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.