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.
Principal Issues: Would the cost to acquire an interest in a production be assistance for the purposes of the film tax credit?
Position: Insufficient facts to conclude. General comments provided. Also noted possible impact of the excluded production definition.
Reasons: Reading of legislation.
XXXXXXXXXX 2008-029635
Allan Nelson, CMA
(613) 443-7253
January 29, 2009
Dear XXXXXXXXXX :
Subject: Canadian Film or Video Production Tax Credit
Technical Interpretation Request
This is in reply to your October 3, 2008 letter requesting our views concerning whether certain amounts received by a producer would be assistance, within the meaning of that term in subsection 125.4(1) of the Act. In this regard, you have asked us to use the definition of assistance that was proposed in Bill C-10, dated October 29, 2007 (that definition is referred to in this letter as "Assistance").
We acknowledge our numerous telephone conversations and emails (XXXXXXXXXX /Nelson). We also acknowledge that you discussed this matter with representatives from our Film Advisory Services Section and with CAVCO.
Hypothetical Facts
Our response will be based on the following set of hypothetical facts.
"Producer" is a qualified corporation, as defined in subsection 125.4(1) of the Act and would otherwise be entitled to claim the Canadian film or video production tax credit under section 125.4 of the Act (the "FTC"), in respect of certain qualified labour expenditures incurred while making a film in Canada (the "Production").
The Production is not a treaty co-production, as defined in subsection 1106(3) of the Income Tax Regulations (the "Regulations").
In order to fund part of the costs to be incurred in making the Production, Producer sold an undivided interest in the Production (the "Production Interest") to "Investor" in return for a significant cash payment (the "Purchase Price"). Legal ownership in the Production copyright remained with Producer.
Investor's Production Interest entitled them to participate in the exploitation rights in the Production based on a predetermined formula.
At all relevant times Investor
(a) is a prescribed taxable Canadian corporation, within the meaning of subsection
1106(2) of the Regulations,
(b) is not a qualified corporation, a co-producer of the Production, or a prescribed
person, within the meaning of subsection 1106(10) of the Regulations, and
(c) operates at arm's length with Producer.
The Purchase Price would not be an amount received by Producer from a person or partnership described in subparagraph 12(1)(x)(ii) of the Act, or in circumstances where clause 12(1)(x)(i)(C) of the Act applies (see paragraph 125.4(1)(a) at the definition of Assistance).
Query
You have asked for our opinion as to whether the Purchase Price that Investor paid to Producer would be Assistance to Producer, thereby reducing the amount of qualified labour expenditure on which Producer could claim the FTC in respect of the Production.
Our Comments
As explained in Information Circular 70-6R5, dated May 17, 2002, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. If a situation involves a specific taxpayer and a completed transaction, all relevant facts and documentation should be submitted to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments, which may be of some assistance to you.
Subsection 125.4(3) of the Act provides for a FTC based, in part, on a percentage of the qualified labour expenditure for the year in respect of a particular production. Subsection 125.4(1) of the Act defines qualified labour expenditure to be certain expenditures in respect of a Canadian film or video production, and provides that it can be reduced by the amount of assistance in respect of certain production costs.
In the above hypothetical case, the amount of the Purchase Price would be Assistance received by Producer if it was an amount that would be included under paragraph 12(1)(x) of the Act in computing the Producer's income for any taxation year if that paragraph were read without reference to subparagraphs 12(1)(x)(v) to (vii) of the Act.
In our view, generally, subparagraph 12(1)(x)(viii) of the Act would apply to exclude any amount of the Purchase Price that might otherwise have been included in computing Producer's income under paragraph 12(1)(x) of the Act. Therefore, the amount of the Purchase Price would not be Assistance received by Producer.
In accordance with paragraph 22 of Information Circular 70-6R5, the above comments are only an expression of opinion, and as such should not be construed as an advance income tax ruling, nor are they binding on the Canada Revenue Agency.
Additional Comments
As discussed on the telephone (Nelson/XXXXXXXXXX ), Investor's acquisition of an undivided interest in the Production raises the question of whether Investor also acquired beneficial ownership of some portion of the Production copyright. If so, the 25-year ownership requirements in clause (A) of subparagraph 1106(1)(a)(iii) of the Regulations at the definition of excluded production would not be met. Consequently, the Production would be an excluded production and not a Canadian film or video production. This would result in the Producer not having any qualified labour expenditure in respect of the Production and not being entitled to claim any FTC in respect of the Production.
Ultimately the question of whether a production is an excluded production always involves questions of fact and law. Any such determination can only be made after reviewing all of the relevant facts and documentation of a particular case. We do not have sufficient facts in the above hypothetical scenario to make such a determination.
We hope the above will be of assistance to you.
Yours truly,
Gwen Moore
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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