it’s good for Canadians and it’s good for the IRS. It just might not be good for you and me.  Coming soon, Canadians winning in the USA.