Bet on It: The Taxation of Online Gambling

Internet use has grown dramatically in Canada in recent years. This trend has joined with the increasing popularity and social legitimacy in Canada of gambling to produce an environment that is particularly receptive to the growth of online gambling. Online gambling sites compete with gambling options provided by provincial governments. This is problematic. Casual gambling gains are not subject to income tax at the federal or provincial level. This has been acceptable historically because subjecting casual gambling gains to income tax is administratively difficult and provincial governments have been earning considerable and growing revenues in an indirect way by being the regulators and providers of most Canadian gambling opportunities. However, to the extent that Canadians (and tourists from the United States and elsewhere) are now beginning to substitute online gambling with foreign entities for gambling facilities controlled by the provinces, this indirect revenue will be lost. The primary implication of the proliferation of foreign gambling websites is therefore that Canadian provincial governments will be sacrificing gambling revenues. Canadian policymakers should respond to this challenge by asking and answering two fundamental questions. First, should net gambling gains be made subject to income tax? Second, how should online gambling be regulated? With regard to the first question, so long as an effective response is mounted to the issues raised by the second question, net gambling gains need not be taxed. Given widespread tastes for gambling and the possibilities presented by emerging technologies, prohibition is not likely to be a stable long-term approach. As the early 20th century experiences with the attempted prohibition of alcohol demonstrated, attempts to prohibit online gambling are apt to be costly to enforce and relatively ineffective. Two more promising routes to preserve government revenues from gambling include (i) following the example set by the United Kingdom in fashioning a new regulatory approach for gambling more generally (this would require the cooperation of the federal government); and (ii) within the existing legal framework at the federal level, provinces individually or collectively could operate one or more competing online gambling sites