This is a common question for Canadians who play lotteries in the United States. With major American lotteries like Powerball and Mega Millions offering jackpots in the hundreds of millions of dollars, it’s no wonder that Canadians often try their luck by purchasing tickets for these big prize draws.
But what are the tax implications for Canadians who strike it rich on an American lottery? Do they have to pay tax in the US, Canada, or both countries? Below, we’ll explain the answers to these questions so Canadians understand their obligations if they win a jackpot outside the country.
Do Canadians have to pay tax in the US on American lottery winnings?
Yes, Canadians do have to pay tax in the United States on any lottery prizes won there. This is because the IRS (Internal Revenue Service), which is the American tax authority, taxes gambling winnings in the same way as regular income.
For American citizens and residents, any gambling winnings they receive, whether from a lottery, casino, or other source, are considered taxable income under US tax law. The same applies to non-residents like Canadians who play American lotteries and games of chance while visiting the US. Their winnings are subject to the same federal tax of up to 37% that Americans pay on this extra income.
The exact amount of tax owed to the IRS will depend on the size of the lottery prize and the winner’s tax bracket. But a substantial portion of any major lottery jackpot will need to be paid to the US government before the winner can take home their net prize amount.
US tax withholding on lottery prizes
For large lottery prizes won by non-residents, the IRS requires that 30% tax be withheld and remitted to the US Treasury before the winner receives their prize money. This mandatory withholding ensures the IRS collects at least some tax upfront from big lottery winners who don’t live in the country.
So if a Canadian wins a $100 million Powerball jackpot, they won’t get the full $100 million prize right away. First, 30% or $30 million will be withheld for US tax purposes. The winner will only receive the remaining $70 million immediately after winning.
The Canadian will then need to file a US tax return for non-residents by the following April to report the $100 million in winnings. Any difference between the 30% withheld and the actual tax owed based on their top marginal tax rate will be reconciled at that time. If not enough tax was withheld, the winner will need to pay the additional US tax due. If too much tax was withheld, the IRS will issue a refund for the overpayment.
Do Canadians also owe tax in Canada on US lottery winnings?
Yes, Canadians who collect lottery winnings from the US are also required to report this income and pay tax on it in Canada. Under Canadian tax law, any gambling winnings or windfalls received from foreign sources must be declared as taxable income by Canadian residents.
After paying US tax, the remainder of the lottery prize brought back to Canada will be subject to Canadian income tax. Tax rates on lottery winnings are the same as regular income and escalate up to a top federal rate of 33% plus provincial tax.
However, one difference is that Canada does not require any tax to be withheld on lottery prizes won abroad. The winner is only obligated to report the winnings and pay applicable Canadian income tax at the time of filing their tax return for the year.
Tax credits for US tax paid
To avoid double taxation, Canada allows residents to claim a foreign tax credit for any tax paid to the IRS on lottery winnings. This tax credit is used to offset Canadian taxes owed on the same income.
For example, if a Canadian paid $20 million in US tax on a Powerball prize, they could deduct this $20 million from their Canadian tax bill on the winnings. The foreign tax credit eliminates double taxation and ensures they don’t pay tax twice on the same income.
What if the winner doesn’t report US lottery winnings in Canada?
It is advisable for Canadians who collect significant lottery prizes from the US to fully declare this income in Canada. If a winner tries to avoid Canadian tax by not reporting US winnings, this would constitute tax evasion.
Tax authorities share information between countries about income earned by each other’s residents. So if a major lottery winner fails to declare their windfall on a Canadian tax return, the CRA will likely find out from the IRS at some point. Tax evasion can result in significant penalties, interest charges, liens, and even potential prosecution in criminal court.
For giant lottery jackpots, it is not realistic to think the income can be hidden. Winners who come forward to collect prizes have their names publicized, making it nearly impossible to conceal the win from tax agencies. Therefore, Canadian residents should properly report major US lottery winnings to avoid tax problems.
How are US lottery winnings taxed at the state level?
In addition to federal income taxes owed to the IRS, some US states also levy their own tax on lottery winnings paid to Canadians and other non-residents.
A number of American states impose income tax on lottery prizes over certain thresholds – often $5,000 or more. State income tax rates range from about 3% up to over 13% in some areas like California and New York City.
So a Canadian winning a huge Powerball or Mega Millions jackpot could face additional state taxes in whichever US state sold the winning ticket. State taxes are withheld directly from the lottery prize prior to payout similar to federal tax.
However, Canadians can typically get back some or all of the state tax withheld by filing a non-resident state tax return after winning. Most US states offer full or partial refunds of tax withheld from lottery prizes paid to non-residents who submit the proper tax forms.
Example of state tax refund
For example, a Canadian wins $300 million on a Powerball ticket purchased in California. California income tax of 13.3% is withheld, equaling around $40 million. However, by filing a California non-resident tax return, the winner could receive a refund of around $30 million, leaving them with only $10 million in state taxes owed. The winner gets back most of the California tax originally withheld on their giant prize.
Are smaller lottery prizes also taxable for Canadians?
Yes, Canadian residents do need to declare all gambling winnings from the US, no matter how small. While the IRS does not mandate withholding on lottery prizes below $5,000 for non-residents, this income is still taxable.
Even if a Canadian wins a few hundred dollars on a Powerball ticket, this technically needs to be reported as taxable income to the IRS and Revenue Canada. In most cases, only minimal tax would be owed on small prizes. But to comply strictly with tax laws, all US lottery winnings should be declared.
What about prizes from Canadian lotteries – are they taxed?
For Canadians playing and winning lotteries within Canada, such as Lotto 649 or Lotto Max, tax rules differ slightly compared to American lotteries.
In Canada, lottery winnings are not taxed at the federal level. Canadians do not have to pay federal income tax on any amount won on domestic lottery draws. However, prize winners may still face tax at the provincial level, depending on the province where they reside and purchase the ticket.
Provincial lottery taxes
Province | Tax on Lottery Prizes? |
---|---|
Alberta | No |
British Columbia | No |
Manitoba | Yes – 10% withholding |
New Brunswick | Yes – 10% withholding |
Newfoundland & Labrador | No |
Northwest Territories | No |
Nova Scotia | Yes – 5% withholding |
Nunavut | No |
Ontario | Yes – 20% withholding |
Prince Edward Island | Yes – 15% withholding |
Quebec | Yes – 24% withholding |
Saskatchewan | No |
Yukon | No |
As the table shows, some provinces levy tax ranging from 5% to 24% on lottery and gambling winnings paid to residents. This provincial tax is withheld directly from large prizes before payment, similar to US lotteries. Winners must still report total winnings on their Canadian tax return, with the tax withheld applied as a credit against federal/provincial tax payable overall.
Should Canadians declare small provincial lottery prizes?
For small Canadian lottery wins under $500-$1,000, most provinces do not require any tax withholding or reporting. However, Ontario and Quebec require winners to complete tax paperwork and pay taxes on prizes over $500. So when playing provincial lotteries in Canada, check the reporting rules in that province for small windfalls.
Can lottery winnings be split with family to lower taxes?
For Canadians lucky enough to hit a massive US lottery prize, one question that arises is whether the winnings can be divided with family members to lower the overall tax burden. For example, could a $500 million jackpot be split up among five family members to reduce tax rates applied?
Unfortunately, American lottery organizers do not allow winners to split up or redirect prize payments in this way to avoid taxes. Lottery claim forms require one individual or entity to be designated as the sole recipient. For any winnings over $600, the lottery corporation will issue a 1099 tax slip solely in the name of person claiming the prize.
There is no way for multiple Canadian family members to each declare a portion of the winnings independently. Therefore, joint ownership or splitting a giant prize to save on taxes is not permitted. All US lottery winnings must be claimed in total and taxed fully in the hands of the one Canadian ticket holder.
Should the winner incorporate to reduce tax on lottery winnings?
With a major lottery jackpot, some financial advisors recommend the Canadian winner incorporate and claim the prize through a corporation rather than personally. This strategy could help reduce taxes compared to declaring winnings as personal income.
By claiming a prize through a Canadian corporation, the lottery payout becomes taxable active business income rather than personal passive income. Active business income is eligible for the small business tax rate in Canada of only 9% versus personal rates up to 33%.
However, there are some disadvantages to winning a lottery through a corporation:
- The personal tax-free capital gains exemption would not apply
- Income attribution rules prevent shifting income to family members
- Administrative costs are higher to run a corporation
Overall, establishing a corporation to claim lottery winnings can reduce taxes in some cases, but the benefits are limited. Given the complex rules, specialized tax expertise is suggested to determine if it is worthwhile.
How are lottery winnings taxed for Americans in Canada?
For American citizens or residents who are in Canada and win money on a Canadian lottery, they face different tax implications.
As US persons, Americans are subject to tax by the IRS on their worldwide income regardless of where they reside. So any Canadian lottery winnings will need to be reported as taxable income on a US tax return.
Americans in Canada can claim a foreign tax credit for any Canadian tax withheld or paid on the lottery winnings. This provides relief from double taxation. But Americans cannot escape US tax obligations on gambling income no matter where in the world it is earned.
Dual citizens of Canada and the US
For dual citizens of Canada and the United States, they face tax reporting and liabilities in both countries on worldwide gambling income. Any lottery prizes from Canada, the US, or other countries need to be declared to the IRS and CRA.
Dual citizens can utilize foreign tax credits to avoid being double taxed on the same gambling income. But complex filing obligations still apply. Consulting a cross-border tax expert is advisable for dual citizens and green card holders winning foreign lotteries.
Final Thoughts
Canadians who strike it rich playing US lotteries like Powerball or Mega Millions are obligated to pay tax in both countries. Federal and state taxes apply in the US, while Canada also taxes the worldwide income of residents.
Proper reporting of lottery winnings is essential for Canadians to remain tax compliant and avoid penalties. While multi-country taxation reduces the take-home prize amount, clearly declaring income prevents problems with tax agencies. With prudent planning, Canadians can mitigate some of the tax burdens on US lottery income.