https://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/315931/index.do
Rocco Gagliese Productions Inc. v. The Queen (July 10, 2018 – 2018 TCC 136, D’Arcy J.).
Précis: Rocco Gagliese is a composer and a Writer Member of SOCAN. He carries on his business through a corporation (RGP). Under the rules of SOCAN almost all of the corporate revenue took the form of transfers from SOCAN. CRA reassessed to deny RGP the small business deduction on the basis that the payments from SOCAN were not “active business income”. RGP appealed to the Tax Court which allowed its appeal with costs on the basis that the amounts paid to RGP by SOCAN were income from an active business carried on in Canada.
Decision: Mr. Gagliese was a “Writer Member” of SOCAN. Thus the income of RGP was subject to strict rules set down by SOCAN:
[13] SOCAN requires data in order to make payments to its Writer Members and Publisher Members. SOCAN determines the amount of money to pay its members in respect of music used on broadcast television as follows:
- SOCAN receives in respect of each performance of a music track (also referred to as a cue) on a television show that aired on public television sufficient data to allow it to match the performance to the holders of the rights in respect of the music. The data is provided on what are referred to as cue sheets.
- SOCAN then employs a formula developed by its board to calculate individual royalties. The formula incorporates usage (whether the track was theme music, feature music or a track otherwise used in the television program) and the duration of the track on the specific television show. SOCAN applies the formula to the total amount of licensing fees it has received in respect of television.
[14] The Court was provided with a copy of SOCAN’s distribution rules. Rule 3.01 of the distribution rules provides for the pooling of the television licensing fees as follows: “All revenue from broadcast television licence fees and broadcast television retransmission royalties, less net overhead, shall be pooled for the purposes of the television distribution.”
[15] Exhibit A-24 is an example of a cue sheet. The cue sheet contains the name of the television production, the actual episode in which the music track was used, the year the episode aired, the performance duration, a list of the music used in the episode, a list of the composers who may have scored the music for the show and the usage of the music. Ms. Williams noted that either the Writer Member or the television production company prepares the cue sheet. It is used to determine if the music was specifically composed for a television production.
[16] Rule 19.02.02 of SOCAN’s distribution rules provides in part: “Distribution cheques on account of performing right royalties credited to a writer member may, on that writer member’s written direction, be made payable to an incorporated entity . . . the shares of which are entirely owned and controlled by that writer member. . ..”
[17] Thus, while a Writer Member must be an individual, the member may assign any royalties payable to him or her to a corporation, provided the member is the sole owner of the corporation and controls the corporation.
[18] On October 10, 2007, Mr. Gagliese executed a direction to SOCAN to make all future royalty distribution cheques payable to the Appellant. He warranted and represented that he had assigned to the Appellant the right to receive distribution cheques on account of performing rights royalties ordinarily payable to him as a Writer Member of SOCAN.
[Footnotes omitted]
On the evidence the Court held that RGP’s income was income from an active business:
[55] The evidence before me is that the principal activity of the Appellant was the writing and recording of music for specific television episodes. This was its primary source of revenue.
[56] In light of this evidence, it is my view that the principal purpose of the Appellant was to earn income from the writing and recording activities of its primary asset, Mr. Gagliese, who was its only employee. Further, the vast majority of this income arose from the daily activities of Mr. Gagliese, as an employee of the Appellant, in procuring clients, writing the numerous tracks/cues for specific television episodes and the subsequent recording of such tracks. This required a significant amount of daily activity, which is evidenced by the fact that Mr. Gagliese wrote and recorded at least 6,000 new music tracks for specific television episodes during the relevant period. I accept his testimony that each of these tracks was used in a new episode of a television show that aired on a specific date.
[57] For example, the CBC retained the Appellant to write for a specific showing of its nightly The National newscast, specific music tied to the news for that specific day.
[58] The Appellant received very little revenue from so-called residuals, that is, from tracks that were heard in reruns of television episodes.
[59] It was not the principal purpose of the Appellant’s business to earn income from property. The principal purpose of the Appellant’s business was to earn income from Mr. Gagliese’s daily activities of originating and recording music tracks for individual television episodes. As Mr. Gagliese testified, if you take away his daily writing activities, the Appellant earned little or no income.
Thus the appeal was allowed with costs.