Royalties Qualified for Small Business Deduction
A Canadian-controlled private corporation (CCPC) is entitled to the small business deduction on the first $500,000 of its active business income in a taxation year. The small business deduction reduces the corporate tax rate to around 11-14%, depending on the province, as compared to the regular corporate tax rate of around 25-30%, again depending on the province.
As a general rule, active business income does not include income from a "specified investment business", which includes a business the principal purpose of which is to derive income (including interest, dividends, rents and royalties) from property.
In the recent Rocco Gagliese Productions case, the taxpayer was a CCPC whose sole shareholder was Mr. Rocco Gagliese. Mr. Gagliese was a music composer who wrote music for various television programs. He did so as an employee of the CCPC. The CCPC received royalties for the use of the music from SOCAN, which collects and distributes royalties to music creators. The CCPC claimed the small business deduction on its earnings.
The Canada Revenue Agency (CRA) assessed the company, disallowing the small business deduction on the grounds that its business was a specified investment business the principal purpose of which was to earn royalty income.
The company‘s appeal of the assessment to the Tax Court of Canada was allowed. The judge held that the principal purpose of the taxpayer’s business was to earn business income from Mr. Gagliese’s daily activities of originating and recording music tracks for television episodes. This was an active business of the taxpayer, and so the small business deduction was allowed.
