18 August 1995 External T.I. 9520295 - ROYALTY INCOME 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:

Can royalty income be considered active business income?

Position TAKEN:

The Department recognizes that royalty income may be classified as active business income depending on the cicumstances.

Reasons FOR POSITION TAKEN:

In order to produce active business income, the energy required to produce that income must be referred to. In addition, if the income originates from a "specified investment business" as defined at 125(7), it will be excluded from the "active business" definition. IT-73R4 recognizes that under certain conditions royalty income may be from an active business (see par 10-16).

5-952029
XXXXXXXXXX Franklyn S. Gillman

Attention: XXXXXXXXXX

August 18, 1995

Dear Sirs:

Re: Section 125(7) of the Income Tax Act (the "Act")

This is in reply to your letter dated July 24, 1995 wherein you requested clarification as to the application of subsection 125(7) of the Act.

The situation described in your letter appears to be an actual fact situation related either to a past transaction or to an actual proposed transaction. If the situation described relates to an actual transaction which has already been implemented, the review of such a transaction falls within the responsibility of the Tax Services Office and it is the practice of this Department not to comment on such transactions when the identities of the taxpayers are not known. If, however, the situation described relates to an actual proposed transaction, it should be the subject of an advance income tax ruling. However, we are prepared to offer the following general comments which may be of assistance to you.

While it may be possible that income earned from allowing a person to use an intangible, such as a patent, copyright, trademark, etc., is derived from an "active business" for purposes of subsection 125(7) of the Act, it is also possible that such income is obtained from a specified investment business. Another possibility is that it is royalty income derived from a property. In order to make a determination as to the source of such funds, one must examine all the facts of the particular case. This analysis must be conducted on a case by case basis.

We trust these comments will be of assistance.

Yours truly,

for Director
Manufacturing Industries,
Partnerships and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch