Are the taxes on an American sweepstakes win by a Canadian worth our while?
September 25, 2009 8:28 AM   Subscribe

SweepstakesFilter: My wife (a Canadian like myself) recently won a large number of travel rewards points from an American chain of hotels. Help us determine if the prize is worth keeping considering what we'll have to pay in taxes to the IRS.

We have confirmed the legitimacy of the prize. (The contest was handled by ePrize and we've been in direct communication with a rep from the hotel chain.) To redeem the prize we have been asked to fill out an IRS W8BEN Foreign Status form. The instructions for the form state that "Foreign persons are subject to U.S. tax at a 30% rate on income they receive from U.S." Unlike casino winnings (for which the 30% tax can be recouped by a Canadian winner) I cannot find any information on the foreign tax liability for points-based sweepstakes.

When asked about taxes, a representative from hotel chain said the following:

"Although I cannot provide you with tax advice, it is likely that your tax liability will not be based on the published retail value of the points, but instead based on internal costs to provide the points."

The published retail value of the points was $35,000 and we've been told that the internal cost will be around $15,000. The points can be cashed in for approximately 12 round-trip overseas flights, or (for the sake of monetary comparison) converted into $10,000 worth of Amazon gift-cards.

So here are my questions:
  • Have you been in a similar situation? Care to share your "Canadian winner of US sweepstakes" taxation experience?
  • Can you suggest a firm to contact that will know how to deal with this situation? (So far the Canadian tax advisers we've contacted haven't been overly helpful.)
  • Should we accept the prize, even if it means paying $4,500 to $10,500 USD? (The former being tax on internal costs, the later being tax on the retail value of the points.)
  • If we accept the points and are surprised with a giant tax bill (say the full $10,500) can we return the prize to avoid the taxation?
posted by stungeye to Law & Government (6 answers total) 1 user marked this as a favorite
Have you asked the company if it would be possible for them to internally convert the prize into $10,000 worth of Amazon gift cards? That way, you'll get the $10k and should be liable for 30% of a more definite amount - you can then sell $4k of the cards on eBay, etc, for $3k (I've seen them do better than that, but just for example) and be in the clear with $6k of gift cards as the eventual "prize."
posted by wackybrit at 8:36 AM on September 25, 2009

Intriguing. No idea about the tax issues (though it seems, to my uninformed self, weird that there would be a tax distinction between "points-based" winnings and those from a casino).

But no way would I accept the prize if you're going to be hit with a tax bill on the upper end of your range ($10K+). When computing the cash value of 12 round-trip overseas flights, keep in mind that (if this is like most points-based redemption schemes) you won't have access to every flight, just to those that have award seats available. You should check the exact terms of this specific program, but the point is that typically you are fairly restricted in terms of what flights you can choose. Flights that have award seats available are, typically, also flights that have plenty of cheap seats left. In other words, you should (again, presuming this program is typical) be comparing to the cost of 12 "cheap" overseas flights (so, say $600-700ish a piece), not to the last-minute $2k+ tickets. I can't for the life of me imagine how you'd get a $35K estimated value of this, unless airline tickets represent an extremely poor use of these points.

Alternatively, if these are points that can also be used for flight upgrades, etc (instead of just free tickets), you might ask yourself how you value those potential upgrades. In many airlines' frequent-flier programs, the "cost" (in miles/points) of an upgrade is comparable to the cost (in points) of an overseas coach tickets -- even though the price differential between coach and business or first class is often much much larger than the price of a cheap coach ticket. What you would actually have paid for that upgrade, of course -- which is what should determine how you value the miles/points -- may be vastly different from the amount the airline is trying to charge.

In any case, congratulations!
posted by chalkbored at 8:46 AM on September 25, 2009

My reading of it suggests that if you paid money to enter, then it is covered like any other lottery or gambling winning. However, I believe that you only get the tax free status if the lottery pays out as a lump sum (not an annuity), and I'm not sure how points would work in this instance.

The CRA should be able to help you answer this, no?
posted by jeather at 9:41 AM on September 25, 2009

Best answer: Try asking at one of the message boards for contests. You'll have to register but it's free. I've seen a couple posts on the Instant Win board about people who have won trips. Some have turned them down for tax reasons. Others figure it's worth it. Most people are in the U.S. but they're very nice and might be able to offer you ideas on where to get good advice.
posted by stray thoughts at 6:05 PM on September 25, 2009

Response by poster: Follow up:

I took stray thoughts' advice and posted to a few sweepstakes forums:

* Online Sweepstakes Forum - Some very helpful info provided here.
* Sweepstakes
posted by stungeye at 10:54 AM on September 27, 2009

Thanks for the update. Glad you found someone who could give you more info.
posted by stray thoughts at 12:30 AM on September 28, 2009

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