December 02, 2021
By: Stanley Ndibe
If you have not watched the sensational South Korean drama “Squid Game” on Netflix, chances are you have at least heard about it. The show ranked first on Netflix’s global chart for 29 days and, as at the time of writing, is Netflix’s most-watched show in the streaming platform’s history. For the taxpayers and tax practitioners, the show presents several events which raise interesting tax law issues, especially in the context of the tax treatment of gaming activities, gifts and windfalls.
The plot is straightforward. A total of 456 people all neck-deep in direct personal debt and other uncrystallized financial liabilities are invited to play a series of children’s games for a total price of 45.6 billion Korean Won (approximately 49 million Canadian dollars). The only catch is that if a player fails to follow the rules of the game or unilaterally refuses to play, the player is killed and his or her body discretely disposed of, presumably becoming a missing persons case. Only in instances where a majority of the players vote to terminate the game does the series of games end and the participants go home early, alive, but empty-handed. The first and probably most popular of the games is the “red light – green light” game. In this game, players must cross the finish line and were permitted to move only when a giant doll would say, “green light”, but remain stationery when the doll would say, “red light”. Players caught moving to any degree at “red light” were gruesomely killed.
The show gained popularity for many reasons, but especially because of its dark portrayal of human nature. In the show, after a total 440 players were eliminated through the series of deadly games, the protagonist, Seong Gi-hun (“Gi-hun”), became the (un)lucky winner of a total of 45.6 billion South Korean Won.
This article addresses some notable events from the show and their potential tax treatments pursuant to Canada’s Income Tax Act (the “ITA”), the Canada Revenue Agency’s (the “CRA”) interpretative materials, and the income tax regime as a whole.
As will be revealed, the Canadian income tax regime is heavily nuanced and not just a series of “green lights” and “red lights”.
The Canadian Income Tax Regime and the Concept of Income Source Taxation
Paragraph 3(a) of the ITA expresses the source concept of income, and thereby imposes tax on a taxpayer’s “income from a source”.
Although the ITA does not explicitly define “income”, it states that “income from a source” includes income from employment, business, and property. Additionally, section 56 of the ITA enumerates types of receipts, which would otherwise not be derived from employment, business, and property, and includes items, such as, pension benefits, RRSP withdrawals, retiring allowances, and other items usually not attributable to a source. Consequently, determining what is or is not income has been left up to the Tax Court of Canada (the “TCC”). The TCC has largely applied a restrictive interpretation of the phrase “income from source” and usually only treats income from business, employment, or property as taxable. Most notably in the context of the Squid Game, receipts from gambling, windfalls, inheritance, and gifts would generally not be taxable in Canada.
The Taxability of Seong Gi-hun’s Gambling Winnings
Just because a taxpayer adopts a certain characterization of their receipts as non-taxable does not mean that position is immune from recharacterization as “income” by the CRA.
For gambling wins, there is an important distinction between receipts from ordinary gambling and profits made from gambling as a business or a commercial activity. The former is not taxable, while the latter is income from business and is taxable. Determining the difference between the two can be challenging, especially since the traditional test for determining if an activity is business (such as the intention to make a profit) is almost always present in gambling. Some factors, which would be considered in determining if a person is in the business of gambling, include:
- the person’s degree of organization in carrying out the gambling activity;
- the existence of special knowledge or inside information that reduces the element of chance;
- whether the person is gambling for pleasure or with the intention to make a profit as a means of livelihood; and
- the extent of the taxpayer’s gambling activities.
Based upon the above, there are two possible tax treatments of Gi-hun’s winnings from the game.
Firstly, Gi-hun’s winnings may be considered receipts from gambling and therefore, non-taxable. This is premised upon the contention that Gi-hun’s success was purely one of chance and for which he had almost no preparation. He had no special knowledge or advanced skill, which improved his chances of winning the game. On the contrary, for the most part, he would not have survived the game, but for sheer luck and the contributions of his team. Gi-hun’s lack of insider knowledge of the game may be contrasted with the show’s doctor-player who conspired with rogue Red-Suit workers to harvest the organs of the deceased players in exchange for advance information about the games.
Secondly, Gi-hun’s winnings may instead be characterized as income from a gambling business. This position is plausible given that Gi-hun joined the game with the intention of making a profit. In addition, Gi-hun was not new to gambling. Twice in the show, he took huge risks in the pursuit of profit. The first time, he stole from his mother and used the proceeds to gamble on horse races and won. The second time, he agreed to be slapped multiple times by the Squid Game’s recruiter as a consequence of losing rounds of Ddakji (a simple traditional South Korean folded-paper tile flipping game) for a chance to win 100,000 South Korean Won, and eventually won. In addition, Gi-hun did have some degree of familiarity with the games. In episode 3 “The Man With An Umbrella”, we see Gi-hun applying some of his prior knowledge to the game by repeatedly licking his wafer until he got a perfect umbrella shape, which permitted him to advance to the next round. Further, Gi-hun’s participation in the game was intended to be his means of livelihood – he did not hold any other job at the time.
These factors may support the position that Gi-hun was carrying on the business of gambling and any receipts arising from his activities may be taxable as business income.
Although the position that the winnings in Squid Game would be taxable may be far-fetched, the nature of Canada’s self-reporting system is that the Minister of National Revenue (the “Minister”) who presides over the CRA, delegates her authority to CRA agents to review, assess, and reassess taxpayers based upon assumptions made of what appear to be the facts of a taxpayer’s situation. It is then incumbent upon the taxpayer to rebut the Minister’s assumptions through an internal CRA appeals process if the assessing outcome following an audit is unfavorable to the taxpayer and/or believed to be incorrect by the taxpayer. Oftentimes, in situations where it is a question of law whether certain receipts are “income”, the Minister, through her delegates, will not decide in favour of the taxpayer and prompt the appeal to escalate to the TCC.
If Gi-hun’s winnings are taxable, would he be entitled to deduct any amount he would eventually pay to his creditors (recall that he owed quite a lot of money to loan sharks)? The answer would be in the negative. By virtue of paragraph 18(1)(a) of the ITA, only expenses that were incurred in earning income from business and property are deductible. In this scenario, Gi-hun’s debt and the need to pay off his creditors were part of his motivation for joining the game; however, the loans were not directly used in furthering his participation in, or winning, the game. Therefore, it is unlikely that these pre-existing loans would be deductible.
It should be noted that regardless of the treatment of Gi-hun’s winnings, if he takes them and invests or loans the money, the interest and/or dividend income would be taxable as income from property.
Another important aspect to Gi-hun’s winnings is whether the money remains taxable even though it was earned in a game to which Gi-hun consented, and in which he indirectly participated and was perhaps complicit in the series of murders? The short answer is yes. Canadian jurisprudence is settled on the point that illegally obtained “income” is nevertheless taxable. As long as the income is from a taxable source, it is immaterial that it was obtained from illegal or criminal activities.
Windfalls to the Families of the Deceased
After the first game of the tournament, the iconic “green light red light” game, a total of 255 players were eliminated from the series of games. The remaining players elected to vote to leave the show in line with the rules of the game. The Red-Suit in charge informed the players that if the tournament is terminated early, the pot of money that had accrued at the time will be given to the families of the deceased players. A majority of the players eventually elected to terminate the games and leave. It is not clear if the families of the deceased players eventually received the money pot, but if they did, what would be the tax treatment of such money?
There are two perspectives in this regard. Firstly, did the money pot flow to the families of the deceased players as income earned by the deceased players or as a non-taxable receipt from gambling in the hands of the deceased players? Secondly, did it simply flow directly to the families of the deceased players as a gift or a windfall?
Each interpretation would give rise to a different tax treatment. If the receipt passed through the deceased players as income or as a non-taxable gambling receipt, it may trigger estate taxation rules. Terminal returns would have to be filed by the estate administrators of the deceased players and income tax on the money pot would also be payable if it is determined that the deceased players were in the business of gambling. Generally, there is a deemed disposition upon death in Canada, so any assets held by the deceased participants would have to be factored-in for estate tax purposes. In addition, estate administration taxes may be necessary to obtain a certificate of probate with or without a will. If the money passed directly to the families of the gamblers, estate taxation would not be applicable in the circumstances.
Although the money would have been paid on account of the deceased players’ contribution to the game, it is unlikely that the money would be taxable in the hands of the deceased players either as income or as a non-taxable game prize. This is because the obligation of the host to pay the money to the families arose after the death of the players and only after the early termination of the game by the vote of the surviving players.
For the families of the deceased players, the money pot will likely not be a gift. Under the common law, a gift exists when there is a voluntary transfer or property, a free disposition by the donor, and where the recipient of the gift confers no advantage upon the donor. In this case, it is arguable that the payment to the deceased players’ families is not voluntary since there appears to be some obligation upon the game host to pay the money on account of the early termination of the game. All of this was contingent upon the players’ vote to terminate the remaining series of games.
Nevertheless, the payments to the families of the deceased players would still be a windfall and therefore, not taxable. This is supported by the facts that the families had no enforceable claim to the payment, had no reason to believe the payment would occur, did nothing on their own to earn the payment, and made no organized effort to receive the payment.
Seong Gi-hun’s Gift of Money to Sang-Woo’s Mother
Gi-hun and Cho Sang-woo (“Sang-Woo”) eventually became the last two men standing and competed in the final game: the Squid Game. Gi-hun won the game but decided to vote to terminate the game. At this point, he only needed Sang-woo’s vote to terminate the game (recall that a majority of the players may vote to terminate the game). Sang-woo refused to go along with the vote, asked Gi-hun to take care of his mother, and took his own life. A year after leaving the game, Gi-hun fulfilled Sang-woo’s request by giving his mother half of his winnings.
The show’s final events raise two important questions. Firstly, is the money taxable in the hands of Sang-woo’s mother? Secondly, does the fact that Gi-hun gifted half of his winnings reduce his taxable income if in fact the winnings are “income from a source”?
For Sang-woo’s mother, the receipt will likely be treated as a windfall or a gift, which, as stated earlier, is not taxable in Canada; the following facts support this position:
- Sang-woo’s mother has no enforceable claim to the money received;
- She was not a participant in the game and had no knowledge of it at any point;
- She did not expect to receive any such amount of money; and
- Gi-hun gave her the money voluntarily and received no material benefit from her. Accordingly, Sang-woo’s mother will likely take the money tax free with no obligation to report it in her returns.
Alternatively, if a portion of Gi-hun’s pre-existing debt was a tax debt, the gift to Sang-woo’s mother would not be free and clear. In instances where a taxpayer has a tax debt and makes a transfer to another person for inadequate consideration from the recipient, the CRA may assess the recipient through section 160 of the ITA for up to the fair market value of the property transferred less the consideration provided.
As for Gi-hun, the reverse will likely be the case. Ordinarily a taxpayer is entitled to a Charitable Donations Tax Credit for gifts made to “qualified donees”. The tax credit would have potentially reduced Gi-hun’s tax payable on the pot money; however, to be eligible, the gift should be made to “qualified donees”. Qualified donees, as enumerated under the ITA, include registered charities in Canada, registered Canadian amateur athletic associations, a housing corporation resident in Canada and exempt from tax, a Canadian municipality, the United Nations and its agencies, etc. Given that Sang-woo’s mother is not a “qualified donee” pursuant to the ITA, Gi-hun would be unable to enjoy the benefit of a tax credit to offset the income inclusion in the year.
Tax Implications for the Games’ Host
There are several indices in Squid Game which suggest the games’ host was actively running a gambling (albeit illegal) business. The host had an audience who placed bets upon players and who were potential financiers of the game. The game was seasonal, and we know that the show only depicted the 33rd Squid Game tournament. The game was very well organized. Accordingly, it is very likely that the host would be found to be running a gambling business and any income arising from the game would be taxable as a business profit. The host would also be entitled to deduct all expenses incurred in earning the income from the business, being salaries for the games’ recruiter, Red-Suit workers and the Front man, some part of meal expenses, and the cost of cleaning up the game arena, etc. As stated earlier, the nature of the Canadian income tax regime is such that illegal and even criminal activities are subject to tax, and in the case of the games’ host, an organized gambling business had existed.
Although the immorality of Squid Game and the crushing desperation arising from the participants’ personal debts ought to never be treated lightly, the show properly depicts the idiom that, “Tis impossible to be sure of any thing but Death and Taxes…” As shown above, the Squid Game, as a worldwide sensation, engages some of the most fundamental concepts within Canadian tax law and depicts some of the interpretative tensions that often appear in tax disputes between the CRA and Canadian taxpayers.
-  Income Tax Act, RSC 1985, c 1 (5th Supp), at subsection 3(a) [ITA].
-  Ibid, at section 56.
-  Canada Revenue Agency, Income Tax Folio S3-F9-C1, Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime, <https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-3-property-investments-savings-plans/series-3-property-investments-savings-plans-folio-9-miscellaneous-payments-receipts/income-tax-folio-s3-f9-c1-lottery-winnings-miscellaneous-receipts-income-losses-crime.html> [CRA Folio].
-  Ibid.
-  ITA, supra note 1, at subsection 18(1)(a).
-  The Queen v Poynton,  CTC 411, 72 DTC 6329 (Ont CA); MNR v Eldridge,  CTC 545, 64 DTC 5338 (Ex Ct).
-  CRA Folio, supra, note 3.
-  Ibid.
-  ITA, supra note 1, at section 160.
-  Ibid, at subsection 149.1(1).
-  Christopher Bullock, The Cobbler of Preston, London, 1716, Lincoln’s Inn Fields Theatre.