March 10, 2017 Jaclyn Bickerton
There seems to be a lot of confusion around whether or not a contest or sweepstakes prize winner has to pay taxes on their winnings. We get asked this question a lot, and for good reason, because tax laws vary depending on what country the prize winner lives in. For simplicity’s sake, I’m going to limit this article to Canada and the United States, the main countries in which we run contests and sweepstakes.
If you live in the United States
As a United States resident, federal law requires a winner to pay income tax on ALL winnings. The prize value is considered ‘income’ and must be reported on the winner’s tax return as taxable income. The winner is solely responsible for paying the tax, not the sponsor. Furthermore, if the prize value is over $600, the sponsor is required to send you Form 1099-Misc to complete.
As an American, it’s important to track the actual cost of the prizes, as the tax is only payable on the Fair Market Value (FMV) of the prize, not the Actual Retail Value (ARV).
If you live in Canada
As a Canadian resident, the Canada Revenue Agency (the CRA) does not require a contest or sweepstakes prize winner to pay fees or taxes of any kind on your prize winnings. The CRA states that any unsolicited phone call, email, or letter stating otherwise is a scam. However, Canadian winners are required to answer a skill-testing question before claiming a prize. The skill testing question is administered to potential winners before being declared a winner as a way for the sponsor to avoid illegal lottery offences under the Canadian Criminal Code.
An exception to this rule applies to many Canadian ‘Win a Trip’ contests or sweepstakes. Many sponsors of these types of contests expect the winner to pay travel taxes including HST and/or Airline Taxes. In these cases, the sponsor is only donating the vacation, not paying any of the government fees associated with the prize. Make sure to always read the contest rules as this must be stated under the “Prizing” section.
Another exception to this rule applies to employees who win a prize from their employer. The CRA considers these ‘prizes’ as a type of salary, and the value of the prize will be taxable under the terms of employment income.
If you’re a Canadian resident and are chosen as the prize winner in a contest or sweepstakes open to the USA and Canada, the contest sponsor must abide by Canadian law and you will not be obligated to pay tax on your winnings.
Jaclyn Bickerton, Raven5, March 2017