Winning the lottery is a dream come true for many Canadians. The chance to win millions of dollars can seem incredibly tempting when buying a lottery ticket. However, along with the euphoria of winning a jackpot prize comes the reality of having to pay taxes on those winnings. Understanding how lottery winnings are taxed in Canada is an important step in making the most of a big lottery prize.
Are lottery winnings taxed in Canada?
Yes, lottery winnings are considered taxable income in Canada. This means that anyone who wins a lottery jackpot, or other lottery prize over $1,000, will have to pay tax on those winnings. The full amount of the winnings, not just the portion over $1,000, must be reported as income.
Lottery winnings fall under the “windfall” category of taxable income for the Canada Revenue Agency (CRA). They are subject to the same federal and provincial tax rates as regular income such as employment earnings. The rate you pay depends on what tax bracket your total income for the year places you in.
What taxes apply to lottery winnings?
Lottery winnings are subject to both federal and provincial income taxes in Canada. This includes:
– Federal income tax
– Provincial or territorial income tax
– Canada Pension Plan (CPP) contributions
– Employment Insurance (EI) premiums
The rate for CPP contributions is 4.95% up to an income maximum of $64,900 for 2023. The EI rate is 1.58% on income up to $60,300 for 2023.
In addition to income tax, lottery winnings may be subject to withholding tax at the time you collect your prize. More details on withholding tax are provided later in this article.
What is the tax rate on lottery winnings?
As lottery winnings are considered ordinary income, they are taxed at your federal and provincial marginal tax rates. Your marginal tax rate is the rate you pay on your next dollar of income based on your total taxable income for the year.
Canada has a progressive tax system with increasing tax brackets based on income level. The federal tax rates and brackets for 2023 are:
| Taxable income | Federal tax rate |
|---|---|
| Up to $51,631 | 15% |
| $51,631 to $103,267 | 20.5% |
| $103,267 to $159,143 | 26% |
| $159,143 to $221,708 | 29% |
| Over $221,708 | 33% |
Each province and territory also has its own set of tax brackets and marginal rates. The combined federal and provincial marginal rates can range from around 25% to over 50% depending on the province and your income level.
For example, if you won $1 million from the lottery as a resident of Ontario, your federal marginal rate would be 33% on the portion over $221,708. Your Ontario marginal rate at that income level would be 13.16%. So your combined marginal rate on your lottery winnings would be 46.16%.
Are lottery winnings taxed at source?
In some cases, yes. Many provincial lottery corporations will withhold tax directly off your lottery prize when you go to claim it. Others will require you to pay estimated taxes when you claim your winnings.
The amount withheld can vary by province. For example:
- In Ontario, OLG withholds 24% in tax off prize amounts over $10,000.
- In BC, BCLC withholds 15% in tax off any prize over $500.
- In Quebec, Loto-Quebec does not withhold any tax directly.
Any amount withheld at source will be considered a “payment on account” of your taxes for the year. You can claim it as tax already paid when you go to file your tax return for the year. However, it may not cover your full tax bill on the winnings. You could still owe additional tax when you file if your total marginal rate exceeds the withholding rate.
What if I win in a different province?
If you win a lottery prize in a different province than where you live, you may be subject to withholding tax in that province when you collect your winnings.
However, you will still owe income tax in your home province at your resident tax rates. So you may need to top up any withholding when you file your taxes.
For example, say you live in Manitoba (where there is no withholding on lottery winnings) but you won $1 million in the Ontario lottery. Ontario would withhold $240,000 (24%) in tax from your prize. But when you file your Manitoba tax return, you calculate you owe $300,000 based on Manitoba’s tax rates. You would still need to pay the extra $60,000 to Manitoba at tax time.
Do I have to report lottery winnings if under $1,000?
Prizes under $1,000 from lottery games do not need to be reported for tax purposes and are tax-free. So if you won a $500 prize or a free ticket, you do not have to report it on your tax return.
However, be aware that this $1,000 threshold applies per lottery prize, not cumulative winnings. For example, if you won five $900 prizes in one year, they would add up to $4,500 total. You would still need to report the full $4,500 as taxable lottery winnings, even though each individual prize was under $1,000.
How do I report lottery winnings on my Canadian taxes?
You must report all lottery winnings, and withholding tax deducted, on your annual Canadian income tax return. Report your winnings as “Other income” on Line 13000 of your T1 General tax return.
Provide details of the type of income (i.e. lottery winnings) and the amount. Report any withholding tax that was deducted in the “Income tax deducted” field on the same line.
If you won foreign lottery prizes, these must be reported under Foreign Income on your T1 return. Report the Canadian dollar amount on Line 11500, with foreign tax deducted on Line 40500.
Keep any tax slips, winnings statements, or other documentation provided by the lottery corporation as proof to support your lottery income.
Can I deduct gambling losses against lottery winnings?
Unfortunately, no. The CRA does not allow you to offset or deduct gambling losses against lottery winnings for tax purposes. Lottery tickets are essentially treated the same as any other expense. The full amount of gross lottery winnings must be reported as taxable income.
The only deductions permitted are those allowed under the standard deductions, like RRSP contributions, child care expenses, etc. But you cannot subtract gambling losses to lower your net lottery winnings.
Are there strategies to reduce tax on lottery winnings?
There are some ways to potentially reduce taxes owing on lottery winnings, including:
- Claim deductions/credits – Claim any eligible deductions or non-refundable tax credits you qualify for to lower your taxable income and taxes owing.
- Income splitting – If you have a spouse or common law partner, you can spread the winnings across your tax returns to take advantage of lower marginal rates.
- Incorporate – Incorporating can potentially help defer some tax on lottery winnings. However, this strategy requires professional tax advice.
- Tax-advantaged investments – Investing some or all of the winnings in RRSPs, TFSAs, or certain securities can provide tax savings.
- Donate to charity – Donating a portion of your winnings to registered charities can provide tax relief via the donation tax credit.
However, there is no way to completely avoid paying taxes on lottery winnings in Canada. Professional advice is highly recommended when large lottery prizes are involved.
What are the taxes on lottery windfalls in Canada?
Here is a summary of the key taxes that apply to lottery windfalls and jackpot prizes won by Canadians:
- Federal income tax – 15% to 33% depending on income level
- Provincial/territorial income tax – Ranges from around 5% to 20% depending on province and income
- CPP contributions – 4.95% (to annual maximum amount)
- EI premiums – 1.58% (to annual maximum amount)
- Withholding tax – Varies by province, up to 24% withheld at source in some cases
When combined, taxes on lottery winnings can take 30% to over 50% of the prize amount, especially for substantial multimillion dollar jackpot prizes. Proper tax planning is key to managing large lottery windfalls.
Are lottery winnings taxed the same across Canada?
While lottery winnings are fully taxable in Canada, there are some differences in how they are taxed across provinces:
- Tax rates – Provincial tax rates vary, resulting in different combined federal/provincial marginal rates across Canada.
- Withholding rates – Rates for withholding tax off prizes at source differ by province.
- Claiming prizes – Anonymity rules and requirements for claiming prizes also vary between provincial lottery bodies.
- Non-resident taxes – Tax implications can differ for non-residents claiming Canadian lottery prizes.
So while the basic tax treatment is similar, make sure to understand the specific provincial rules and rates that apply to your particular lottery winnings.
Are lottery winnings taxed differently than other income?
Lottery winnings are taxed the same as regular income for tax purposes in Canada. They are fully taxable and not given any special tax treatment.
The main way lottery winnings differ from other common types of income are:
- Withholding tax – Other income like employment earnings has tax deducted at source, while lottery winnings may have a flat withholding rate.
- Lump sum – Rather than being spread over a year, lottery winnings are often paid out in one lump sum.
- Marginal tax rates – Large lottery winnings can push you into the top tax brackets very quickly.
Aside from these differences, lottery income is treated the same as other forms of ordinary income. It is fully taxable at your federal and provincial marginal rates.
Are lottery corporations required to withhold taxes?
It depends on the province. Some provincial lottery corporations are required by law to withhold income tax from prize payments over certain thresholds:
- OLG (Ontario Lottery & Gaming Corporation) – Withholds 24% from prizes over $10,000.
- BCLC (British Columbia Lottery Corporation) – Withholds 15% from prizes over $500.
- Loto Quebec – Does not withhold any income tax at source.
In other provinces, withholding is not mandatory but winners may need to pay estimated taxes or have voluntary amounts deducted when prizes are claimed.
Check with your provincial lottery corporation on their specific tax withholding policies. The amount withheld may not cover your full taxes owing so additional payment is often needed when filing.
What are the tax obligations when you win the lottery?
If you are lucky enough to win a major lottery prize, here are some key tax obligations to keep in mind:
- Report full amount of winnings on your tax return, even if under $1,000 threshold.
- Pay any balance of taxes owing not covered by withholding when you file your return.
- Keep records of all supporting documents provided by the lottery corporation.
- Report winnings under the correct income type (Canadian winnings as ‘Other Income’, foreign as ‘Foreign Income’).
- Report and pay taxes owing in your Canadian province of residence, regardless of where you purchased the ticket.
Failure to report lottery winnings can result in reassessment, penalties, interest, and even prosecution for tax evasion. Claiming winnings on your taxes may seem painful but it beats tax fraud charges.
How do I manage a large lottery windfall?
Coming into a sudden windfall like lottery winnings can be overwhelming. Here are some tips on managing a financial windfall responsibly:
- Keep it quiet – Don’t rush to tell everyone you know. More modest living will draw less attention.
- Assemble a team – Hire experienced financial, legal and tax advisors. Take time to decide your goals and a plan.
- Pay off debts – Eliminate high interest debts and loans to avoid accumulation.
- Set aside for taxes – Reserve at least 30-50% to cover taxes right away. You don’t want an unexpected tax bill.
- Make conservative investments – Protect at least some of the capital through low-risk investments.
- Give back – Set aside a portion to donate to causes important to you.
- Create a budget – Continue tracking income and expenses. Don’t let uncontrolled spending drain your winnings.
- Help others wisely – Be cautious about requests for money from others. Set limits and loan terms.
Taking things slowly and getting professional advice can help make lottery windfalls last well into the future.
Conclusion
Winning the lottery certainly comes with substantial tax obligations. But with proper planning, you can reduce taxes and manage your windfall responsibly. Seeking professional tax and financial advice is highly recommended when large lottery prizes are involved. This will help set you up for long-lasting financial success.
While having a portion of those winnings go to taxes isn’t the most exciting prospect, it sure beats not winning at all! With the right guidance, you can maximize your lottery after-tax income and achieve your financial dreams.
