13 March 1998 External T.I. 9706545 - PRODUCTION TAX CREDIT

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 Department.

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

Principal Issues:

Subsidiary corporation formed specifically to produce a film. Parent will acquire all the rights to commercially exploit the film at a cost equal to the net production cost of the film (i.e.net after any assistance and any tax credits in respect of the film). Would such transaction cause the subsidiary to be denied the film tax credit under 125.4?

Position:

The transaction could be considered as a disposition of the film to the parent before the film was produced or that the intention was to produce the film for the parent. In both cases, it can be argued that all the costs involved to produce the film would be the parent's. Accordingly, the subsidiary would not have any qualified labour expenditure on which the credit could be calculated.

Based on a question of fact and law, there is some uncertainty as to who would retain ownership of the film after all the distribution rights are acquired by the parent. If the parent can claim CCA, then this would avoid any claim for a tax credit.

There is also uncertainty that the film would not be an "excluded production" under Regulation 1106(1). Parent is not a "qualified corporation" for the purposes of section 125.4 and, accordingly, does not qualify as a "prescribed taxable Canadian corporation" under (a)(ii) of the definition of "excluded production".

Reasons:

Sale of all the distribution rights would amount to a sale of the film under IT Bulletin 441. Interpretation of the re;levant provisions.

970654
XXXXXXXXXX F.B. Fontaine, FCCA

Attention: XXXXXXXXXX

March 13, 1998

Dear Sirs:

Re: Production Tax Credit

Further to our recent voice mail communication (Fontaine/XXXXXXXXXX), this is in reply to your letter requesting a technical interpretation in respect of the Canadian film or video production tax credit (the "tax credit").

You described a situation in which a parent company ("parentco") that is not a "qualified corporation" incorporates a subsidiary corporation ("productco") for the purpose of producing a production. Parentco which is neither a "prescribed person" nor actively engaged in a Canadian film of video production business would acquire the worldwide distribution rights from productco for a fee equal to the cost of production less any government assistance or tax credits. Parentco would be entitled to all proceeds from the commercial exploitation of the production. Your concern is whether the tax credit under subsection 125.4(3) of the Income Tax Act (the "Act") would be denied to productco as a result of such outright sale to parentco.

The situation that you have described appears to be an actual fact situation. Whether or not the situation is a completed or contemplated transaction, paragraph 22 of Information Circular 70-6R3 (the "Circular") outlines the procedure to be followed in respect of such transaction. Accordingly, while we are unable to provide confirmation of the income tax effects of the particular situation, we are prepared to offer the following general comments:

1. Paragraph 4 of Interpretation Bulletin, IT-441 (the "Bulletin") states that:

"a disposition of a film or tape will be considered to take place where the investor grants to a person or persons the right to distribute or otherwise exploit the film or tape in markets representing most or all of the exploitable value of the film or tape for a fixed amount of consideration which can reasonably be considered to be its fair market value".

2. Based on the Bulletin, the situation described above would appear to be a pre-production disposition of a film or tape by productco to parentco. In this case, it appears that parentco would incur the labour costs involved in the production of the film or tape such that productco would have no qualified labour expenditure ("QLE") on which it can claim the tax credit.

3. We would suggest that you confer with the Canadian Audio-Visual Certification Office ("Cavco") since Cavco is charged with the responsibility of (i) estimating amounts relevant for the purposes of determining a qualified corporation's QLE and (ii) issuing certificates which will entitle such corporation to claim the tax credit.

4. We note that the proceeds of disposition of the production to productco does not appear to represent fair market value.

The comments above represent an expression of our opinion which, as indicated in paragraph 22 of the Circular, is not an advance income tax ruling and, accordingly, is not binding on Revenue Canada.

Yours truly,

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch