Tax Court of Canada


Income tax


Residual income was incidental to taxpayer’s active business and not derived from property

Taxpayer corporation composed music and was member of Society of Composers, Authors and Music Publishers of Canada (SOCAN). SOCAN was performing rights organization that distributed payments to its writers and publishers in respect of public performance of musical works by way of telecommunication to public. Taxpayer wrote for wide variety of television shows, including number of children’s shows, and won Emmy award. Although taxpayer did receive residuals, income derived from residuals was very little. Minister denied taxpayer small business deduction for three taxation years, because Minister claimed that music from which royalties were received was not income from active business. Taxpayer appealed. Appeal allowed. It was concluded that principal purpose of taxpayer’s music composing business was to derive income from provision of services. Taxpayer’s business was to earn income from daily activities of originating and recording music tracks for individual television episodes, which was evidenced by fact that taxpayer wrote and recorded at least 6,000 new music tracks for specific television episodes during relevant period. Although taxpayer did receive so-called residual income, such income was incident to and pertained to taxpayer’s active business, accordingly, such income was not derived from property but from active business. Case was referred back to Minister for reconsideration and reassessment on basis that taxpayer was engaged in active business carried on in Canada.

Rocco Gagliese Productions Inc. v. The Queen (2018), 2018 CarswellNat 3661, 2018 TCC 136, Steven K. D’Arcy J. (T.C.C. [General Procedure]).

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