Winning the lottery is enough to make anybody ecstatic. Once the emotions wear off, though, the first question is often, “Are lottery winnings taxed in Canada?“
Canada does NOT tax lottery winnings of any amount, no matter how small or large your win may have been. This means that you don’t have to report your winnings when filing your income taxes.
This means that you’re free to spend or invest your earnings however you see fit!
Below, I’ll explain more about how the lottery works in Canada, how gambling winnings are taxed, and give you some tips on how to make the most of your winnings.
How Lottery Winnings Are Taxed In Canada
Personally, I’m not much of a lottery player.
Every now and then, I might buy a $5 scratch-off ticket for fun. I’ve never won more than a few dollars from a ticket, though, so I just don’t see the point. I’d prefer to put my money into investments with a higher rate of return.
Recreational players and lottery winners will be happy to hear that their winnings are exempt from taxation. Furthermore, the law states that you don’t even have to report winnings on your tax return.
That being said, any interest or earnings generated from the lottery winnings may be subject to standard income or capital gains taxes.
For example, if you win $100,000 from the lottery and invest the sum into the stock market, the earnings realized from that investment are taxable.
How The Lottery Works In Canada
Have you ever played the lottery? Here are a few interesting statistics to keep in mind:
- Around 51% of Ontario adults purchase a lottery ticket (such as Lotto Max or other scratch-offs) at least once a year, according to a study by Ontario Lottery and Gaming.
- British Columbia missed over 100 million winning tickets in 2022.
- Canadians are more likely to be bitten by a snake or struck by lightning than they are to earn significant winnings.
Although it’s certainly possible to win money playing the lottery, it’s nowhere near as common as you may think. I don’t recommend playing the lottery unless it’s strictly for occasional fun and personal enjoyment.
Like gambling, playing the lottery can be addicting, and most people lose far more than they earn.
Is The Lottery Regulated In Canada?
All Canadian lotteries are regulated by their local provincial governments. Lotteries that aren’t registered with and regulated by a provincial government are illegal. This also applies to raffles, where participants purchase tickets hoping to win an award or cash prize.
Only non-profit groups and religious organizations are allowed to perform raffles. Even then, these events are strictly regulated by the local government.
Why does the government regulate lotteries?
For one, government regulation keeps lotteries safe, fair, and organized for everyone. However, the lottery is also a significant source of income for local governments, and the funds are often re-directed into public education, road maintenance, and other aid programs.
Even if a Canadian wins money, the house (the government, in this case) still comes out on top.
Do You Have To Pay Taxes On Lottery Winnings In Other Countries?
Canada’s gracious stance towards lottery winnings doesn’t necessarily extend to other countries. In many countries, lottery winnings are subject to taxation.
The government often takes its share of the earnings before issuing the remaining amount to the winner.
This also applies to foreign visitors.
For example, if Canadians visit the US and win the lottery, they must report their earnings to US tax authorities. In the US, lottery winnings are subject to a 24% federal tax as well as up to 13% in additional local-state taxes.
All-in-all, the winners may only be able to keep around 60% of their earnings.
Each country has its own laws regarding how winnings are taxed. My advice is to research these laws before you play the lottery or gamble, as foreigners are typically subject to the same taxes as the country’s citizens.
Are Gambling Winnings Taxable?
If you think about it, playing the lottery is a gamble. Players may win or lose a few dollars and very actually hit the jackpot. Casinos generate large amounts of revenue, much of which ends up in the government’s pockets through business taxes.
Lucky winners will be glad to hear that casino winnings or money won from a bet, such as horse racing, are not subject to taxes.
However, professional gamblers who own a gambling business may be required to report some of their earnings as business income.
What About Online Gambling?
Online gambling winnings are treated like offline gambling winnings in Canada. This means that you don’t have to claim any of the taxes you win from online casinos, sports betting, and other forms of legal betting.
Are Gambling Winnings Taxed In Other Countries?
Every year, around 1.5 million Canadians fly to Las Vegas, Nevada. Many of them participate in some form of gambling while they’re there, even if it’s as simple as playing slots.
If you happen to win money while gambling in another country (such as the US), your winnings may be subject to taxes. US citizens, for example, must report all gambling earnings and pay taxes as if it were regular employment income.
Taxation rates depend on a number of factors and may differ from one country to the next. It’s always a good idea to do some research before you gamble across the border.
Are Gambling Losses Tax Deductible In Canada?
Most players lose more than they earn while gambling or playing the lottery. It’s important to note that gambling losses are NOT tax-deductible in Canada. This is only fair, as your earnings are also non-taxable.
Professional gamblers are the only individuals who may be able to claim gambling losses as a tax deduction. This is because gambling is their primary source of income.
Best Ways To Invest Your Lottery Winnings In Canada
Many lottery and gambling winners find themselves back at square one within a few years, spending more than they invest. One of the best ways to prevent this is to take your winnings and invest them in:
- Starting a small business
- High-interest Savings Accounts
With that in mind, here are some of the best ways to invest your winnings.
Invest In ETFs
You may be tempted to invest your money into a trading platform like QTrade Questwealth and start trading stocks. Unless you’re an experienced trader, though, you’re liable to lose more than you win.
If you’re new to trading and investing, I’d recommend investing in exchange-traded funds (ETFs) instead. ETFs are essentially portfolios that hold shares in top-performing stocks and industries.
Professional investors manage these ETFs, meaning the average retail investor will see consistent long-term growth if the ETF is carefully managed.
- Not sure where to start? Check out my guide on How To Buy ETFs in Canada!
Maximize Your TFSA Contribution Room
Lottery and gambling winnings aren’t taxable in Canada and don’t need to be reported on tax returns. However, any income generated by your winnings will be subject to standard tax rates.
For example, if you invest $250,000 of earnings into an ETF and withdraw $10,000 of profit at the end of the year, then you’ll need to pay capital gains tax on that amount. This also applies to interest earned by lending stocks.
One of the best ways to avoid capital gains taxes is to use your tax-free savings account (TFSA) as an investment vehicle. Many banks and brokerages offer TFSA investment accounts, which are incredibly easy to sign up for.
Any earnings realized within a TFSA are non-taxable, meaning you can withdraw profits at any time tax-free.
This means that you could use your TFSA to purchase reliable investments, such as ETFs or real-estate investment trusts (REITs), earn a consistent profit, and not have to pay taxes.
The only caveat is that TFSA accounts have annual and lifetime contribution limits, which must be strictly followed. This means that big winners may not be able to put everything into a TFSA.
It’s still a great way to shelter some of your earnings from future taxes, though.
Purchase A Rental Property
If you’re a natural entrepreneur, you may also consider investing in a rental property, such as:
- A duplex or four-plex (building with two or four apartment units)
- A short-term rental property to rent out to travellers on AirBnB or VRBO
- A home that you plan on renting out long-term and eventually selling for a profit
Keep in mind that managing a property may not be as easy as it seems. As a landlord, you’ll be required to register for a business, learn your legal obligations as a landlord, and maintain the property. You’ll also have to manage your tenants and any issues that may arise with them.
The Verdict – Lottery And Gambling Winnings Are Non-Taxable
One of the great things about playing the lottery or gambling in Canada is that your winnings are tax-free. You can keep every dollar you earn and spend or invest it how you like. Just remember that income generated from your earnings is taxable.
Looking for even more ways to invest your lottery winnings? Keep reading to see my list of the best long-term investments in Canada.