Copyright violation leaves musician’s income at risk

A musician’s legacy is at risk after a controversial restaurant uses one of his songs to promote its brand. If his fans don’t buy his albums, the royalties he’s living off of could be in jeopardy. Add to that his declining mental and physical capacity, after being diagnosed with early onset Alzheimer’s disease. As a result, his only daughter has a host of financial and estate challenges to deal with. Three experts weigh in.

The experts

Susan Abramovitch

Partner at Gowlings, Toronto

Karen Slezak

Partner, Tax at Crowe Soberman, Toronto

Mark Berry

Vice-President, Senior Wealth Advisor, BMO Nesbitt Burns, London, Ont.

The situation

Nellie McGruder*, 26, nearly wrecked her car when she heard one of her father’s songs being used as the jingle for an expanding fast-food franchise.

The music of her 62-year-old father—the legendary folksinger Niles McGruder*—has one clear message: peace and love. So Nellie is livid to hear his songs being associated with a restaurant chain that recently made headlines when one of its executives made bigoted statements at the chain’s AGM. Outraged, thousands have said they’re boycotting the chain and any associated businesses, including Niles’.

Niles had always told his only child she’d receive the rights to his catalogue of country classics. He assured her she’d be able to live comfortably off the royalties, which bring in about $10,000 a month.

Problem is, Niles was diagnosed two years ago with early onset Alzheimer’s disease and has lost much of his memory. Doctors say her father will live three to 10 years.

Even though Niles’ will clearly gives his posthumous royalties to Nellie, she’ll get nothing except for the nice house he owns free and clear outside Bracebridge, Ont. and a couple of battered Gibson B-25s if they don’t rehabilitate his image.

Niles is in no condition to sue for copyright and moral rights infringement. The task lies with Nellie, but there’s no way she can raise the necessary cash to sue (estimated between $20,000 and $50,000 if the matter goes to trial; more if there’s an appeal).

Since Niles doesn’t have a PoA, a friend has advised Nellie to have her father declared incompetent. But she views this as a humiliating blow, and is reluctant to move forward. She has no other family to turn to. Her father was an only child, and her mom hasn’t been seen since she left Niles for a heavy metal guitarist in 1990. Even though her mother and Niles never married, and it’s unclear how long they actually lived together, Nellie fears her mom will come out of the woodwork after her father passes away.

The clock’s ticking. Nellie needs to take swift action to preserve her dad’s legacy, and prevent his life’s work from being maligned.

Further, even though she’s currently unattached with no plans for a family, she could use some sage advice on what these music royalties mean for her net worth going forward.

Nellie works as a sound engineer for several indie recording studios. Work is sporadic but she averages $3,200 per month, which is more than enough to cover the modest $800-per-month rent on a basement apartment in a Parkdale Victorian house. More often than not, she’s paid in cash or by personal cheque. What she doesn’t spend on herself sits in a chequing account and currently totals $31,286. She jokingly calls it her “unemployment insurance.” Nellie does not have a TFSA or RRSP because, since graduating with an audio engineering degree from a polytechnic university four years prior, she has not filed a tax return.

$10,000

The amount Niles had been receiving in royalties per month.

To sue or not?

SA: It’s unusual for a company to do a commercial without getting clearance, so I’d want to make sure the rights were actually owned by her father, as opposed to a publisher, and they didn’t consent to this. If whoever controls the copyright issued consent, it would eliminate the copy-right infringement.

And there could be two infringements here: one for the copyright in the musical composition and one for the copyright of the master recording. The actual recording of the song is the master, and the musical composition embodied in that recording is the musical composition.

So, when a company uses a song in a commercial, they could re-record or use his original recording of that musical composition. But they need to get the rights to the musical composition and his master recording of it. Or, they can get the rights to the musical composition and then re-record it themselves, or have some other artist record it and deal with that master separately.

Also, giving the copyright license wouldn’t necessarily remove the moral rights violation, unless he waived his moral rights, and those rights only apply to the musical composition.

If we assume he retains copyright and moral rights and never consented use to the restaurant, and he authorizes in a document for Nellie to take action on his behalf, then she could sue for copyright infringement. That’s because what the restaurant did is synchronize the song, which means putting this music in their radio ad. So, what the restaurant should’ve done is get a synchronization license.

And under the [Copyright Act of Canada], this situation is a clear moral rights violation, so she could also sue for that. There also might be other claims that are associated with slight of character, like misappropriation of personality, defamation or implied endorsement. As long as he’s alive, it’s easier to sue. You can’t sue for defamation if he’s dead.

The other problem is, we can no longer count on the $10,000 a month because the public is boycotting his music.

KS: Yeah, she may get stuck and the only thing she’s got left is to sell the family home in Bracebridge to raise the funds to carry the lawsuit.

SA: Unless you can find a lawyer who will do it on contingency. Also, legal action is only one thing she can do. She can go out in the press and social media, not spend money on a copyright lawsuit, and shame this company into admitting that they basically violated his copyright—that he wasn’t associated with it—and that might reinstate his $10,000 a month.

Also speaking to the royalties, that income is not dependable. We’re going through a music industry revolution. If that $10,000 was dependent on CD sales or downloads, the industry has shifted towards streaming services. The royalties are dealt with differently.

A songwriter gets a mechanical royalty for the sale of a record, and right now that’s 8.3¢ for a song of five minutes or less per CD sold. For downloads, it’s between 8¢ and 12¢ per 99¢ download for publishing. Add to this the mastering royalty, which varies a lot because it’s always negotiated. That’s easy economics and it multiplies quickly. But for streaming, it’s more complicated because each streaming service has a different model, and the royalty is fractions of pennies per song played. You’d have to have millions and millions of streams in order to earn a couple thousand bucks.

That being said, for financial planning purposes, [some investment banks may] buy or securities royalty streams. You’re probably selling it at a discount, and you can sell the catalogue outright or for an ongoing sum of money, but at least you have more certainty of what the royalties will be over time.

Lack of PoA

MB: The first step Nellie should take is to get a medical assessment to determine his mental acuity.

KS: That way, you can determine whether he’s in any state to be able to sign a power of attorney. At this point, Nellie has no rights to administer his property unless she can apply to be his attorney. Or, the courts will administer a public trustee.

MB: Correct, and it’s my experience with Alzheimer’s patients that they have times when they’re of clear mind and can make these judgments on their own, so he could name Nellie in his PoA.

KS: And the key part to the will is naming Nellie or another executor, so one of them could administer the estate. Then, ensure the executor has gathered all the assets [and] paid off all the father’s debts, including tax. Then, the remaining assets can pass to Nellie.

But there will be a tax bill on her father’s death because he can only pass things tax-free to a spouse or common-law partner, and the mother’s out of the picture.

The Bracebridge house might be sheltered with his principal residence exemption, but the song rights are an interesting question as to what type of tax they’re going to trigger on death. It’s going to be tricky to value them if they’re in the middle of a legal fight. If they’re successful in the lawsuit and he’s back to getting his $10,000 a month, then it’s possible for a valuator to come up with a value. It’s likely to be considered eligible capital property, so half of it will end up being taxable.

And as far as the mother, she’d have to have been common-law for three years to have any type of right to the estate. But I’d check if she was receiving any type of support from him, because if Niles was slipping her money each month, then she may be able to apply for rights if she’s dependent.

Long-term care options

KS: Typically, Alzheimer’s pa-tients need a lot more care. Nellie [should plan for] a specialized facility that makes sure he doesn’t wander off or harm himself. But a care facility, supplemented with a personal care worker, can range from $6,000 to $10,000 a month.

MB: Correct. Then we have to look at where that cash flow is coming from. He’s probably collecting CPP, but he’s not quite old enough to get OAS.

KS: Nellie could claim medical costs by getting her father’s doctor to fill out a disability tax credit. Then, at least the cost of the care facility and full-time nursing would be eligible medical expenses. You’re getting about a 22% deduction for them because they count as credits.

MB: And he’s got his undependable royalty stream.

KS: He’s probably losing about 30% in taxes off his royalties if they continue to come in at $10,000 a month. At about $120,000, he’s probably going to net about $90,000 once he’s paid his taxes, if he’s on top of it.

MB: He could supplement the cost of the long-term care by selling his house, which would be redundant. Nellie’s living in Toronto; she’s not likely to move to Bracebridge. As the attorney, she could manage the sale.

KS: Plus, she needs to think about whether she could even handle the carrying costs of the house if she were to inherit it. She should consider her own income due to this fluctuating royalty stream, and whether she wants to keep her apartment.

The recap

How much does a songwriter make in royalties?

CDs 8.3¢ per song that’s 5 minutes or less

Downloads 8¢–12¢ per 99¢ download

Streaming Fractions of pennies per song played

Plans for Nellie

KS: She needs to get together with an accountant, the estate lawyer and an advisor to get her financial affairs in order. She’s got a huge tax problem. She’s got a chequing account with $31,000 and hasn’t filed tax returns, but she’s been making $38,400 a year for the last four years. That’s about a $6,400 tax bill per year that she hasn’t been paying, and there would also be interest and penalties.

Worst-case scenario, she’s got a $30,000 tax bill hanging over her head, so there go the funds in her checking account. Add to this her accounting fees.

There were years she was in university, so she may be able to carry forward tuition credits. Then, get her to make a voluntary disclosure to the tax department to remove the late filing penalties, which are 17% of the tax owing.

MB: After getting that tax issue resolved, she won’t have much left to build up her RRSP room. She should consider a TFSA with anything that’s left over because it’s an easy place to park money in the interim until she figures out what the future might look like.

KS: She has no husband or kids, so she needs to sit down and think about what happens if she passes away suddenly. Where does she want her assets to go? What are her goals, her objectives? Does she have a distant relative she wants to benefit? Does she want a charity to benefit?

MB: Yes, in conjunction with her father’s estate, I’d encourage her to get her own will and PoA in place, which might actually be integrated with her father’s, because what happens with him will deeply impact what happens with her.

3 common misconceptions about copyright law

Paul Sanderson, lawyer at Sanderson Entertainment Law in Toronto, provides insights.

• You can copyright a name. No. You can trademark a name, but you can’t copyright it. You can only copyright a work, which is defined in the copyright act as being a form of expression. Examples of work include a sound recording, book, script or video. And that form of expression is what’s protected.
• You must register to be protected. No. For copyright and trademarks, you don’t have to register to acquire exclusive rights. You acquire those automatically if you’ve created original work. And if you use a trademark copyright in the marketplace, you also acquire rights if the trademark or trade name is distinctive to you, your work and your services, and can’t be confused with someone else’s.
• If you’ve registered your name with the Business Name Registrations Act, which is a provincial statute in Ontario, your name is automatically trademarked. No. Getting registered is like getting a license, and only gives you the right to do business while using that name. If you’re doing business under a name other than your legal name, you’re obligated to register. But, again, you are not acquiring trademark rights, which are a federal statute, but you may be acquiring common-law rights in Ontario. Even if you haven’t registered, you can acquire some exclusive rights in the geographical territory in which you’re known, but you get it from using that name in the marketplace. And your business name and trademark may be identical.

*These are hypothetical clients. Any resemblance to real persons, living or dead, is purely coincidental.