Does Canada still have that thing where you have to answer an easy math problem to enter sweepstakes? Or maybe only Quebec?
They are not gifts, they are prizes: taxable to the recipient, and deductible by the prize giver. It’s a business transaction. The car company didn’t give the car out of the goodness of its heart; they gave it away for advertising goodwill.
In this case, the car company can only deduct the actual cost of production, not the retail value of the car.
Gift recipients do not pay tax on the gifts, nor can the giver deduct the gift from his taxes. When you give your nephew $1000 for graduation, you can’t deduct the gift, nor is he obligated to declare the gift as income.
Those ads line the walls in the Las Vegas airport, near the gates that Air Canada typically uses. I’ve never won big enough in Las Vegas to worry about it, but I imagine that such companies are more a convenience than anything else. They must be doing well enough, though, to be able to afford all that advertising.
In at some states (California and Arizona are two I know of) winning that state’s lottery is not taxable in that state. The feds always want their cut.
If you’re a resident of, say, Illinois, and win the California lottery… well that’s income so far as Illinois is concerned.
I believe that applied to private contests (i.e. some private company, not government-run lotteries like 649 and Lotto Max). It went back to the days when gambling and sweepstakes were an offense against nature and God, and heavens forbid that someone actually won a game of chance… so there was an element of skill added to ensure the person won by virtue of their brainpower, skill rather than chance. Plus, for-profit private companies are not allowed to have gambling. So AFAIK it’s still a thing for private contests. Does not apply to licensed gambling, AFAIK only non-profits like charities can get an actual lottery license for a raffle or Bingo or such. I assume for Video slot machines, the skill tested is being able to insert money in the slot. 
Yes, the “skill-testing question” is still a thing in Canada. It doesn’t apply to government-run lotteries, however; only to privately-run sweepstakes and contests. So, a win at McDonald’s Monopoly or Tim Hortons Roll-up-the-Rim, will require an answer to the skill-testing question, while a winning scratch-off ticket issued by the government-run lottery won’t.
But as you note, the question is usually an easy math problem (and we’re talking as simple as 3 + 5 - 2 = ___ ), and often, the answer will be posted in the place that offers the contest. The skill-testing question is more an anachronism than anything else; a holdover from the days when operating a game of pure chance was illegal and some element of skill had to be involved; but it’s not important enough for Parliament to debate removing it from the Criminal Code. So it remains, but the questions are so simple as to be laughable.
As for Quebec, many, if not most, privately-run contests are not run in Quebec. Unlike other provinces, Quebec requires upfront fees and lots of paperwork to run any contest. It’s more expense and bother that companies don’t have to put up with elsewhere, so most companies just don’t run contests in Quebec.
Thanks, yes I meant private sweepstakes not lotto. A test on the lotto would require the 7-11 employee to actually know the answer :dubious:
Dumb gambling laws are everywhere. In California, craps can’t involve dice. You have to play with c A-6, as dice are low class or something.
I have noticed more giveaways and sweepstakes lately that offer additional cash prizes (or all-cash replacements) to “help with taxes.” Like you can win a million dollar house, a car, and $250,000 or choose to only get the house and cash in place of the car. Or just get all cash but at a lower supposed value. Also saw one that was like a $40,000 car and 10 grand cash to help.
You can have a prize that you win through no intentional effort of your own that does not require anything else to be done by you, such as a Nobel Prize, be assigned to a charity and excluded from your income. Why wouldn’t you just have the income and then deduct the charitable gift? Two (or more) things: One, the Pease phaseout which limits the actual deduction taken by high income individuals (which you would be only if the prize were income), and two, the annual income-based cap on charitable contribution deductions, 50% in general. Additionally, you would have any other deduction, credit, or the like that depended on income phased out presumably as much as possible, but whether those apply is a case-by-case thing.
“No intentional effort of your own” means that even though you intentionally did whatever it was that’s being recognized by the prize, you didn’t do it specifically to win that prize nor did you nominate yourself for consideration for the prize.
You must make the assignment to charity before accepting the prize.
I now feel dumb for overlooking something in my previous response.
The gift tax is a tax on individuals. Corporations are not liable for the payment of gift tax.
In the unlikely event that a corporation, in a spirit of disinterested generosity and affection gave you a gift, it would be treated as a gift from each of the individual shareholders of the corporation and each of the shareholders would be responsible for paying gift tax on their share of the gift. (If the recipient of the gift is also a shareholder, his allocated share of the gift would be excluded from tax.)
So, I don’t know how many shareholders GM has. I presume thousands. If this had been a gift (and it wasn’t a gift in the sense of the word as used in the tax code), I think it is safe to say that each shareholder would have made a gift of less than one cent to each of the automobile recipients. That would easily be covered by the $14,000 annual exclusion (unless the shareholder had made other gifts to the recipient).
See Treasury Regulations Section 25.2511-1(h)(1).
The recipients of these cars were required to pay INCOME taxes, not GIFT taxes. Those are two separate and distinct taxes.
Which brings us full circle -
There are winnings - i.e. lottery, slot machines - these are considered earnings.
There are giveaways - “you get a car, you get a car, and you get a car…” just for being in the audience.
There are gifts - “Gee willickers, nephew Bob. You graduated high school, here’s $2,000!”
What’s the difference between these situations in the eyes of the taxman? Why is a gift from Uncle Fred not taxable to Bob, but one from Oprah or GM is? Is watching Oprah considered hard work? Or is she considered a game of chance (guess her weight)? Or is it the lack of family/personal connection?
No, not “earnings.” Income.
The word “earnings” implies that you had to do something in order to earn them. The tax code does not tax earnings. It taxes “all income from whatever source derived…” IRC § 61(a). You don’t have to earn it.
This is also income. Remember, “all income from whatever source derived…”
Congress, in its infinite wisdom, wrote a law that “gifts” are not income. “Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.” IRC § 102(a)
First, there’s something that needs to be clarified. We are confusing two completely separate taxes here: The gift tax and the income tax. One is a tax on “gifts” the other is a tax on “income.” The workings of the two taxes are completely separate and must be considered separately.
Most people are familiar with the income tax. It is taken out of their paychecks and they have to file long forms every year. It is an exceedingly simple tax. It starts out by saying you have to pay a tax on “all income from whatever source derived…” Couldn’t be simpler, right? You get money, you pay income tax on it. And then, it lays out a few hundred pages of exceptions and special rules. (Before you reach for the “reply” key, please note the tone of sarcasm in my typing, OK?)
So, as far as your first example, winnings, goes: They are income, there is no exception anywhere in the tax code for them. The income tax applies to them. Whether they are “earnings” or not is irrelevant.
Your second example: giveaways. Same analysis as winnings. Is there an exception in the code for giveaways? No? Then pay income tax.
Third example: Gift to nephew Bob. Is there an exception in the code for gifts to nephew Bob? Why, yes there is! IRC § 102(a). No income tax for Bob!
Then there is another tax, called the “gift tax” which is completely separate from the income tax. This tax is imposed only on “individual[s]” IRC § 2501(a). It is not imposed on corporations or other entities. Most people will never pay this tax and know very little about it, except when they run into debates on the internet. This tax is imposed primarily on the donor of a gift. But if the donor of the gift is liable for paying a tax on their gift and fails to do so, the donee (recipient) of the gift can be held jointly liable up to value of the gift.
So the big argument that shows up every couple of months is “Gee, the Oprah cars are gifts, right? Isn’t it obvious?”
Well, to settle that question, we should be able to just look at the law and find the definition of a “gift” and be done, right? Well…it would appear that Congress thought it was so obvious that they didn’t need to define it, just put in a few specific inclusions and exclusions.
So it becomes the job of the IRS to write up regulations explaining their interpretation and for the Courts to slap their hands if they think the IRS has overstepped its bounds.
Probably, the most complete legal summary we have of what is and what isn’t a gift is the US Supreme Court decision in Commissioner v. Duberstein
363 U.S. 278 (1960). I’ve linked to it, if you are seriously interested in the topic, you should read it. It basically says that the matter must be decided on a case-by-case basis taking into account the donor’s intent. It reaffirms previous rulings that say
So did the Oprah cars proceed from a detached and disinterested generosity out of affection, respect, admiration, charity or like impulses? You decide.
If you decide yes, nobody owes any gift or income taxes, except for the shareholders of GM who might in the worst case owe a fraction of a penny in gift taxes.
If you decide no, nobody owes gift taxes but the recipients owe income taxes.
What "Gift Taxes’ are is really Estate taxes. So you cant "give’ all your stuff away on you deathbed and not pay Estate taxes.
Very very very very few people pay Estate taxes.
Thanks for the detailed explanation. So basically, if it’s one of those shows where “oh, you lost everything in a house fire, poor family, here’s a new house and furniture after coming on the show to tell your story” Then I assume that satisfies the “generosity” criteria, whereas GM giving a car to audience members for the helluvit (i.e. publicity) is not considered detached generosity…?
(Actually, you do have to work for your VLT winnings, you have to pull a lever.)
Yeah, they’re taxed the same, but money earned through wages, sales, etc. is considered separate from passive income. If you made $10,000 wages last year and nothing else, you’d be eligible for the EITC, but you wouldn’t if you’re living off interest and dividends, or winnings.
As the Duberstein court said, the motivations have to be considered on a case-by-case basis. I’m not prepared to argue that such a show would meet the detached generosity criterion. It could be argued that paying the guests is an expense of producing an entertainment show which is then distributed to TV stations for a profit.
Interesting aside along these same lines: You know those “home makeover” TV shows where they remodel the home of a family with a crippled child and give them back a remodeled home that they can’t afford to pay the real estate taxes and utilities on?
No one argues that those are gifts, not subject to income taxes. But they use an ingenious tax loophole to prevent the families from having to pay taxes. There is a provision in the income tax code that if you rent out your home for 14 days or less in a year, you don’t have to pay any tax on the money (or other valuables) you receive for renting out the house.
So the production companies lease the houses from the families for 14 days and the improvements they make to the house are their payment for the lease. Sound preposterous? Well, nobody has challenged the practice.
I first came across this some months ago when I couldn’t believe people had to pay tax on their winnings. It seems demented. If the Revenue want some of the winnings they should pay for part of the action. Britain used to have Betting Tax ( 6% against USA 25% ), but that applied to sports bets made in bookmakers.
*All winnings from sports bets, casino play, lotteries and other forms of gambling are completely tax free. Furthermore, you don’t even need to declare it to HMRC.
*
Anyway, came across a useful and funny article from the Off Shore Gaming Association [ sadly I am not a gambler myself ] by a Hartley Henderson in 2011.
Is the U.S. System of Taxing Gambling Winnings Fair?
*Even better news for those foreign players is that there is usually no income tax paid on gambling winnings in their home country either. UK citizens aren’t taxed on gambling winnings at all nor are Germans and in Canada all taxes on windfalls are tax free. So in Canada, if someone were to win $50 million in the lottery they would be given the full amount up front with no taxes due on the amount. Professional gamblers are required to pay income tax on their earnings but a couple of Canadian tax lawyers have informed me that tournaments, unlike regular poker games are generally exempt because they are predominantly luck. *
…
*I was curious when exactly the U.S. decided that gambling winnings were taxable and there doesn’t seem to be a concrete answer. As far as anyone can tell when the 16th amendment was passed in 1909 and ratified in 1913 it was decided that all revenue, regardless of what type of revenue it is or where it is obtained will be taxable at the rate decided by the treasury and state. So income from a job was clearly taxable, but was gambling revenue really intended to be income? At the turn of the century prohibition against gambling meant that only horse racing was a legitimate form of wagering. The professional gamblers of the old west and the prevalence of lottery games in the 1800s were nowhere to be found by the time 1909 rolled around. In fact New Mexico and Arizona had to outlaw casinos in order to gain statehood. Of course there were illegal underground gambling operations run in speakeasies often controlled by the mob but it’s safe to say that no one bothered to declare money won at a mob based casino on their income tax form.
*
…
And some splendid ressentiment from an accountant…
*Indeed I spoke to a couple of U.S. tax accountants who were hardly sympathetic to gamblers. One of those accountants, John Stephenson, who runs a medium sized accounting firm and who says he has several gamblers as clients was downright hostile to anyone who wants to change the tax system.
*
“Pius Heinz is hardly lucky to be a citizen of Germany,” Stephenson said. “Germans are taxed to death. The same is true for Brits and Canadians. The United States has one of the lowest income tax rates in the world and the reason we can do so is because we have the opportunity to tax other areas like gambling. As well, we have far greater write offs against income tax. As far as I know the U.S. is still the only country where a citizen can write off mortgage payments. If there is anything I regret it’s that the U.S. has these tax treaties at all. There is no reason Heinz shouldn’t pay 30% of his $8 million dollar win to the IRS. Hell, if I had any say in the matter foreigners would have 50% withheld.”
So what? Oprah Winfrey has a lot of money. Why does that obligate her to pay other people’s taxes?
Do you feel every billionaire owes you something?
I don’t know. Canadians pay about the same tax as Americans, AFAIK. on earnings of about $80,000 I pay about 28% in income tax (federal and provincial). Sales tax is higher, between 5% and 14% depending on province, but a lot of basics - groceries, rent, insurance payments - are typically tax exempt.
My impression is that the share of taxes that civilized countries spend on their health care, the USA spends on their military. (And hence their deficit)
Nah. US spends a moderate amount on defense per capita. They spend way, way too much on healthcare.