In technical interpretation 2010-0391651E5, the Canada Revenue Agency (CRA) addressed the issue of whether royalty payments received by employees from their employers would be taxable as employment income or, instead, as property income. Specifically, the technical interpretation related to intellectual property created by faculty members employed by a University in the course of their employment.
Ownership of any intellectual property so created would initially rest with the faculty member that created it. However, in many cases, the faculty member would assign 100% of the intellectual property to the University in exchange for the University’s agreement to commercialize, develop and exploit the intellectual property. In some cases, a portion of the revenue received in respect of the intellectual property would be shared with the faculty member. The question is whether this payment would constitute property income or employment income.
The CRA noted that royalty payments received by individuals are typically taxed as property or business income. However, when a royalty payment is received through employment, it may be taxable as employment income to the extent that the University holds the rights to the intellectual property and pays the royalty to the faculty member. Where, however, the faculty member retains ownership of the intellectual property, the royalty payment would constitute royalty income to the faculty member, even if flowed through the University. In such a case, the University would be viewed as a conduit for the flow through of the royalty payment instead of as the payor of the amount in question. Where the intellectual property is owned by both the University and by the faculty member, the portion of the payment to the faculty member in excess of his or her share would constitute employment income.
This technical interpretation is of interest as it underscores the need to look to the ownership of the intellectual property underlying the royalty payments in question to properly characterize the payments. While the fact pattern set out in the technical interpretation is simple enough, it is easy to imagine scenarios in which making such a determination would be significantly more difficult. Ownership of assets and, in particular, of intangible assets, is not always straightforward to ascertain and may lead to some interesting inquiries. Nonetheless, this technical interpretation provides a useful starting point for some of the more complex fact patterns that may arise.