26 September 2003 External T.I. 2003-0013195 - MATCHABLE EXP.-FILM

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Does an agreement between a film producer and distributor constitute a tax shelter property to the film producer and do the matchable expenditure rules apply to restrict the deductibility of the marketing costs and distribution fees incurred by the film producer.

Position: In the circumstances described, the agreement would not normally result in the film producer acquiring a tax shelter and the matchable expenditure rules should not apply to restrict the deduction of the marketing costs and distribution fees incurred by the film producer.

Reasons: (a) a distribution agreement with respect to the commercial exploitation of the film by the film producer would not result in an acquisition of an interest in a tax shelter property by the film producer; and (b) the payment of the marketing costs and distribution fees by the film producer would not normally be made to acquire a "right to receive production".

2003-001319
XXXXXXXXXX Bob Naufal, CMA
(613) 957-2744
September 26, 2003

Dear XXXXXXXXXX:

Film Distribution Agreements

We are writing in response to your letter dated April 11, 2003 and our follow up phone discussion (Naufal/XXXXXXXXXX) on May 29, 2003, wherein you requested our views as to whether the provisions of sections 18.1 and 237.1 of the Income Tax Act (the "Act") would apply to a taxpayer ("film producer"), who is in the business of producing and exploiting motion picture films. In particular, you asked us if either of these provisions would apply to the film producer, if, as the owner of the film, the film producer enters into a distribution agreement with a third party distribution company (the "distributor") to assist with the commercial exploitation of the film.

In general terms, you stated that the relationship between the film producer and the distributor is analogous to that of a manufacturer and sales agent in that the distributor is contracted by the film producer to help sell or license the film. The film producer and the distributor enter into an arrangement under which the film producer and distributor agree to an advertising and distribution campaign and the method for funding expenses relating to the campaign. The agreement generally specifies that the distributor will be compensated from the gross revenues generated by the exploitation of the film. In some circumstances, the distributor may cover some of the advertising expenses and recoup these expenses from gross revenues realized on the exploitation of the film or from higher financing and distribution fees. In all cases, the film producer owns the rights associated with the film (e.g., distribution rights, sequel rights, etc.).

You have asked us to assume that representations have been made concerning the deductibility of the advertising and distribution expenses.

Our Comments

Written confirmation of the tax consequences that apply to a particular fact situation is given by this directorate only in the context of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. However, we are prepared to provide the following general comments.

In the situation described in your letter, we agree that the distribution agreement should not be a tax shelter property to the film producer. In addition, we agree that the marketing and distributing expenditures would not be made by the film producer to acquire a right to receive an amount in respect of another taxpayer's activity, property or business (i.e., a right to receive production). Accordingly, the matchable expenditure rules should not apply to these expenses incurred by the film producer.

Please note that our comments are restricted to the film producer and do not extend to the film distributor.

We trust our comments will be of assistance.

Yours truly,

D. Boychuk, LL.B
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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