Copyright

Commentary

Copyright royalties generally are income.

In addition, the sale of copyright (even if for a lump sum and entailing a transfer of all the rights to the copyright) will be on income account if the copyright was generated by the taxpayer in the course of exercising the vocation of writer, dramatist, biographer etc. (see Howson v. Monsell and Glason v. Rougier), including where the work is the first such effort of the taxpayer (see Hobbs v. Hussey) or the writing or other activity was carried out as a side-line activity (see Billam v. Griffith and LaRue). Conversely, such a sale potentially can give rise to a capital receipt (potentially giving rise to the recognition of an eligible capital amount, a capital gain or recapture of depreciation, depending on the circumstances) if the taxpayer is not carrying on such a vocation (see Haig, Shiner v. Lindblom and Withers v. Nethersole).

See Also

LaRue v. MNR, 63 DTC 553, 32 Tax A.B.C. 281

The taxpayer, who was a professor of mathematics at Laval University, assigned the copyright in four textbooks that he had translated or written to the University (which was also a publisher) in consideration for future royalties. At a later date, he assigned all his rights under these contracts to the University in consideration for the lump sum of $75,000. In concluding that this sum was taxable, Mr. Boisvert first found that the royalties which otherwise would have been received by the taxpayer clearly would have been taxable profits from the taxpayer's "temporary profession" of writer, and then applied the principle that a sum of money paid in commutation of annual sums that were income, was also chargeable to income tax. Mr. Boisvert also stated (p. 560):

"It would be a different matter if, as the owner of copyrights which he himself made use of by publishing his own treatises, he had sold his rights in bulk when giving up his career as a writer ... . In the case of the appellant it happens that there is nothing which points to the sale of a capital asset, of a well-established proprietorship."

No. 682 v. MNR, 60 DTC 65, 23 Tax A.B.C. 300

The taxpayer, together with another senior government lawyer, agreed with a publisher to compile an encyclopedia of legal forms for total consideration of $17,500 payable in instalments over such period of time as it might take them to prepare and complete the work. Mr. Snyder found that the true nature of the transaction was the performance of services by them rather than the sale by them of copyright, with the result that the $17,500 was taxable in the years of receipt.

Shiner v. Lindblom (1960), 39 TC 367 (Ch. D.)

The taxpayer, who was a well-known actor, paid £200 for the film rights to a novel. On his later exercise of the option he acquired the rights for £1,500 and assigned them to a film company for £4,000. In the same agreement, provision was made for him to play the leading part in the film.

Danckwerts J. noted the finding of the Commissioners that it was not the intention of the taxpayer upon acquiring the option to sell his rights to the novel at a profit but, instead, treated the acquisition as an investment in order that income from the film could supplement his earnings. Because of this finding and a finding that it was not part of the taxpayer's profession to dispose of copyright, his gain of £2,300 was not subject to tax.

Mackenzie v. Arnold (1952), 33 TC 363 (C.A.)

Royalties received by the taxpayer after becoming a U.K. resident that were in respect of novels that the taxpayer wrote while he was a non-resident of the U.K. were subject to tax under Schedule D as "annual profits or gains arising or accruing ... from any trade, profession, employment, or location".

Howson v. Monsell (1950), 31 TC 529 (HCJ)

A writer of historical fiction received amounts (payable in instalments) for the sale of film rights to two of her books. Because she received these sums by reason of the fact that she was carrying on the vocation of writer and the receipts were plainly in the course of carrying on that vocation (she had been writing historical fiction for many years), the amounts were income rather than capital receipts.

Withers v. Nethersole, [1948] 1 All E.R. 400, 28 TC 501 (HL)

The taxpayer who had the exclusive right to dramatize Rudyard Kipling's novel "The Light that Failed" later agreed with Mr. Kipling that Mr. Kipling would have entire control of the film rights and that 1/3 of all sums received by Mr. Kipling for the film rights would be paid to the taxpayer. The taxpayer accordingly received the sum of £2,666 when the widow of Mr. Kipling granted world film rights for a 10-year period to Paramount Pictures Inc. for consideration of £8,000. At the time of receipt, the taxpayer was no longer carrying on the profession of a dramatist.

In finding for the taxpayer, Viscount Simon stated:

"Here we have the sale and transfer outright of an item of property which previously belonged to the Respondent not the licence to use it granted by its unchanged owner, and this does not give rise to annual profits or gains unless the sale takes place in the course of carrying on a trade or profession ... "

Glasson v. Rougier (1944), 26 TC 86 (KBD)

An author, who desired to raise substantial sums of money, agreed with her publishers that in consideration of £750 paid in three instalments she would grant them the sole and exclusive right throughout the term of her copyright to three already published novels to publish further editions of those novels in volume form throughout most of the British Commonwealth. In response to an argument of the taxpayer (who was the author's husband) that because this was the only case in which she had ever disposed of her copyright for a lump sum, it should be excluded from assessment, Macnaghten J. stated (p. 90) that "whatever Mrs. Rougier receives, whether by way of royalty or by payment for the sale of her copyright, each and all are profits earned by her in her vocation which must ... be included in the assessment".

Hobbs v. Hussey (1942), 24 TC 153 (KBD)

The taxpayer, who was a solicitor's clerk who had never carried on the profession of an author, agreed with a newspaper publisher to write his life story for the payment of £1,500 to be made in instalments. He retained no interest in the copyright. In finding that such payments were taxable, Lawrence J. found that the true nature of the transaction was the performance of services and that the element of sale of a capital asset (i.e., copyright) was subsidiary to this characterization.

Billam v. Griffith (1941), 23 TC 757 (KBD)

After finding that there was no basis for disturbing the finding of the Commissioners that a practising barrister was also carrying on the vocation of a dramatist or playwright when, in his spare time, he wrote a play, Lawrence J. also found that it was open to them to find that an ordinary incident of the business of a dramatist or playwright is to dispose of his plays or (as in this case) the motion picture rights to his plays. Lawrence J. stated (p. 762):

"When such a vocation is carried on, and it is an ordinary incident of the disposition of plays either to realise them by means of royalties or by outright sale, it seems to me that it is really the realisation of what may be regarded as the circulating capital of the dramatist, his brain being his fixed capital, and his circulating capital being the plays ... ."

Beare v. Carter (1940), 23 TC 353 (KBD)

£150 that a practising lawyer received from an English publisher for permission to publish a 6th edition of his "History of the English Courts" was a capital receipt, it being agreed that for purposes of the appeal the £150 should not be treated as representing consideration for what little work he did in revising the book.

Trustees of Earl Haig v. C.I.R. (1939), 22 TC 725 (CS (1st Div.))

The trustees of the estate of Earl Haig made an agreement with an author to make the diaries of the late Field Marshall available to him in consideration for a 1/2 share of all profits generated from sales of the resulting biography. Under the agreement entered into between the author and his publishers, he received £10,000 paid on account of royalties, which in the result was all that was likely to ever be received from the publishers.

In finding that the £5,000 received by the estate was a capital receipt, Lord Fleming stated (p. 736) that the transaction:

"involved the sale of a valuable part of the property itself and was not a transaction whereby a person got merely the use of the property upon terms which resulted in its return to the owner with its capital value substantially undiminished ... . I am of the opinion that what has happened here is that there has been a partial realization of a piece of property by an isolated transaction not in the course of trade and that such a transaction does not attract Income Tax."

Administrative Policy

10 May 2013 External T.I. 2013-0485501E5 - Disposition of Intellectual Property

In response to a question respecting the treatment of income received from the sale of intellectual property by a taxpayer that carries on a business of developing video games, CRA stated:

in the case where the transferor can be considered to be in the business of developing game software, any payments received would be included in business income as a trading receipt.

Articles

Wilson, "Tax Treatment of Development, Acquisition, and Transfer of Technology", 1983 Conference Report, pp. 851-857.