Does your small business offer contests? Understand the legalities

Running a contest can be a great way to build awareness for your business. But before you decide to use a prize-based promotion to attract new customers, be sure your contest is legal.

Before running a contest, you need to comply with Canadian and provincial contest regulations and ensure the program isn’t actually a lottery, says Chad Finkelstein, a business lawyer with Dale & Lessmann LLP in Toronto.

“Contests [and lotteries] are governed by the federal Criminal Code and also the Competition Act,” he says, explaining that lotteries have three elements:

• payment is required for contest entry;
• chance or randomness is the basis of game play; and
• there is a prize.

“If you’re running an operation that has all three of those things, [that’s] gambling, because that’s saying, ‘Throw your money into this thing you have no control over, and maybe you’ll win something shiny.’ And that tends to cause impulsive behaviour,” he explains.

Finkelstein says running an unlicensed lottery is a criminal offence. “The maximum penalty is up to two years in jail. It’s anywhere from being told to shut it down to being fined up to $2 million and charged criminally.”

Ensuring it’s legal

To make sure a contest is legal, Finkelstein says, you must “eliminate one or two lottery elements from what you’re offering.”

Since it’s not logical to eliminate the prize, many organizers eliminate the payment requirement, he notes. “That’s why in every contest, it almost always says in caps and bold letters, ‘no purchase necessary.’”

Alternatively, he suggests eliminating the chance factor. “What a lot of contest organizers will do is a random draw; then they ask a skill-testing question,” says Finkelstein.

Case law from Alberta, he says, has established the minimum difficulty for a skill-testing question. “It’s basically a BEDMAS equation, [which is] the math order of operations from elementary school.” And, if a contest is based on pure skill and eliminates the chance element (e.g., an essay-writing or photography contest), entry payments can be accepted.

You’ll also have to make sure prospects and clients understand the contest. “The federal Competition Act says you have to give full and fair adequate disclosure of all the terms and conditions and rules.”

Finkelstein says the entry form should, at minimum, state “what the contest period is, when is the winner determined, what the approximate retail value of each prize is, what your odds of winning are and who is eligible to enter.” Then, there should be an obvious link to a page outlining the full contest rules.

He adds it’s common to see Quebec residents eliminated from entry. That’s because its provincial regulator — Régie des alcools, des courses et des jeux — has extensive requirements. For example, “Quebec is the only place in Canada where you actually have to submit your rules and all promotional materials in advance to the provincial regulator. And all of it needs to be submitted in both English and French.”

Taxation

In terms of taxation of the prize, Finkelstein says it depends on the size and type. Generally, sales tax would be charged.

But with the right language, the prize winner (rather than the business) can be responsible for paying provincial or federal sales tax. “You want to say that each user is responsible for their own taxes that may apply to each prize. So if you win a vacation, for example, it may be all expenses paid, but not the taxes.”