29 March 1993 External T.I. 9235745 F - Definition of Active Business Income Royalty 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.

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Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Definition of Active Business Income

This is in reply to your letter dated November 26, 1992 requesting an interpretation of whether royalty income earned by a farming operation would be considered to be active business income.

The situation described in your letter appears to be an actual fact situation related either to a past transaction or to an actual proposed transaction. If the situation described relates to an actual transaction which has already been implemented, the review of such transactions falls within the responsibility of District Taxation Offices and it is the practice of this Department not to comment on such transactions when the identities of the taxpayers are not known. If, however, the situation described relates to an actual proposed transaction, it should be the subject of an advance income tax ruling. However, as stated in subparagraph 14(j) of IC 70-6R2 the Department will not provide an advance income tax ruling in cases where an advance ruling would require a determination which is primarily one of fact and the circumstances are such that all the pertinent facts cannot be established at the time of the request for the advance ruling. This could include issues involving residence, carrying on of a business and the existence of a partnership or whether income could be considered to be active business income.

We can however provide you with the following general comments.

Our Comments

As a general rule, royalty income is from a source that is property. However, where it could be established that the royalty income is related to an active business carried on by the recipient corporation or the recipient corporation is in the business of dealing in or originating the property from which the royalties are received such income would be considered to be income from an active business.

There are numerous cases dealing with whether property is incident to or pertains to an active business carried on by a corporation. The approach adopted by the courts is best represented by the following excerpt from Atlas Industries Ltd. v. M.N.R., 86 DTC 1756, pages 1764- 1765:

"Giving the words "incident to or pertains to an active business" their grammatical and ordinary sense, and bearing in mind their context, there must I think be a financial relationship of dependence of some substance between the property and the active business before the exclusion in paragraph 129(4.1)(b) comes into play. The operations of the business ought to have some reliance on the property in the sense that recourse is had to it from time to time or that it exists as a back-up asset to be called on in support of those operations when the need arises. This I regard to be the basic approach to paragraph 129(4.1)(b). Whether income-producing property has crossed the dividing line into the paragraph will depend on the facts of each case. I am satisfied that the facts under consideration do not place the relevant property within it. The relationship between the debts created by the term deposits and the appellant's business was tangential at best. The debts were never resorted to in aid of the appellant's business nor was there any real expectation that they would be. The fundamental purpose of these term deposits was unrelated to sustaining the appellant's businesses, but it was to direct the profits therefrom into the hands of the shareholders, primarily by way of bonuses."

We trust the above comments will be of assistance to you.

Yours truly,

R. Albert for Director Business and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch