Sunday, February 15, 2009

Millionaire Life not tax free?

We take pride in our lotteries and casinos in Canada. No, not for the social damage they cause which is quite widespread -- even if they deliver badly needed and usually reliable revenues to government coffers for education, health care and community services. We're proud that the winnings are tax free, at least the principle is; if we put the money into a bank account and earn interest, dividends or capital gains then of course there are tax implications. By my searching, only the United States and Switzerland taxes lottery winnings from dollar (or euro) one.

Well, it's February, and once again all the regional lotteries in Canada have gotten together for the annual raffle called Millionaire Life. One lucky ticket holder is guaranteed in a random computer draw to win $1 million per year for the next 25 years. Tax free? Not quite. Because it's an annuity. The winner has a choice of taking a lump sum of $17 million, the present value of the prize. If you do, then it is tax free.

But according to the fine print, if one were to take an annuity, you'd have to pay tax on the remaining $8 million, spread out over time. That means if you take the annuity option you get $640,000 tax free then have to pay tax on $360,000 and at the top bracket. Assuming a 45% marginal rate (about the average in Canada right now for "high" income earners) that's $162,000 in taxes -- so the one million drops to $834,000.

So rather than saying, What would you do with $1 million for 25 years, the advertising should say, what would you do with $834,000 for 25 years.

Mind you, if you're in a group, the annuity doesn't apply, the group would get the lump sum.

Good luck, folks. I hope you win the Big Kahuna -- but if you've got a problem with this tax arrangement, yell at Canada Revenue Agency, not the lotteries or me.

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Anonymous said...

When I read the PDF document provided online by Millionaire Life which descibes the rules and regulations for claiming the prize, it says the ILC (inter-provincial lottery corporation) will pay any applicable Federal/Provincial tax based on the residence of the winner at the time of the claim so as to make the NET annual payout equals $1 Million.

I'll post the link to that PDF file as soon as I'm done this post.

Anonymous said...

Here's the Game Conditions for Millionaire Life. The link will open a PDF file.

Section 7.5 Tax Considerations states that the ILC will pay any Federal and/or Provincial tax "so as to provide the holder of the winning ticket annual annuity payments of $1,000,000 net of any taxes."

This tells us that the million per year for 25 years is what you'll get if you win.

Anonymous said...

The link:

Anonymous said...

Which would you pick
Millioaire Life in Canada being a
wheelchair bound quadiplegic
in pain being pain $1,000,000. a year for life or be a very healthy
poor person in mexico who
makes $4.50 a day being $0.56
a hour working 6 days a week 8
hours a day.

Like to know which you would pick