Gagliese Productions found that royalty income of an author/musician was income from services because the person who derived the income was earning the income in the normal course of his business. If CRA agrees with this decision in this case? If so, would the decision apply to a mortgage lending business that earns interest income on a business of renting real estate?
CRA agrees with the Gagliese Productions decision based on the factual findings made. The principal purpose of the taxpayer’s music composing business was to derive income from the provision of services. The residual income from the music tracks aired in reruns of television episodes was incident to, and pertained to, the taxpayer’s active business. 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 was 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 earned by the taxpayer respecting the copyrighted music will generally be considered to be active business income.
A strong connection between the Gagliese Productions case and a mortgage-lending business is not apparent.
If the principal purpose of a corporation’s business is to derive income from property such as interest or rental income, and the business does not employ more than five full-time employees, and none of the other exceptions apply, then the income will be considered to be an income from a specified investment business. Here, the interest and rental income does not pertain to, is not incident to, and is not inseparable from or inextricably linked to an active business carried on by the corporation.