Canadian Gamblers Tax Guide

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Disclaimer: This article is limited to the one or more Federal tax issues addressed in the article. Additional issues may exist that could affect the Federal tax treatment of the transaction or matter that is the subject of this article and the article does not consider or provide a conclusion with respect to any additional issues. With respect to any significant Federal tax issues outside the limited scope of this article, the article was not written, and cannot be used by the taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.

Pity poor John Smythe. On one beautiful June day he walked into the Bellagio casino in Las Vegas and entered their $500 + $40 (entry fee) poker tournament. He even managed to get to the final table where he finished in ninth place and won $600. Well, a net win of $60 is better than losing $540, he thought. As he walks away from the table the tournament director asks to see his identification. John shows him his Alberta driver license. The tournament director looks at it, frowns, and fills out John’s W-2G, and hands John $420.

John counts the money but comes up short of the $600 he is expecting. “Hey,” he exclaims to the tournament director, “Where’s my other $180?”

“I’m sorry,” the tournament director states. “The IRS requires us to withhold 30% of all gambling winnings to Canadians. You’ll see that it is noted in Box 2 of the W-2G.”

John looks at the W-2G, sees the $180 noted in Box 2, and asks the tournament director, “How do I get my money back? I’m from Canada!” But the tournament director has gone back to watch the tournament.

John can get some of his withheld money back, but it’s not that easy of a process. First, John should check the W-2G and look at what identification number is listed in Box 9 of the W-2G, if any. The tournament director should have asked John for his Individual Taxpayer Identification Number (ITIN). This is a nine-digit number that begins with a 9, and has a 7 or 8 as the fourth digit, and is formatted as follows: 9xx-7x-xxxx or 9xx-8x-xxxx. Normally, you obtain an ITIN by filling out Form W-7. It would seem that obtaining an ITIN before you head to Las Vegas would be a good idea; however, the IRS changed its’ procedures in 2003 and it appears that Canadians can no longer obtain an ITIN in advance of a trip to Las Vegas.

However, this shouldn’t be a problem – the IRS recognizes that there will be situations where an ITIN needs to be issued almost immediately. The IRS has set up procedures with withholding agents (such as casinos) so that they can issue an ITIN on an expedited basis. So John should either receive a W-2G with his ITIN or receive a revised W-2G in the mail with his ITIN. (An ITIN is kept by an individual for his or her life.)

Unfortunately, that’s just half the battle. How does John get his withheld tax back?

John will need to complete Form 1040NR available at the IRS’s website, www.irs.gov. John will have to wait until after the close of the calendar year in which he had his money withheld.

Form 1040NR appears complicated because it mimics the IRS’s standard income tax form (Form 1040). However, John will only have to complete his name, address, filing status, and dependents (lines 1-8), include all his U.S. gambling income on line 21 (Other Income), include all his U.S. gambling losses on line 35 (Itemized Deductions), and his exemptions on line 37 (of course, all of the boxes which subtotal and total various lines must be completed, too). He will then obtain his taxable income (line 38) and his tax (line 39). He’ll include the amount withheld on line 57 (and attach the appropriate copy of the W-2G to page one of Form 1040NR). He’ll sign his return (if he’s married, his spouse does not have to sign the return), and mail it to the IRS. In about 90 – 120 days, he’ll get his refund.

If John has substantial income, or if he can’t figure out how to complete the paperwork, he should consult a professional tax preparer that is familiar with non-resident income tax returns.

John should look at the bright side – at least Nevada doesn’t have a state income tax. Had he won his money in California or Mississippi he might have to file a state tax return, too.

By Russell Fox – a tax practitioner enrolled to practice before the Internal Revenue Service. He can be reached by email at [email protected]

money being withheld, the IRS’s current position is that it won’t issue an ITIN in advance for gambling purposes. However, it may be possible for a Canadian to obtain an ITIN by citing some other relevant portion of the tax treaty.

Canadian Gambler’s Tax Guide