Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Question 7 of the 2019 Step Conference. 1. Does the CRA agree with the case of Roco Gagliese Productions Inc. v. The Queen 2018 TCC 136 where it was held that the royalty income was income from services because the person who derived the income was earning the income in the normal course of his business? and 2. If so, how does the decision apply to a mortgage lending business that earns interest income on a business of renting real estate?
Position: 1. We agree with the TCC decision. 2. If the principal purpose of a corporation's business is to derive income from property and none of the other exceptions apply then the income will be considered to be income from a specified investment business.
Reasons: Our previous position.
2019 STEP CRA Roundtable – June 7, 2019
QUESTION 7. Nature of Income of Author/Musician
A) The case of Roco Gagliese Productions Inc. v. The Queen, 2018 TCC 136 involved determining the nature of copyright royalties received by an author/musician. The question was whether the income was royalty income (which would be from a specified investment business) or income from services (which would be active business income). It was held that the income was income from services because the person who derived the income was earning the income in the normal course of his business. Does CRA agree with the decision in this case?
B) If so, how does the decision apply to a mortgage lending business that earns interest income on a business of renting real estate?
CRA Response
A) A specified investment business (“SIB”) is defined in subsection 125(7) of the Income Tax Act (“Act”) as a business the principal purpose of which is to derive income from property (e.g., interest, dividends, real estate rentals and royalties), subject to certain exclusions which are not relevant for the purposes of this discussion.
We agree with the Tax Court of Canada (TCC) decision in Rocco Gagliese Productions Inc. v The Queen 2018 TCC 136. In particular, we agree with the court’s decision to allow the appeal on the basis of the factual findings of that case: that the principal purpose of the taxpayer's music composing business was to derive income from the provision of services, and that the residual income from music tracks aired in reruns of television episodes was incident to and pertained to the taxpayer's active business.
Our position as stated in technical interpretation 9722915 and confirmed in document 2007-0238221E5 remains unchanged. Although royalty income is generally considered to be income from property, such income will be considered to be income from an active business where it can be established that the income is related to an active business carried on by the recipient taxpayer in the year, or the recipient taxpayer is, in the year, in the business of originating property from which the royalties are received.
If a taxpayer is in the business of composing music, the income it earns with respect to its copyrighted music would generally be considered active business income. The fact that such income is in the form of royalties is not, in and by itself, sufficient to conclude that it is property income. Whether royalties are income from property or from an active business will depend on the circumstances of the particular case.
B) It is unclear from the question what is the interconnection between the mortgage lending business and the real estate rental business. We can, however, provide some general comments.
Our position as stated in document 2002-0168575 remains unchanged:
“Pursuant to subsection 125(7) of the Act, the expression "income of the corporation for the year from an active business" generally refers to income from an active business carried on by it, including any income for the year pertaining to or incident to that business. As indicated in paragraph 5 of IT-73R6, the expressions "pertains to" or "incident to" involve a financial relationship of dependence of some substance between a property and an active business before the property is considered to be incident to or to pertain to the active business carried on by the corporation. In addition, the operations of the business have to have some reliance on the property such that the property is a back-up asset that could support the business operations either on a regular basis or from time to time.
Moreover, the courts have also held that when a corporation derived income from an activity that was inseparable from its normal active business, such income may properly be classified as active business income. If the income is part of the normal business activity of the corporation, and it is inextricably linked with an active business, it will be considered active business income.”
If the principal purpose of a corporation’s business is to derive income from property, (such as interest or rental income), it does not employ more than five full time employees, and none of the other exceptions apply, the income will be considered to be income from a specified investment business. The question posed does not identify an active business, so, in our view, the interest and rental income does not “pertain to”, and is not “incident to”, “inseparable from” or “inextricably linked” an active business carried on by the corporation.
Jennifer Smith and Sandro D’Angelo
2019-079832
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