5 December 1989 Ruling 58891 F - Royalty Interests as Active Business Income

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.

December 5, 1989

Dear Sirs:

Re:  Request for Technical Interpretation Royalty interests and each of paragraph 55(3)(b) and section 125 of the Income Tax Act (the "Act")

This is in reply to your letter of October 6, 1989, in which you requested our opinion regarding the nature of royalty interests for the purposes of paragraph 55(3)(b) of the Act and the nature of income therefrom for the purposes of the small business deduction rules in section 125 of the Act.

With respect to the first matter, our views have not changed from those set out in our letter of December 21, 1987 to you - in our view a royalty interest may be a "business property" for the purposes of Revenue's categorization of property under paragraph 55(3)(b) of the Act where income from the royalty is properly described as income from an active business.  Again, we agree that income may normally be properly so described where the royalty interest is reserved or obtained by an oil and gas company as a farmor in a farmout arrangement, although, as you appreciate, the categorization of such revenue is always a question of fact.  In situations in which an oil and gas company purchases existing royalties from third parties, the royalties would produce active business income assuming they are income from a business in which five or more full-time employees are used throughout the year.

With respect to the second matter, we suggest that income from royalties could well be active business income - this is, after all, the basis on which we suggested a royalty may be a business property - but wish to emphasize, again, that such characterization would depend on the facts of the situation. 

As you are aware, our comments are our opinion only, and are not binding on Revenue Canada.  In the event there is a proposed acquisition of a royalty which concerns you, we would be pleased to examine a ruling request relating to the characterization of the income therefrom, although there is some possibility we might not be able to determine its nature and consequently be unable to provide a ruling.

Yours truly,

Section ChiefResource Industries SectionBilingual Services and ResourceIndustries DivisionRulings Directorate