26 September 1997 External T.I. 9722915 - ROYALTY INCOME 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether royalty income from copyrighted music is active business income or income from property.

Position:

Depends.

Reasons:

If royalty income derives from a product created by the company, then generally would be considered active business income; if derived from product created by someone else, then question of fact.

972291
XXXXXXXXXX P.Spice

Attention: XXXXXXXXXX

September 26, 1997

Dear Sirs:

Re: Royalty Income As Active Business Income

This is in reply to your facsimile transmissions of August 25, 1997, and September 5, 1997, in which you describe a particular fact situation and ask whether royalty income received by a Canadian-controlled private corporation is income from an active business for purposes of section 125 of the Income Tax Act (the "Act").

Your question relates to a specific fact situation and we are unable to confirm the tax consequences except in the context of an advance income tax ruling. However, we may provide the following general comments which we trust will assist.

In applying section 125 it is necessary to determine each year whether the income derives from an active business or from a source in Canada that is a property. Such property income is defined in subsection 129(4) of the Act to include income from a "specified investment business". This latter term is defined in subsection 125(7) of the Act to mean a business "the principal purpose of which is to derive income from property (including interest, dividends, rents or royalties)". Note that this definition excludes certain types of businesses but these exclusions are not relevant to this discussion.

Although royalty income is generally from a source that is property, where it can be established that the royalty income is related to an active business carried on by the recipient corporation in the year, or the recipient corporation is, in the year, in the business of originating property from which the royalties are received, such income will be considered to be income from an active business. Therefore, if a company 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.

Where the copyrighted music owned by the company was not produced directly by the company but rather relates to music composed by an individual who was not in the employ of the company at the time of its copyright, it is a question of fact whether the royalty income received by the company in any particular year is from a specified investment business or an active business carried on the company.

Although the foregoing comments are not binding on the Department, we trust they will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch